Q2 2023 DaVita Inc Earnings Call
Good evening My name is Michelle and I will be your conference facilitator today at this time I would like to welcome everyone to the Davita second quarter 2023 earnings call. Today's conference is being recorded if you have any objections you may disconnect. At this time all lines have been placed on mute to prevent any background.
Noise after the Speakers' remarks, there will be a question and answer period.
If you would like to ask a question. During this time simply press star and the number one on your telephone keypad. If you would like to withdraw your question Press Star then the number two mystery lives than you may begin your conference.
Thank you and welcome to our second quarter Conference call. We appreciate your continued interest in our company I'm Nicolaisen Group, Vice President of Investor Relations and joining me today are Javier Rodriguez, our CEO and Joel Ackerman our CFO .
Please note that during this call we may make forward looking statements within the meaning of the federal Securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward looking statements.
For further details concerning these risks and uncertainties. Please refer to our second quarter earnings press release, and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q, and other subsequent filings that we may make with the SEC.
Our forward looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements except as may be required by law. Additionally, we'd like to remind you that during this call. We will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is <unk>.
<unk> in our earnings press release furnished to the SEC and available on our website I will now turn the call over to Javier Rodriguez.
Thank you Nick and thank you for joining our call today I hope that everyone is having a safe and joyful summer.
The Davita, we've been focused on innovation and continuous improvement to provide the highest quality of care for our patients.
Hand in hand, with these efforts, we've been driving operational improvements across our organization.
Our second quarter performance reflects strong traction across those initiatives, putting us on a path to deliver strong clinical outcomes and financial results for the year.
Today I'll cover second quarter results offer some perspective on the industry landscape and drivers of long term performance and update our full year guidance.
Before we get into the second quarter details I would like to take a moment to celebrate our clinical and technological milestone.
On our February call, we mentioned the rollout of our next generation clinical I T system, which we referred to as center without walls or seawell.
I'm happy to report that after five years of development Cyo is now alive in each of our approximate 2700 clinics across the United States.
This patient centric cloud based system combines and replaces four legacy systems and is designed to provide seamless flow of information across each of our centers in all modalities.
This includes real time clinical dashboards data sharing with our physicians and integrated kidney care platforms and notifications such as critical lab alerts.
For ease of use it features wristbands for quick teammate login improve ability to track and reschedule mistreatment enhance real time documentation.
And consolidated reporting for streamline analysis.
And while we're enthused about these immediate benefit the most significant enhancement at the state of the art data structure and platform upon which we can build further capabilities, including artificial intelligence to advance the care delivery in the years ahead.
With this groundbreaking platform our clinicians are able to access the right information at the right time in the right place.
Transitioning to our financial performance in the second quarter, we delivered adjusted operating income of 432 million and adjusted earnings per share of $2.08.
These results were driven by improvements across our financial trilogy of treatment volume revenue per treatment and patient care costs I'll touch on each of these in a bit more detail.
On volume, we saw our second consecutive quarter of improvement in census, and treatments per day. This is encouraging and sits as a result of better macro environment and progress in our operating initiatives.
We're trending near the top of our original volume range of down 3% to flat year over year and if these trends continue we would anticipate delivering volume growth in 'twenty 'twenty four.
Shifting to revenue and revenue per treatment revenue per treatment was particularly strong in the quarter. This was primarily driven by typical seasonal factors from patients meeting their copays and deductibles, along with normal expected rate increases and improvement in mix, including Medicare advantage.
Adding to the RPT increase we have seen progress from investments, we've been making in our revenue cycle capabilities. These.
These investments resulted in higher cash collections and a decline in our DSO.
I'm excited about the investments we've been making in these area, which represent a good example of how we are constantly improving operations.
And filing patient care costs improved as expected in the quarter.
Although base wage increases remained well above historic pre pandemic levels other expenses, including contract labor and pharmaceuticals continued to decline.
This benefit was partially offset by elevated training costs.
While staffing level in a clinic or in a much better position compared to last year, we continued to experience above average turnover among facility teammates.
As a result, we no longer expect an improvement in our training productivity during the back half of this year.
Taking a step back from the most recent results I would like to offer some reflections on the broader industry landscape and our effort to drive performance going forward.
Beginning with the reimbursement rates, we're disappointed by CMS has proposed rule to update the ESR D perspective payment system for 'twenty 'twenty four specifically the proposed rate increase fall short of expected cost inflation in 'twenty 'twenty four and it fails to adjust for the acknowledged inflation forecast Miss relative to <unk>.
Actual wages and inflation increases over the past two years.
The kidney care community will continue to advocate for an adjustment mechanism to reconcile these forecasters similar to what exists today for skilled nursing facilities.
In response to the persistent cost inflation, we're continuing our track record of innovation across all areas of our cost structure.
Most recently, we consolidated portions of our facility footprint and reduce pharmaceutical costs through our conversion to Mircera for anemia management. These programs are proceeding in line with our expectations.
Going forward, we will continue to drive cost efficiencies across the P&L.
Through these efforts and continued improvement in our volume trends, we continue to target, 3% to 7% long term growth of our enterprise adjusted operating income.
Looking forward to the remainder of the year given our progress during the second quarter, we're revising our adjusted operating income range of 1.475 billion.
Two 1.625 billion to a new range of 1.565 billion to 1.675 billion.
We're also updating our adjusted earnings per share range of $6.20 to $7.30 to a new range of $7 to $7.80.
Our performance relative to this guidance will continue to depend heavily on momentum in patient census trend our ability to manage patient care costs within the broader labor environment and sustained improvement and revenue cycle management.
I'll now turn the call to Joel to discuss financial performance and outlook in more detail.
Thanks, Javier I'll walk through a few factors driving our strong performance in the second quarter, starting with treatment volume.
In the second quarter U S dialysis treatments per day were up by approximately point <unk>, 3% sequentially.
This is the result of continued census gains in the second quarter, driven by an increase in new to dialysis add mitts mortality remains higher than pre COVID-19 levels, but came in lower than Q1 and in line with our expectations for the quarter.
Our mistreatment rate continues to be elevated relative to historic levels.
Revenue per treatment was up $10 and 15 nine cents versus Q1 approximately.
Approximately half of this increase was the result of seasonality primarily due to higher patient responsibility amounts in the first quarter.
Approximately $2 came from normal expected rate increases and continued increases in patient mix.
And an additional roughly $2 was the result of strong cash collections in Q2.
As Javier said, we've been investing in improvements in our revenue cycle management systems and processes and are beginning to see the benefits of these efforts in both our P T and dsos.
We were anticipating these improvements, but they came earlier than forecasted.
We expect these benefits to persist in the back half of the year and going forward.
As a result, we now anticipate year over year, our P T growth to be 2.5% to 3%.
On a non-GAAP basis patient care cost per treatment decreased one 5% sequentially.
While base wage increases remain high we have successfully reduced most of the temporary compensation measures we relied on during 2022.
At the end of Q2 contract Labor has returned back to pre pandemic levels.
Operating income from our integrated kidney care business was approximately flat with Q1 the.
The quarter benefited from positive prior period developments and our special needs plans and the timing of expenses that were delayed until later this year for the full year. We now expect Ikea see adjusted operating income to be approximately flat to 20 twenty-two operating income loss of 120.
$5 million.
Regarding our clinic footprint in Q2, we closed or consolidated 16 centers in the U S, bringing our year to date U S closures to 36.
We continue to assess further facility consolidation and closures during the back half of the year.
Regarding capital structure, we ended the quarter with a leverage ratio of approximately 3.7 times EBITDA and did not repurchase any shares during the second quarter.
Our capital allocation strategy remains focused on capital efficient growth a target leverage ratio of three to three and a half times EBITDA and the return of excess cash flow to investors through share buybacks.
Given our increased guidance for the balance of the year, we have increased visibility towards bringing our leverage level back within our target range.
That concludes my prepared remarks for today operator, please open the call for Q&A.
Thank you at this time, if you would like to ask a question you May simply press Star and then the number one on your telephone keypad. If you would like to withdraw. Your question you May Press Star then the number tail.
Our first caller is Kevin Fischbeck with Bank of America, You May go ahead Sir.
Hi, Good afternoon actually this is Joanna <unk> filling in for Kevin.
The question here. So thanks for the color around the revenue per treatment.
Now in terms of the drivers there and clearly very strong performance.
And I appreciate the commentary expect I guess, a faster growth for the year.
Just looking into the pieces.
Said, a better payer mix one of the drivers can you talk about specific commercial pricing and what are you what kind of rate increases are you getting this year and also and.
The indications for how things are tracking into next year, because I guess, that's where maybe one area. Because he also mentioned that Medicare rate out there being lowered and cost inflation. So.
<unk> is a commercial pricing I guess tracking better.
Yeah. Thank you for the question Joanna I'll start off and Joel you can supplement if I Miss anything is important.
Paid mix is holding up.
Picked up.
20 bps, and we continue to see that our private pay patients really value their insurance as it relates to rate increases just a reminder, most of our contracts are multi year. So in any given year, we don't negotiate that many contract there is nothing really to call.
All out on that our rate per treatment increases are in line with expectation.
So there is there another part to your question that I didn't answer China notice, what's yet it was at about I guess also along with later if I can a follow up to that topic.
In terms of the Marietta case, and I guess, we spoke before and they're still in a bipartisan support for FX. So can you give us any update on that and I guess on that topic.
As it relates to pricing commercial pricing.
You know are you see employers using this court decision to restrict networks or are they using it to maybe you know have been able to get up into price negotiations when it comes to pricing.
But.
Let me take them.
And let me lends up a little and some people are not tracking all of the Marietta.
It's probably best for me the divided into what we know and what we don't know so let me start with what we do know.
As we look at our claims year to date, we have not seen much change compared to prior years.
So there's not a lot of volume.
But we have learned more about how employers change benefit and mislead members on how it's done and so we don't want to accommodate this poor behavior. So what we have done is we've implemented a verification process at admission and if an employer eliminates the network dialysis benefit for its member then.
We have the right to prevent that plan from having access to our centers.
In addition, we continue to have very high interest bipartisan interest in making sure that policymakers protect our patients. So those are the things that we do know.
What we don't know is how many employer groups are considering carving out the assets from network in the future and we also don't know if or when members of Congress will introduce the bill and how the CBO will score at the last part of your question was are payers using this in one way or another.
It has not come up in one negotiation because this is really more of a dynamic between the employer trying to decide what to do with the plan not what the payer does with the provider the provider and the Payor both value network.
Does that help you Joanna yes that makes sense and then that totally makes sense and I appreciate that so in terms of what's going on in Congress and the score.
Is there any indication of what we might hear about that or that's not where they are.
Nothing that we can predict from the outside.
Yes, there is nothing we can predict from the outside that that's left the policymakers champions and the dynamics of Washington D C.
Great. Thank you and if I may just on the guidance raise rates it sounds like some.
Some improvement.
In the price, saying wait and then I guess contract labor. It sounds like that's better is that the way to frame that guidance right that $70 million at the operating <unk>.
Income adjusted operating income guidance.
Yes, Joanna if I were to kind of give you the pieces of what drove 70 million of the increase guidance that middle of the range. The middle of the range I know why I would say about half is the RPT as you called it out the other half is volume we saw <unk>.
Stronger admissions this quarter and the nature of volume is it cumulative it'll never really kick in in any one quarter in that big away, but as it accumulates stronger in Q1 stronger in Q2, and we see it better in the back half of the year for the full year, we think that'll.
Tribute about half of the $70 million.
Contract Labor eight continues to improve but it's now pretty much in line with what we were expecting and as we said in the prepared remarks, it's really back down to pre COVID-19 levels and hopefully it won't be much of a topic going forward.
Thank you Christian thanks for the call.
Thank you once again, if you would like to ask a question you May Press Star one our next caller is Andrew Mok with UBS. Sir you May go ahead.
Hi, Good afternoon appreciate all the color on the sequential RPT improvement, but just couple of follow ups. There first is the seasonality component in line with historical seasonality or is there something about the patient benefit design that's creating.
More acute seasonality this year and can you go into a bit more detail on what's driving the better cash collections.
Yes, Andrew Thanks, So on the seasonality no. It's it was a little bit more than $5, which is per treatment, which is right in line with with what we've seen historically.
In terms of collections look we have invested in our processes and in our technology to get better information and to give better information to the health plans on everything from prior authorizations to other data required to claim submission.
And that's both.
The quality of the data and the timeliness of the data and what we're seeing is we're getting paid quicker and that's why you saw dsos come down last quarter and again this quarter and we're also seeing we're collecting more and that's what's driving the RPT increase and I think the most important thing.
From our standpoint is this is not a onetime thing. These are fundamental changes that we've made that we think will persist.
Great appreciate the color and then as a follow up the guidance. The Oi guidance is up about 5% I think of free cash flow was up about 10% can you help bridge. The difference there help us understand why the free cash conversion is better on the New guide and I think I've missed your comments on share repurchase, but would love to get your latest thoughts around there and the potential.
Resumption of share repurchase.
Sure. So the big difference between O Y and free cash flow is the dsos as as we see those dsos come down.
That'll add to the free cash flow for the year in terms of share repurchases, where we're on track with what we set out to do our leverage levels were above our target range. I think we were we were quite clear with everyone. We wanted to get back down to three and a half or below.
We're making good progress on that we're at $3 seven for the quarter.
And.
We didnt buyback any shares we don't expect to buy back any shares in Q3.
But we feel like we've got better visibility now to get back to the three and a half or below.
Great. Thank you I'll hop back in the queue.
Okay.
Our next caller is Peter Chickering with Deutsche Bank, Sir you May go ahead.
Hey, Peter.
Peter Your line is open.
Well go to the next caller, Lisa Clive with Bernstein, you May go ahead.
Hi, there I apologize if you touched on this in the opening remarks, a few minutes late but just could you comment on the CMS rate increase.
And you know the accuracy.
Mistaken the calculations and and what the chances are of getting an improvement there and also just as we think about going into 2025.
What would a fair rate increase look like and perhaps Ah.
Lower number should our expectation around that actually be.
Yes. Thanks for the question Lisa it's kind of funny I've been here for a very long time and not many questions is to come up about the rate increase with Medicare and so we we started to ask ourselves why is this a new dynamic and the reality is is that the system is quite complicated but it will.
It's relatively well in times, where there is economic stability.
And yet when it when we're experiencing times of inflation or lack of stability, it's really showing that it doesn't work in many ways.
But so let me step back if you if you were to spend time on trying to understand the methodology.
You would really come to the conclusion that it is practically.
Not possible to forecast because there's just too many things that are either proprietary or use log data or a benchmark that is not related to dialysis.
It's a benchmark related to all health care cost and it's all weighted and then discounted with some kind of productivity factor and so the short answer is it's a big complicated equation with some variables that we will not have visibility to.
So that's the short answer we cant forecast it I can't believe anyone from the outside World Cat.
Secondly.
What is an appropriate one and what we are advocating for is let's not have let's call. It winners or losers, we understand that forecasting is difficult, but lets have a reconciliation that is actually linked to actual cost and that if costs. If you get an increase in it.
And exceeds what inflation that there could be a decrease or vice versa. So that's what we're advocating for as you know it is very difficult in Washington D. C. Right now on trying to get funding, but we are trying to make our case.
And maybe just touching on med tax roll here I mean, they're just sort of.
Well economic adviser to Medicare, but they don't have any enforcement power and I think there's sometimes some years, there's a big disconnect between the medpac recommendation in the rate and then this year. It was actually quite in line I mean from your perspective do you guys. Even look at the Med pack numbers I think.
It it seems like it should be a useful data point, but.
It often isn't.
Yeah, you know the process from Medpac has a bit opaque to us.
We try to educate and highlight what is really happening with our cost structure and again in periods of stability. It happened to be give or take within reason acceptable and now the gap is widening and it's widening compounded year after year. So it's really.
Starting to be significant.
Okay and then last follow up is does this have just given how all of the rate increase was does this change your decision on some clinic closures in in any way because obviously, that's always a worry that if the Medicare rates get too low you just have clinics.
Clinics here and there where youre on all Medicare and it just doesn't financially make sense anymore.
Yeah, there's lots of go into the decision to close a clinic in particular, you got to really focus on patient care and making sure that our patients are being taken care of.
But it is absolutely a consideration when you look at the economics, but the sort of the first filter there's continuity of care.
Second is is there a convenient place where that patient can be taken care of and then after that you get into economic factors such as reimbursement leases.
And other things, but we are aggressively looking at our footprint and we continue to right size to make sure that we're thoughtful about our resource allocation capital allocation.
Great Thanks for that.
Thank you. Thank you.
And once again that is star one if you would like to ask a question. Our next caller is Peter Chickering with Deutsche Bank. Sir you May go ahead.
Can you guys hear me now.
Yes, yes, Peter Alright, sorry, but I'm not sure what happened there.
Fact that treatment growth here.
Pre COVID-19, we were getting about 4000, new patients a year are about two to two thirds of those in the first half of year.
From Nephrologist jumping on and off to the rest coming from hospitalizations for dropping to you guys I guess how was that tracking.
This year at this point relative to sort of that 4000 times, a tutor or does that what are you guys are seeing for new patients at this point.
Yeah, So Peter.
The short answer is if you're looking at admit.
We are tracking pretty much to pre COVID-19 levels. The challenge is excess mortality and that remains elevated and that's the reason that we're not yet ready to say, we're going to return to pre COVID-19 growth levels.
That said mortality has been coming down year after year since Covid started its down Q2 versus Q1. So if mortality continued to decline and return to pre COVID-19 levels than we'd back then the Matthew laid out of four.
And new patients a year, we'd be back there.
Is it perfect segue for my next question about mortality you sort of talked about that are coming down I guess is there any.
Wait you can give us or what is the rate of that decline and if it follows that path you've seen in the last three quarters.
Yes.
Pat what that indicates.
Yeah, that's a it's a tough piece.
Piece of analysis to do because it hasn't necessarily been smooth quarter to quarter or year to year. So.
Look we're watching it carefully we all know there's a minor surge going on but I think minor is is the operative word from what we've seen so far so we're keeping a careful eye on it but I don't think we can.
We can draw a trend line based on the history to say when we think mortality gets back to zero where it.
Excess mortality gets back to the year, okay. Because it's only if you can quantify for us what excess mortality was this quarter and what is where it was last quarter.
Yeah.
Last quarter. It was roughly 900 lives this quarter it was.
Between five and 600 remember we will sometimes update those over time, we get we get better views of excess mortality as time goes on but but somewhere between 500 600 is our best estimate for Q2, Okay, and I definitely understand sort of the complexity of kept coming up with those firms.
Different reasons for Medicare advantage what percent of your MA patients are currently taking risk for it one way or another.
I'd have to do the math quickly in my head.
Okay.
Peter I don't want to give you a bad number so I'm going to let let's.
Take that offline okay.
Next one here is.
On the managed care rate increase question that was asked earlier I guess are you seeing managed care do anything different in terms of not just in their rate increases, but potentially tries to your patients like have you seen any behavior changes from managed care in the last 90 days or so just you're obviously as youre seeing increased utilization elsewhere, just curious if they're trying to control costs.
And then other parts of the business.
No we haven't seen no changes.
At all.
Okay got it and then just the last one here on the pace of consolidation for facilities. Obviously, you guys had the lowest hanging fruit first but as you see success of capturing those patients start with another two other centers do you get more aggressive about consolidation that maybe you had originally planned for about a year from now.
And when those patients are consolidated do you see an increase of unsold treatments at that point.
Yeah.
I think we want to be really careful about being quote unquote aggressive, but we want to be really thoughtful and balanced.
And all the trade off to go into clothing, a center, we have to remember our patients are incredibly vulnerable and one of the most important thing is to be close to their home and so 90. Some odd percent of our patients are within 10 miles of their home and that is one of the best things, we can offer convenient and.
You know, we talk a lot about health equity issues and not being in the communities. We are in the community and so we take that pretty seriously, but but as the economics constrained happen. If we are able to accommodate our patient.
We are being very thoughtful on that and we have other obligations like leases and other things. So there's a natural time to review a clinic to see if it's appropriate or closure.
Okay and then the second part to your question I think you know, yes. So.
So I'll sort of ask the same question different ways I guess as you have a patient is consolidated do you see increased utilization of home treatments and then the second part of question as to what percent of treatments today are being done in the home.
No is the answer we are not seeing any changes in whether a patient goes home or not we continue to be a very much an advocate of home.
Theres a lot of dynamics in education that go into that.
And we want the right modality for the right patient, but we are huge home champions.
And the mix on the home is roughly around 15%.
A little above.
Above that like 15.2, or so, but it's been hanging around that 15% Covid had a big impact on home that many patients felt more comfortable in that time of insecurity to go and be taken care of by professionals, but we're starting to see a slight pick up in patient choice.
To go home.
Okay, and then I think the last question for me here.
Can we get an update on the Medtronic JV I guess, you know sort of how much of a drag is.
Is that all on the Hawaii and just you know as you look at it today kind of what's the pathway to that becoming.
Operating income neutral and just can you just refresh us as well.
Why you saw that as a good opportunity for you guys. Thanks, so much.
Sure so.
Just as a reminder, it doesn't hit our operating income its below the Oi line. So it hits EPS, it's worth about $15 million pre tax per quarter.
That's on a non-GAAP basis. This quarter, we actually had some positive gain as a result of the transaction and we think that number will decline over the next couple of years and we anticipated getting to breakeven in two to three years in terms of why we like this look as Javier mentioned.
We are really interested in figuring out ways to help our patients.
Get home and new technology can be part of that answer we're looking for other ways to innovate.
Beyond just the service and information capabilities that we can do and we recognize medtronic as a world class leader in innovation on the medical device side and we just thought.
Their history here combined with our knowledge would make for a great partnership which is why we invested in Mozart perfect right in the last quickie for me.
Maybe I missed it did you guys quantify what the turnover was nurses and technicians for this quarter and how that compares versus 2019. Thanks. So much.
Thank you for that last question that we did not go into that level of detail I think what we can say on labor because we've gone into so much detail and labor is in the overall category.
It is playing out as expected.
Some of the underlying components have shifted a bit and so just to give a little more detail on that base wages are above our normal averages our contract labor is back in line to normal and we continue to have elevated training.
And so that's how the.
The levers are moving but overall.
The category is as expected.
Great I'll stop there I think he gets pretty much.
You.
And at this time I am showing no further question, Sir we do have one more question.
Andrew Mok from UBS you May go ahead Sir.
Hi.
Just a couple of follow ups on the clinic closures, you've closed down 16 clinics, but opened 10, new dialysis clinics I'm, just trying to better understand what's driving the new clinics at this point given I've thought a lot of the clinic closures were the result of excess mortality. So what are you seeing in the market, that's causing you to open new clinics that are are there any characteristics that you would.
Call out about them, whether they're home dialysis programs or anything like that thanks.
Uh huh.
In general you can imagine healthcare is local and so there are areas, where there are literally full clinics, there's sometimes relocation sometimes as you called out there might be just a home center that was needed. So there's there's a little of all.
But but as you can see the number is materially smaller as we are very focused on making sure that capacity utilization is where it needs to be and that where capital efficient.
Yeah.
Got it and on the mortality I think you gave us the absolute number in the quarter can you give us a sense of how the mortality rate in general is tracking and how far off are you against pre pandemic levels. Thanks.
The mortality level looks roughly a percentage or so higher than pre pandemic.
And as Joe talked about it it's a bit cyclical and depending on the surge or if there is one or sort of the front end tends to have higher mortality. The front end of the year or the or the backend and the year versus the middle of the year.
But I think a good number is roughly 1% or.
Give or take 2000.
Ah patient.
Great. Thanks for all the color.
Thank you.
And at this time I'm showing no further questions.
Okay, well, thank you Michelle and thank you all for your questions as you heard through our comments today, we've continued to drive operational efficiencies and make investments to fuel our performance now into the future years as well.
Some of those seeds that we planted are beginning to sprout and some will take additional time and continued effort.
We look forward to keeping you updated on our continued progress in the back half of the year. Thank you for joining the call and be well.
Thank you. This concludes today's conference call you May go ahead and disconnect at this time.