Q2 2024 DaVita Inc Earnings Call
non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website I will now turn the call over to Javier Rodriguez.
Javier Rodriguez: Thank you, Nick, and thank you all for joining the call today. On behalf of all the teammates who provide life-saving care to our patients, I am grateful for the opportunity to report another positive quarter for Davita. We continue to enhance our clinical capabilities while optimizing our revenue operations and cost structure. Today, I will cover the details of our second quarter performance, comment on the CMS 2025 proposal, and wrap up with our outlook for the remainder of the year.
Javier Rodriguez: Thank you Nick and thank you all for joining our call today on behalf of all the teammates who provide lifesaving care to our patients I am grateful for the opportunity to report another positive quarter for Davita.
Javier Rodriguez: We continue to enhance our clinical capabilities, while optimizing our revenue operations and cost structure today I will cover the details of our second quarter performance comment on the CMS 2025 proposal and wrap up with our outlook for the remaining of the year.
Javier Rodriguez: But before I dive in, let me begin, as we always do, with a clinical highlight. As you know, every day, tens of thousands of Davita caregivers work to give life to our patients. Nurses play a central role within our interdisciplinary care teams, serving as our patients' caregiver, sounding board, and familiar face they see over 100 times per year. Unfortunately, thousands of nurses left the profession during the pandemic.
But before I dive in let me begin as we always do with a clinical highlight.
As you know every day tens of thousands of Davita caregivers worked to give life to our patients.
Speaker Change: <unk> play a central role within our interdisciplinary care teams, serving as our patient caregiver sounding board and familiar face they see over 100 times per year.
Javier Rodriguez: Unfortunately, thousands of nurses left the profession during the pandemic.
Javier Rodriguez: As a result, the health care system is facing a critical nursing shortage. I am proud of the programs and initiatives we've implemented to support the next generation of dialysis nurses. I'll highlight three examples.
Javier Rodriguez: As a result, the health care system is facing a critical nursing shortage.
Javier Rodriguez: First, we're collaborating with leading nursing universities on tailored nephrology-specific nursing curriculum. We're also providing financial assistance to remove barriers to entry for prospective nursing students. Second, we've created a clinical internship program, immersing students in hands-on experience at Davita Dialysis Centers.
Javier Rodriguez: We have 700 clinical entrants this year, with more than 2,000 individuals participating since inception of the program. Third, we built a nurse residency program to support new nurses from student to practicing registered nurse. Our goal is to help hundreds of nurses in the program feel more confident during their first year of practice, which, among other things, can lead to better patient safety. We're excited to do our part to alleviate some of the pressures of the nursing workforce and to help ensure access to care is not a barrier.
Javier Rodriguez: Transitioning to the second quarter performance, adjusted operating income was $506 million, and adjusted earnings per share was $2.59. This outcome was ahead of our expectations for the quarter, primarily driven by favorable patient care costs and continued strength in revenue per treatment, or RPT. Offsetting this favorability was volume growth that was lower than expected. This was primarily due to elevated mistreatments related to spring storms, along with lower-than-expected census gains. Our second quarter adjusted results also included approximately $15 million of center closure costs. In prior periods, we excluded these types of costs from adjusted operating income as non-gap adjustments.
Javier Rodriguez: We'll expand on this point throughout the call today. But, let me give some additional detail on RPT growth since it continues to contribute to our strong performance and supports our 2024 guidance increase. There are many variables in RPT, but I'll highlight two primary drivers. The first and largest component is continuous improvement in our collection capabilities. This is a multi-year effort, so let me elaborate a bit more on this. The complexity of revenue operations has increased over the last few years. Billing and collecting from health plans now more frequently involves new data and process requirements. These challenges include navigating prior authorization, payer-specific billing requirements, numerous online payer portals, and separately billable items.
Javier Rodriguez: These layers are exacerbated by our growing list of participating health plans due to the growth of Medicare Advantage and exchanges, and by our patients more frequently updating their coverage choices. In response, we made a series of targeted investments in technology and employees to modernize and retain top-in-class capabilities. These investments focus on greater automation of routine tasks, increasing the rate of electronic claim submission, and more frequent benefit insurance verification, among other enhancements. This has improved our overall collection rate and enabled us to collect on claims more quickly, reducing day sales outstanding.
Javier Rodriguez: With more comfort and experience with these capabilities over the past year, we believe these improvements are sustainable and will continue into 2025 and beyond. Second, our health plan negotiations have resulted in modestly higher rate increases as a result of the higher inflationary environment over the past few years. However, despite these rate increases, we are still not recouping the full impact of high inflation.
Javier Rodriguez: We will continue our track record of innovation and discipline within our cost structure to bridge this gap. The combination of these two factors, along with continued improvement in payer mix, increases our expectations for RPT growth for the year. In the first quarter, we communicated our expectation to land on the top end of our range of 2.5 to 3 percent RPT growth in 2024. With continued progress, we now expect 2024 RPT growth within a range of 3.5 to 4 percent.
Speaker Change: For the year in the first quarter, we communicated our expectation to land on the top end of our range of 2.53% RPT growth in 'twenty 'twenty four.
Javier Rodriguez: With continued progress we now expect 2024 RPT growth within a range of three 5% to 4%.
Javier Rodriguez: Staying on the topic of revenue, CMS recently released its ESRD Proposed Rule to update the Prospective Payment System for 2025. The CMS expected rate increase of approximately 2.1% was broadly in line with our internal expectations. The methodology has become more complex with the introduction of a new wage index, and, while we appreciate CMS's effort to innovate, the proposal falls short of reflecting the industry's true cost inflation. We will provide feedback to CMS in the hope of improving this methodology in the final rule and in the years ahead.
Javier Rodriguez: Staying on the topic of revenue CMS recently released its the srd proposed rule to update the perspective payment system for 2025 the.
Javier Rodriguez: The CMS expected rate increase of approximately two 1% was broadly in line with our internal expectations.
Speaker Change: The methodology has become more complex with the introduction of new wage index and while we appreciate CMS is effort to innovate the proposal false shorts of reflecting the industry true cost inflation well.
Javier Rodriguez: We will provide feedback to CMS and hope of improving this methodology in the final rule and in the years ahead apps.
Javier Rodriguez: Absent further edits, the proposed rule would continue to put pressure on the system. Additionally, with the proposed rule, CMS reconfirmed its intention to include oral-only drugs within the bundle as scheduled beginning next year and identified positive policy changes to aid with this transition. Davita supports the MS position and, giving our experience with Calcimedics, we strongly believe this will provide more patients with access to these drugs since many of our patients do not have Part D coverage. We understand that there are entities arguing for Congress to delay the implementation, with stated concerns around patient access and the operational ability for providers to comply.
Javier Rodriguez: Absent further edit the proposed rule would continued to put pressure on the system.
Javier Rodriguez: Additionally, with the proposed rule CMS reconfirmed its intention to include oral only drugs within the bundle as schedule beginning next year and identified positive policy changes to aid with this transition.
Davita: Davita support CMS position and given our experience with cosmetics. We strongly believe this will provide more patients with access to these drugs since many of our patients do not have part D coverage.
Davita: We understand that there are entities, arguing for Congress to delay the implementation.
Javier Rodriguez: Davita is well prepared and investing the necessary resources to implement this transition in support of our patients. Turning to full year guidance, We are raising our 2024 adjusted operating income guidance while incorporating a change in the treatment of our center closure expenses. We are raising our 2024 Adjusted Operating Income guidance from the prior range of $1.875 billion to $1.975 billion to a new range of $1.91 billion to $2.01 billion. This represents a $35 million increase at the midpoint of the range.
Javier Rodriguez: This is the result of a $95 million increase in expected operating performance offset by now including approximately $60 million of full-year center closure costs that we previously would have excluded from adjusted operating income as a non-GAAP adjustment. Joel will provide more detail about this change in our non-GAAP reporting presentation. This guidance reflects sustained momentum in our key operating metrics, including the revenue per treatment progress we highlighted today, and our expectation for a strong performance in the back half of the year. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.
Joel Ackerman: Our second-quarter adjusted operating income was $506 million, adjusted EPS was $2.59, and free cash flow was $654 million. Before I dive into the specifics on our performance for the quarter, let me add some detail to the change in reporting presentation of our non-GAAP results that Javier mentioned. As a result of a recent letter from the SEC to Davita, we will no longer treat center closure costs as an adjustment in our non-GAAP presentation.
Joel Ackerman: These center closure costs impact our patient care costs, GNA, and depreciation and amortization expense lines. Our adjusted OI and adjusted EPS for Q2 now include center closure costs, and our updated full year 2024 guidance shared today follows the same methodology. To help with comparisons to prior periods, we are also now showing prior period results under the new methodology. For comparison, these costs represent approximately $15 million per quarter in 2024 for a total of roughly $60 million expected this year.
Joel Ackerman: Center closure costs in 2023 were approximately $100 million. For 2025, we are forecasting $20 to $30 million in center closure costs. These presentation changes have no impact on how we manage our business, nor our overall profitability, cash flow, or long-term expectations.
Joel Ackerman: With that, let me break down each of the components of our Q2 performance starting with U.S. dialysis and specifically treatment volume. Sequentially, treatments per day were up 1.1% in Q2 versus Q1. This increase was primarily due to census gains in the quarter and a seasonal improvement in mistreatment.
Joel Ackerman: Compared to the same period last year, second quarter treatments per day were up 50 basis points. However, this year-over-year growth was below our expectations as a result of two primary factors. First, severe weather events in May and June resulted in higher mistreatment rates, representing approximately 20 basis points of headwind on year-over-year treatment growth for the quarter. We have seen a similar but more pronounced disruption in July with the impact of Hurricane Beryl
Joel Ackerman: Second, U.S. net census gains were weaker than expected. Although new to dialysis admits grew for the sixth consecutive quarter, mortality was above our forecast. We expect both of these factors to negatively impact the second half of the year. For the full year, we now expect treatment volume growth to be between a half a percent and 1%. Revenue per treatment was up approximately $6 sequentially. This increase is primarily due to typical seasonality from higher patient co-insurance and deductibles in Q1.
Joel Ackerman: As Javier outlined, we now anticipate full-year revenue per treatment growth of 3.5 to 4 percent for 2024. Patient care costs per treatment were approximately flat quarter over quarter. Typical seasonal declines from items like higher payroll taxes in Q1 offset higher health benefit costs and other inflationary increases in the second quarter. Depreciation and amortization declined $12 million in Q2 versus Q1, partially as a result of a decline in center closure costs.
Joel Ackerman: Center closure costs in DNA were approximately $50 million in 2023 compared to $10 million in 2024. Since these costs are now included in our adjusted DNA numbers, we now expect a year-over-year adjusted DNA decline of approximately $40 to $50 million. For Integrated Kidney Care, or IKC, our value-based care business, operating income declined $8 million sequentially. As we have seen in the past, we expect results in the second half of the year to be significantly stronger than the first half as a result of the timing of revenue recognition. International operating income was flat quarter over quarter.
Speaker Change: We have seen in the past we expect results in the second half of the year to be significantly stronger than the first half as a result of the timing of revenue recognition.
Speaker Change: International operating income was flat quarter over quarter we.
Joel Ackerman: We have closed our acquisitions in Ecuador and Chile and expect our acquisitions in Colombia to close in Q3 and in Brazil by year end. Moving now to the capital structure. In the second quarter, we repurchased 2.7 million shares, and to date in Q3, we have repurchased an additional 1.1 million shares. Leverage at the end of Q2 was 3.1 times EBITDA. This was down from three months ago due to growth in trailing 12-month EBITDA and a reduction of net debt by over $200 million.
Speaker Change: We have closed their acquisitions in Ecuador, and Chile, and expect our acquisitions in Colombia to close in Q3 and in Brazil by year end.
Speaker Change: Moving now to capital structure in the second quarter, we repurchased two 7 million shares and to date in Q3, we have repurchased an additional 1.1 million shares.
Speaker Change: Leverage at the end of Q2 was three one times EBITDA.
Speaker Change: This was down from three months ago due to growth in trailing 12 months EBITDA and a reduction of net debt by over $200 million.
Joel Ackerman: As of the end of Q2, we held approximately $400 million of funding from Change Healthcare's parent UnitedHealth Group related to the cyber event earlier this year. As of today, that balance currently sits at approximately $300 million, and we expect additional repayment to align with successful collections on impacted claims. We continue to collect on changed health care impacted claims, and U.S. dialysis days sales outstanding have declined by 14 days quarter over quarter.
Speaker Change: As of the end of Q2, we held approximately $400 million of funding from change Healthcare's parent Unitedhealth group related to the cyber event earlier this year.
Speaker Change: As of today that balance currently sits at approximately $300 million and we expect additional repayment to align with successful collections on impacted claims.
Speaker Change: We continue to collect on change healthcare impacted claims and U S. Dialysis days sales outstanding have declined by 14 days quarter over quarter.
Joel Ackerman: As always, we are assessing opportunities to optimize our capital structure, which includes looking to address the remaining balance of our term loan B maturing in 2026. We continue to target leverage within our range of three to three and a half times. To this end, we are also assessing opportunities to increase our debt to ensure sufficient capacity to maintain leverage within this range. To conclude, let me share some additional detail about our updated adjusted operating income and adjusted EPS guidance for 2020. As Javier said, our new adjusted OI guidance range is $1.91 billion to $2.01 billion. There are several moving pieces within this number, so let me give you the key puts and takes.
Speaker Change: As always we are assessing opportunities to optimize our capital structure, which includes looking to address the remaining balance of our term loan b maturing in 2026, we continue to target leverage within a range of three to three and a half times to this end we are also assessing opportunities.
Speaker Change: To increase our debt to ensure sufficient capacity to maintain leverage within this range.
Speaker Change: To conclude let me share some additional detail about our updated adjusted operating income and adjusted EPS guidance for 2024, as Javier said, our new adjusted Oi guidance range is $1.91 billion to $2.01 billion there.
Javier Rodriguez: There are several moving pieces within this number so let me give you the key puts and takes.
Joel Ackerman: First, we are now including expenses related to center closure costs in this adjusted OI range. This is an approximate $60 million of additional operating expenses that were previously not in our adjusted OI guidance. To reiterate my earlier comments, this is a change in the presentation of our adjusted results and does not impact our GAAP financials or cash flow. Second, additional RPT growth of approximately 50 to 100 basis points relative to our previous expectations represents an increase of approximately $85 million in the mid-term.
Speaker Change: First we are now including expenses related to center closure costs in this adjusted Oi range.
Speaker Change: This is an approximate $60 million of additional operating expenses that were previously not in our adjusted Oi guidance.
Speaker Change: To reiterate my earlier comments. This is a change in the presentation of our adjusted results and does not impact our GAAP financials or cash flows.
Speaker Change: Second additional RPT growth of approximately 50 to 100 basis points relative to our previous expectations represents an increase of approximately $85 million at the midpoint.
Joel Ackerman: Third, the range reflects improved expectations for patient care costs, mostly related to labor and productivity improvements, which is mostly offset by our revised volume expectations for the full year. All together, these changes represent an approximate $35 million increase in our adjusted operating income guidance at the midpoint of the range. We are also updating our 2024 adjusted earnings per share guidance to a range of $9.25 to $10.05, primarily due to the increase in adjusted OI. That concludes my prepared remarks for today. Operator, please open the call for Q&A.
Speaker Change: Third the range reflects improved expectations for patient care costs, mostly related to labor and productivity improvements.
Speaker Change: Which is mostly offset by our revised volume expectations for the full year.
Speaker Change: Altogether. These changes represent an approximate $35 million increase in our adjusted operating income guidance at the midpoint of the range. We are also updating our 2024 adjusted earnings per share guidance to a range of $9 25.
Speaker Change: To $10.05, primarily due to the increase in adjusted Oi.
Speaker Change: That concludes my prepared remarks for today operator, please open the call for Q&A.
Operator: Thank you, sir. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press star and then the number two. One moment, please. Peto, Chickering, Deutsche Bank, you may go ahead, sir.
Speaker Change: Thank you Sir if you would like to ask a question. During this time simply press Star and then the number one on your telephone keypad. If he would like to withdraw your question Press Star then the number two one moment please.
Speaker Change: Peter Chickering with Deutsche Bank, You May go ahead Sir.
Philip Chickering: Hey, good afternoon guys. Nice quarter. Thanks for taking my questions.
Speaker Change: Yes.
Peter Chickering: Good afternoon guys.
Peter Chickering: Nice quarter, Thanks for taking my questions.
Peter Chickering: Can you give us some color on what you saw through the quarter and what you saw in July and.
Speaker Change: Just looking at the high end of your revised guidance I get to grow like one, 5%, which is a big step up versus what you saw in the first half of year. So I just want to sort of see kind of what you guys are seeing to give you confidence in the high end of that.
Philip Chickering: On the NAG, can you give us some color on what you saw through the quarter and what you saw in July? Just looking at the high end of your revised guidance, you get to grow by 1.9%, which is a big step up versus what you saw in the first half of the year. So I just want to sort of see kind of what you guys are seeing to give you confidence in the high end of that.
Joel Ackerman: Sure. Thanks, Peto. So, through the quarter, what we really saw was mistreatments were elevated relative to what we expected, and our census growth was below expectations. The pattern there has continued. Neutodialysis admits remain strong, and the growth there is consistent with what we had seen pre-COVID, and mortality remains elevated. In terms of the back half of the year, I'd point out one thing that gives us confidence, which is we've got an extra treatment day in the second half of the year relative to the second half of the year last year.
Peter Chickering: Sure. Thanks Peter.
Speaker Change: So through the quarter.
Speaker Change: What we really saw was missed treatments were elevated relative to what we expected and our.
Speaker Change: Census growth was below expectations. The pattern. There has continued new to dialysis add Mitch remain strong and the growth there is consistent with.
Speaker Change: With what we had seen pre COVID-19 and mortality remains elevated in.
Speaker Change: In terms of the back half of the year.
Speaker Change: I would point out one thing that gives us confidence, which is we've got an extra treatment day in the second half of the year.
Speaker Change: Relative to the second half of the year last year, so that in and of itself is about 30 bps of additional growth.
Joel Ackerman: So, that in and of itself is about 30 bps of additional growth. Other than that, we really haven't modeled in a whole lot of changes for the back half of the year. We haven't built in much census growth, and we're expecting mistreatment rates to continue to be challenging. So, if you really think about the back half of the year, year-over-year growth, it's really about treatment days rather than any change in any of the underlying assumptions.
Speaker Change: Other than that we really havent modeled in a whole lot of changes for the back half of the year. We haven't built in much census growth and we're expecting mistreatment right to continue to be.
Speaker Change: Challenging so if you really think about the back half of the year year over year growth, it's really about treatment days, rather than any change in any of the underlying assumptions.
Philip Chickering: Okay, fair enough. And you gave some of the moving parts, but if we exclude the $16 million of closure costs, so you raise guidance by $95 million, can you just give us the components of sort of how you raise guidance by $95 million versus previous guidance? Just, you know, I just want to understand that as a big measure of 2025. Thanks.
Speaker Change: Okay fair enough.
Speaker Change: Some of the moving parts, but if we exclude the $60 million of closure costs you raise guidance by $95 million can you just bridge us.
Speaker Change: The components of sort of how you raised guidance by $95 million versus previous guidance just yeah I just.
Speaker Change: Wanted to understand that as anything thats for our 2025.
Joel Ackerman: Sure, so I'd start with revenue per treatment, where we moved the guide from what essentially last quarter was 3% to now between 3.5% and 4%. So at the midpoint, 75 BPS is worth roughly $85 million. So that's number one.
Speaker Change: Sure. So I'd start with revenue per treatment, where we moved the guide from what essentially last quarter was 3% now to 3.5% to 4%. So at the midpoint 75 bps is worth roughly $85 million. So that's number one and that's coming.
Joel Ackerman: And that's coming from a combination of continued success in the revenue operations, strength in contracting that we've seen through the year so far, and then a little bit of mix improvement. So that's the dominant factor and is worth $85 million. Contributing to that as well is some improvement we're seeing in labor costs. I'd highlight two things there.
Speaker Change: A combination of continued success on the revenue operations.
Speaker Change: Strength in contracting that we've seen through the year, so far and then a little bit of mix improvement. So thats the dominant factor in worth $85 million contributing to that as well is some improvement we're seeing in labor costs I'd highlight.
Speaker Change: Two things there first some of the premium pay whether it's overtime or spot bonuses have come down and second we are seeing a little bit better productivity in the year than expected. Those two things combined are worth about $30 million.
Joel Ackerman: First, some of the premium pay, whether it's overtime or spot bonuses, has come down. And second, we are seeing a little bit better productivity this year than expected. Those two things combined are worth about $30 million, and offsetting that is about $20 million of OI headwind from the lower volume that we've called out. So plus 85 from RPT, plus 30 from labor, minus 20 from volume, that'll get you to 95 before taking into account the $60 million change in center closure costs.
Speaker Change: And offsetting that is about $20 million.
Speaker Change: A headwind from the lower volume that we've called out so plus 85 from RPT plus 30 from labor minus 20 from.
Speaker Change: <unk>.
Speaker Change: From volume that will get you to 95.
Speaker Change: Increase before taking into account the $60 million change in center closure cost.
Philip Chickering: Great, thanks so much.
Speaker Change: Great. Thanks, so much.
Justin Lake: Thank you. Our next caller is Justin Lake with Wolf Research. You may go ahead, sir.
Speaker Change: Thank you. Our next caller is Justin Lake with Wolfe Research you May go ahead Sir.
Justin Lake: Thanks. Let me just follow up on Peto's question there. You said 20 million from lower volume? That's right, Justin. And you took down volume by, what, 75 bps at the midpoint?
Speaker Change: Thanks.
Justin Lake: Let me just follow up on Peter's question, There, you said $20 million from lower volume.
Speaker Change: That's right Justin.
Justin Lake: And you took down volume by what 75 bps at the midpoint.
Joel Ackerman: Yeah, I would say as we were thinking about it, we probably weren't internally modeling as of last quarter that would be at the midpoint. So you'd probably get to a little bit of a lower volume number, but you would have to start at a slightly lower volume number.
Speaker Change: Yes, I would say as we were thinking about it we probably werent internally modeling as of last quarter that we'd be at the midpoint, so you'd probably get to a little bit of a lower you'd have to start at a slightly lower.
Speaker Change: Volume number to bridge to that $20 million.
Justin Lake: So maybe it's 50 basis points. I'm just trying to think about the relativity here. You're in the right ballpark there. So in your mind, 50 basis points of volume is about $20 million of OI.
Speaker Change: So maybe it's 50 basis points I'm, just trying to think about the relativity here.
Speaker Change: Youre in the right ballpark there.
Speaker Change: Hi.
Speaker Change: So in your mind 50 basis points of volume is about $20 million of Oi on an annual basis.
Joel Ackerman: Yeah, I probably would, if you had asked me just stand alone, what's 50 basis points of volume worth, I probably would have told you 50 to 60 million. So maybe use a slightly lower number. Oh, I'm sorry. I'm sorry. Correcting me 1% is worth 50 to 60. So you're in the right ballpark there.
Speaker Change: Yes, I would.
Speaker Change: Probably if you had asked me just standalone, what's 50 basis points of volume worth I, probably would have told you $50 million to $60 million. So.
Speaker Change: Maybe a slightly lower number not the same thing.
Speaker Change: Sorry, I'm sorry.
Speaker Change: Yes with required correcting me, 1% is worth 50 to 60. So you are in the right ballpark there.
Justin Lake: Okay, and then on center closures. Did you say $20 or $30 million for next year?
Speaker Change: Okay, and then on center closures.
Speaker Change: Did you say $20 million to $30 million for next year.
Joel Ackerman: Yeah, for 2025, I think the number will be in that range. Okay, and just to be clear about that, when you're modeling center closure costs, it's important to realize that not all the costs come right when we close a clinic. Some of them, like lease acceleration costs, for example, can have a delay from when we close the clinic. So I think by next year, our clinic closure rate should actually be back to what it was pre-COVID.
Speaker Change: Yes for 2025, I think the number will be in that range.
Speaker Change: Okay.
Speaker Change: And just to be clear about that this year.
Speaker Change: When when you're modeling center closure costs. It is important to realize that not all the costs come right. When we close a clinic.
Speaker Change: Some of them like lease acceleration cost for example can have a delay from when we close the clinic. So I think by next year, our clinic closure rate should actually be back to what it was pre COVID-19 level call. It 20 clinics a year somewhere in that range.
Joel Ackerman: We'll call it 20 clinics a year, somewhere in that range. But the costs we're calling out will be a holdover from what we've seen. Some of them will be a holdover from the clinic closures in 2024.
Speaker Change: But the costs, we're calling out will be a holdover from what we've seen some of them will be a holdover from the clinic closures in 2024.
Joel Ackerman: Got it. That's what I was trying to get to. So you think you'll be back to like 2020 center closures next year?
Speaker Change: Got it that's what I was trying to yes. So you think you'll be back to like 'twenty 'twenty Center closures next year.
Joel Ackerman: Yeah, something like that. This year, I think last quarter we called out 50 for the year. We're probably running light, and I would guess at the end of the year we'll probably have closed only about 40 for the year and will get back to a more normal pace for next year.
Speaker Change: Yes, something like that this year I think last quarter, we had called out 50 for the year, we're probably running light and.
Speaker Change: I would guess at the end of the year, we'll probably have closed only about 40% for the year and getting back to a more normal pace for next year.
Justin Lake: Okay, and then just a question before I jump off on revenue for treatment one, the I think you said in the release that you had some offsets to pricing from lower from mixed pressure. What's mixed in the second quarter versus Q1?
Speaker Change: Okay and then just.
Speaker Change: Before I jump off on.
Speaker Change: Revenue per treatment one.
Speaker Change: I think you said in the release.
Speaker Change: Yeah.
Speaker Change: You had some offsets the pricing from lower from mix pressure.
Speaker Change: What's mix in the second quarter versus Q1.
Justin Lake: Mix was down a drop in Q2, but it's hanging right around 11%. It's right where it was at the beginning of the year. Our commercial mix at the end of Q1, which I don't think we disclosed, was a little bit harder to estimate because of some of the changes, some of the challenges with changing healthcare as some of the claims were delayed. But I don't think there's been a lot of movement on commercial mix between Q1 and Q2 that would have any real financial impact.
Speaker Change: Yeah.
Speaker Change: Mix was down a dropped in Q2, but.
Speaker Change: It is hanging right around 11%, it's right where it was at the beginning of the year, our commercial mix at the end of Q1, which I don't think we disclosed was a little bit harder.
Speaker Change: To estimate because of some of the changes some of the challenges with change healthcare.
Speaker Change: Some of the claims were delayed but I don't think theres been a lot of movement on commercial mix.
Speaker Change: Between Q1, and Q2 that would have any real financial impact.
Justin Lake: And then lastly, on the exchanges, so I assume that, you know, you're at 10.9 to end the year for the fall quarter report, but let's say you're at 11. How much of that is coming from exchanges today? And how much of that came from exchanges, let's say pre-COVID?
Speaker Change: And then lastly on the exchanges.
Speaker Change: So I assume that that Youre at 10.9 to end the year, if I remember the fourth quarter report.
Speaker Change: The let's say you're at 11.
Speaker Change: How much of Thats coming from exchanges today, and how much of that came from exchanges, let's say pre COVID-19.
Justin Lake: Yeah, the numbers are up about 200 basis points.
Speaker Change: Yes, the numbers up about 200 basis points.
Justin Lake: I'll take that. I appreciate it, guys. Thanks.
Speaker Change: Okay.
Speaker Change: I'll take that I appreciate it guys. Thanks.
Speaker Change: Thank you.
Albert Rice: Thank you. Our next caller is A.J. Rice with UBS. You may go ahead, sir.
Speaker Change: Thank you. Our next caller is AJ rice with UBS you May go ahead Sir.
Albert Rice: Hi, thanks for the question. On the IKC business, I guess year-to-date the loss, if I've calculated it right, is about $60 million. I know your target for the year is $50 million, and as you did say in the prepared remarks, you think you'll see more positive results in the back half of the year. Is $50 million still the expectation, and does that suggest you'll be positive in both the third and fourth quarters
Speaker Change: Hi.
AJ Rice: For the question.
AJ Rice: On the <unk> business, I guess year to date loss, if I calculate it right. It's about $60 million I know you are.
Speaker Change: Target for the year is $50 million.
Speaker Change: Say in the prepared remarks, you think youll see more positive in the back half of the year is 50 million still the expectation.
Speaker Change: <unk>.
Speaker Change: Does that suggest it will be positive in both the third and fourth quarter.
Joel Ackerman: Thanks for the question, AJ. You've got the numbers right, meaning we're at negative 60 and change for the year-to-date, and we still expect the year to come in that 50 range. But it's not necessarily because there's a big change in the business, but rather revenue recognition on the back end of the year. So that's the big difference there. And as you know, this business, and we've asked you to look at it more on an annual basis because quarter-to-quarter fluctuation can be a bit more dramatic, but that still holds in the range.
Speaker Change: Thanks for the question AJ, you got the numbers right, meaning were negative 60 and change for the year.
Speaker Change: Year to date, and we still expect the year to come in.
Speaker Change: That 50 range, but it's not necessarily because theres, a big change in the business, but rather revenue recognition on the back end of the year.
Speaker Change: So that's the big difference there.
Speaker Change: As you know this business and we've asked you to look at it more on an annual basis because quarter to quarter fluctuation can be a bit more dramatic, but that's still hold on the range.
Joel Ackerman: Yeah, AJ, just on the quarterly spread between Q3 and Q4, it can be hard for us to predict when revenue will land. That said, I would expect Q3 to be a loss-making quarter again, and Q4 to be a much, much stronger quarter. Then again, depending on when we get information. Some of the Q4 revenue could pull forward to Q3.
J: Yes, a J just on the quarterly split a spread between Q3 and Q4, it's it can be hard for us to predict when the revenue will land that said I would expect Q3 to be a loss, making quarter again and Q4 to be.
Speaker Change: A much much stronger quarter.
Speaker Change: Then again, depending on when we get information.
Speaker Change: Some of the Q4 revenue could pull forward to Q3.
Joel Ackerman: Okay, and obviously, the comments on the volume are mostly around the storm impact on mistreatment, but you did sort of mention mortality. What did you see in mortality, and was that a significant contributor to your decision to adjust, or was that just the normal fluctuations you see from quarter to quarter?
Speaker Change: Okay, and obviously it sounds like.
Speaker Change: The comments on the volume or mostly around.
Speaker Change: The storm impact.
Speaker Change: <unk>.
Speaker Change: You did sort of mentioned mortality what did you see in mortality and was that a significant.
Speaker Change: A contributor to your decision to adjust or that's just the normal fluctuations you see from quarter to quarter.
Joel Ackerman: Yeah, so, um, the short answer is mortality is definitely higher than we expected, and maybe it would be helpful to step back for a second and just give you a sense of how we're thinking structurally about where we are on volume for the year. And as we step back,
Speaker Change: Yeah. So.
Speaker Change: The short answer is mortality is definitely higher than we expected and.
Speaker Change: Maybe it would be helpful to step back for a second and just.
Speaker Change: Give you a sense of how we're thinking structurally about where we are on volume for the year and as we step back.
Speaker Change: The question, we are have been asking ourselves is.
Speaker Change: We are behind on volume growth call. It 150 bps relative to pre COVID-19 relative to where we'd like to be and.
Joel Ackerman: We are, and we've spent a lot of time trying to quantify that. But we are limited by the information we have, both the quality of the data as well as the timeliness of the data, recognizing we're playing with relatively small numbers here, right, 100 bips, 150 bips, with inputs that have a decent amount of volatility or variability. That said, as we try and quantify it, we think the $150 million gap between where our volume growth for the year is relative to where it was pre-COVID is really made up of two things. About 50 to 100 bips of that gap is related to mortality. Mortality is just running higher than it was. It's actually up this year relative to where it was six months ago.
Speaker Change: We are we've spent a lot of time trying to quantify that we're limited by the information we have both the quality of the data as well as the timeliness of the data recognizing we're playing with relatively small numbers here right 100 bps to 150 bps with inputs that have a.
Speaker Change: Decent amount of volatility or variability.
Speaker Change: That said as we try and quantify it we think the $150 million gap between where our volume for volume growth for the year is relative to where.
Speaker Change: It was pre Covid is really made up of two things about 50 to 100 bps of that gap is related to.
Speaker Change: Mortality mortality is just running higher than it was it's actually up this year relative to where it was six months ago, and we think structurally that's.
Joel Ackerman: And we think structurally that's the biggest component of why we're not 150 basis points higher. The second thing we believe relates to the capital efficient approach we took to managing our clinic footprint. If you go back three or four years, volume for us and the whole industry was beginning to decline. We recognized that our capacity utilization was going down, and we were very focused on getting back to a healthy capacity utilization. One that could support our investment in our teams, in clinical quality, and in information technology.
Speaker Change: The biggest component of why we're not 150 basis points higher the second thing we believe relates to the capital efficient approach, we took to managing our clinic footprint you go back three or four years volume for us in the whole industry.
Speaker Change: <unk> was beginning to decline we recognize that our capacity utilization was going down and we were very focused on.
Speaker Change: Getting back to a healthy capacity utilization, one that could support our investment in our teams and clinical quality and in information technology and the result of that was we pulled back on de novo's.
Joel Ackerman: And the result of that was we pulled back on de novos before others did, and we closed roughly 200 clinics over the last few years. The result of all that was a decline in our clinic share over the last few years. Let's call it a point and a quarter, roughly. And with that, we believe we have lost some volume.
Speaker Change: Before others did and we closed roughly 200 clinics over the last few years. The result of all that was a decline in our clinic share over the last few years it call. It a point in the quarter roughly.
Speaker Change: And with that we believe we have lost some volume.
Joel Ackerman: It's hard to quantify, but if we had to put a range on it, it would probably be somewhere in the range of 40 to 60 basis points. So, you put those two things together, 50 to 100 basis points of mortality higher than historical combined with 40 to 60 basis points of impact from our clinic footprint management. We think that explains the majority of the 150 basis point gap. I will note one important thing; new to dialysis admits is not on our list of the gap. As I've said before, those remain strong. The growth in new dialysis admits is consistent with the growth we saw pre-COVID and remains at a healthy level.
Speaker Change: It's hard to quantify but if we had to put a range on it would probably be somewhere in the range of 40 to 60 basis points. So you put those two things together.
Speaker Change: 50 to 100 basis points of mortality higher than historical combined with 40 to 60 basis point impact from our clinic footprint management and we think that explains the majority of the 150 basis point gap I will know.
Speaker Change: One important thing new to dialysis admit is not on our list of the gap as I've said before those remains strong the growth in new dialysis add mix is consistent with the growth we saw pre COVID-19 and remains at a healthy level. So.
Joel Ackerman: So, I hope at the beginning I answered your question about the year and then gave you a bit more color on the bigger picture. Javier, anything to add? Yeah. I'll add it.
Speaker Change: I hope at the beginning I answered your question about the year and then gave you a bit more color on the bigger picture Javier anything to add I'll add.
Javier Rodriguez: Yeah, I'll add one thing. First of all, at the beginning of the sentence, Joel inadvertently said 150 million. And he was talking about 150 basis points, just to make sure that the record reflects that the rest of the conversation, he was clear on the 150 basis points. But I think, while he walked you through a lot of numbers, at the end of the day, the question that you and all of us are trying to ask yourselves is, is there a structural change that is going to change the growth rate?
Javier Rodriguez: One thing first of all at the beginning of this thing.
Joe: Joe inadvertently said $150 million.
Speaker Change: 150 basis point.
Speaker Change: To make sure that the record reflects the rest of the conversation.
Speaker Change: Clear on the 150 basis point, but I think well he walked you through a lot of numbers at the end of the day. The question that you and all of US are trying to ask ourselves is is there a structural change.
Speaker Change: That is going to change the growth rate.
Javier Rodriguez: And to the best of our ability based on the work that we've done, the answer that we come up with is no. It appears that we are in a bit of a just a, let's call it a period of time where mortality is elevated, but we see through these new to dial suspicions that the volume should come back to normality over time.
Speaker Change: And to the best of our ability on the work that we've done the answer that we come up with is no.
Speaker Change: It appears that we are in a bit of a just a let's call. It a period of time.
Speaker Change: Mortality is elevated but we see through these new to dialysis patients.
Speaker Change: That the volume should come back to normality overtime.
Albert Rice: Okay, great. Thanks so much.
Speaker Change: Okay, great. Thanks, so much.
Speaker Change: Thank you.
Andrew Mok: Our next caller is Andrew Mok with Barclays. You may go ahead, sir.
Speaker Change: Our next caller is Andrew Mok with Barclays. You May go ahead Sir.
Andrew Mok: Great, thank you. Maybe just to follow up on that mortality point, I guess, what's the working assumption on why mortality is elevated? Because I think the excess mortality dynamic during the early years of the pandemic would intuitively suggest there would be a tailwind in the aftermath. So what's your working assumption here on why it remains elevated? Thanks.
Andrew Mok: Great. Thank you maybe just.
Andrew Mok: Follow up on that mortality point, I guess whats the working assumption on why mortality is elevated because I think the excess mortality dynamic during the early years of the pandemic would intuitively suggest there would be a tailwind in the aftermath. So what's your kind of working assumption here on why it remains elevated.
Javier Rodriguez: Yeah, your question is one that we've been asking a lot, and we've been talking to our physician community and trying to understand what is driving it. The reality is that people come up with hypotheses, and you can actually support them a bit, a higher-elevated flu season, etc., but the real quantifiable answer is not one that we could say with confidence. And, you know, if you were going to say on the other side of the equation, we're starting to see improvements on things that should have an impact on mortality, like integrated kidney care, managing people upstream, new drugs, SGL-2 and GLP-1, etc. So we are scratching our heads, and we will be working on it, and as soon as we get something with confidence, we will share it with you.
Speaker Change: Yes.
Speaker Change: Question is one that we've been asking a lot and we've been talking to our physician community and trying to understand what is driving it there.
Speaker Change: Reality is people come up with hypotheses and you can actually supported a bit of higher elevated flu season et cetera, but but.
Speaker Change: The real quantifiable answer is not one that we could say with confidence.
Speaker Change: And.
Speaker Change: If youre going to say on the on the other side of the equation, we're starting to see improvement something that should have an impact on mortality like the integrated kidney care managing people upstream new drugs, <unk> and <unk> et cetera, and so we are scratching our head.
Speaker Change: Ed.
Speaker Change: We will be working on it and as soon as we get something with confidence we will share with you.
Joel Ackerman: And then, in your prepared remarks, I think you mentioned that improving collections is a multi-year effort, and given the strong gains we've seen over the last six quarters, just where are we in this process, and how much runway is left beyond 2024? Thanks.
Speaker Change: Great. Okay. Thank you and then in the prepared remarks, I think you mentioned that the improvement in collections is a multiyear effort and given the strong gains we've seen over the last six quarters, just where are we in this process and how much runway is left beyond 2024.
Speaker Change: Yes.
Speaker Change:
Andrew Mok: Yeah. I would say there's certainly going to be more in 2025, if from nothing else than just the annualization of the improvements we're anticipating in the back half of the year. Looking forward from there, I think it's safe to say that any benefits from this are going to decline over time. And what I mean by that is their contribution to RPT growth will decrease over time. I think everything we've achieved so far is sustainable.
Speaker Change: I would say there is certainly going to be more in 2025, if for nothing else than just the annualized nation of the improvements we're anticipating in the back half of the year.
Speaker Change: Looking forward from there.
Speaker Change: I think it's safe to say that any benefits from this are going to are going to decline over time, and what I mean by that is their contribution to RPT growth will combine over time I think everything we've achieved so far is sustainable.
Andrew Mok: That said, it's hard to predict how much more there is and over what time period we're likely to capture it. But I think it is fair to say, relative to when we started this a few years ago and when we started talking about it with the street in Q2 of 2022, it has certainly exceeded our expectations.
Speaker Change: That said, it's hard to predict how much more.
Speaker Change: There is and over what time period will likely to capture it.
Speaker Change: I think it is fair to say relative to when we started this a few years ago. When we started talking about it with the street in Q2 of 2022, it has certainly exceeded our expectations.
Andrew Mok: Got it. And if I could just follow up on one more point, I think you called out the clinic closures as being a potential drag on volume growth as well. You know, given you and your competitor, one of your big competitors, are all closing clinics at the same time, where do you think, how much leakage do you think there is there, and where are those patients going to get their dialysis treatment if not, you know, one of the two large dialysis chains? Thanks.
Speaker Change: Got it and if I could just follow up on one more point I think you called out the clinic closures as being a potential drag to volume growth as well.
Speaker Change: I think given you and your competitor one of your big competitors are closing clinical at the same time.
Speaker Change: Where do you think how much leakage do you think there is there and where is where are those patients going to get their dialysis treatment if not one of the two large dialysis chains.
Javier Rodriguez: Yeah, so we've done a lot of work on this, and interestingly enough, the data we have on clinic share is better than the data we have on treatment share. And we believe that the midsize and smaller dialysis operators have actually gained share over the last few years. They have closed fewer clinics. They have built more clinics. The result of that is probably picking up some volume as a result of that.
Speaker Change: Yes so.
Speaker Change: We've done a lot of work on this and interestingly enough the data we have on clinic.
Speaker Change: Clinics is actually better or clinic share is better than the data we have on treatment share and we believe that the mid size and smaller dialysis operators have actually gained share over the last few years. They have closed fewer clinics they have.
Speaker Change: <unk> built more clinics.
Speaker Change: And.
Speaker Change: The result of that is probably picking up.
Speaker Change: Some volume as a result of that.
Javier Rodriguez: And the question on that, and we ask ourselves, is that good or bad, in general, of course, you start to think of market share. And in this one, it's clinic share. And the way that we've looked at it, and, of course, time will tell, is that we led the way in stopping de novo as the mortality escalated during the pandemic. So if you see Davita build, it was very aggressively stopped.
Speaker Change: And the question on that.
Speaker Change: And we ask ourselves is that good or bad in general of course, you start to think of market share and in this one its clinic share and the way that we looked at it and of course time will tell us that we led the way and stopping de novo's as the mortality.
Speaker Change: Escalated during the pandemic to have you see davita build it was very aggressively stopped and then we led the way and right sizing the capacity.
Javier Rodriguez: And then we led the way in right-sizing the capacity. And so if you were just going to do shorthand, you would say we've closed roughly 200 centers. And depending on the math, you could say it's roughly 100 to $150 million of fixed expense reduction, and the loss of volume is roughly in that 50 million. So you would say that just with that math, it looks like we're making the right trade-off. Of course, there's a lot of other dynamics of patient access, the local relationship with physicians, and all the normal considerations that we have to go into. But I'm just giving you the money side of it.
Speaker Change: So if.
Speaker Change: If you were just going to do shorthand you.
Speaker Change: I would say we've closed roughly 200 centers.
Speaker Change: And depending on the math, you could say, it's roughly $100 million to $150 million of fixed expense reduction.
Speaker Change: And the loss of.
Speaker Change: Volume is roughly in that $50 million. So you would say that just with that math it looks like we're making the right trade off of course, there's a lot of other dynamics.
Speaker Change: <unk> access the local relationship with physicians and all the normal considerations that we have to go into but I'm, just giving you the.
Speaker Change: Money side of it.
Speaker Change: Great. Thanks for all the color.
Joel Ackerman: Sure. Hey, before we take the next question, I just want to come back to an answer I gave to Justin on the exchanges. I talked about a 200 basis point increase from the exchanges. I just wanted to clarify that that's 200 basis points of revenue, not 200 basis points of mix increase that came from the exchanges. So, just wanted to make sure that was clear.
Speaker Change: Sure.
Speaker Change: Before we take the next question I just wanted to come back to an answer I gave to Justin on the exchanges I talked about 200 basis point increase from the exchanges I just wanted to clarify that's 200 basis points of revenue not 200.
Speaker Change: <unk> points of mix increase that came from the exchanges. So just wanted to make sure that was clear.
Kevin Fischbeck: Thank you. And once again, if you do have any questions, you may press star one to withdraw your questions or press star two. Our next caller is Kevin Fischbeck with Bank of America. You may go ahead. Great, thanks.
Speaker Change: Thank you and once again, if you do you have any questions. You May press Star one will give withdraw your question star to our next caller is Kevin Fischbeck with Bank of America. You May go ahead Sir.
Kevin Fischbeck: Great, thanks. Maybe just to follow up on that point, do you just have the percentage of revenue that comes from the exchanges, year to date so far?
Kevin Fischbeck: Great. Thanks, maybe just a.
Kevin Fischbeck: Follow up on that point, you just have like a percentage of revenue that comes from the exchanges.
Speaker Change: Year to date so far.
Kevin Fischbeck: Yeah, I'm not sure we're gonna I don't think we're going to give that number, Kevin.
Speaker Change: Yeah.
Speaker Change: I'm not sure we're going to I don't think we're going to give that number Kevin.
Speaker Change: Okay.
Kevin Fischbeck: And then, uh, you made a comment in the prepared remarks about leverage. And I think you said that you were looking to add debt to ensure that capacity would be in this range. Are you saying that you would potentially lever up, um, to deploy more capital, I guess, on share repurchase, or were you just talking about...
Speaker Change: And then.
Kevin Fischbeck: You made a comment in the prepared remarks about leverage I think you said that you were looking to add debt to ensure capacity would be in this range are you, saying that you would look to potentially lever up.
Speaker Change: To deploy more capital I guess on share repurchase or were you just talking about.
Speaker Change: Els.
Joel Ackerman: Yeah, so I wouldn't use the phrase lever up because what we're really targeting here is maintaining the leverage range of three to three and a half times. And if our goal was to get our leverage range, or our leverage multiple, above that, that's what I would characterize as levering up. I think the reality is, as our EBITDA grows, in order to maintain that leverage range of three to three and a half times, recognizing we're at the low end of that range right now, we need more debt capacity.
Speaker Change: Yes so.
Speaker Change: I wouldn't use the phrase lever up because what we're really targeting here is maintaining the leverage range of three to three five times and if our goal was to get our leverage range or our leverage multiple above that that's what I would characterize as levering up.
Speaker Change: I think the reality is as our EBITDA grows in order to maintain that leverage range of three to three five times recognizing we're at the low end of that range right now we need more debt capacity and.
Joel Ackerman: And it's just, you know, using the middle of the number as EBITDA goes up, you multiply it by 3.25, and that's the capacity you need. So we're thinking about how much debt capacity we need to make sure that we can stay in that range of EBITDA growth.
Speaker Change: And it's just using the middle of the number as EBITDA goes up you multiply it by three to five and that's the capacity you need. So we're we're thinking about how much debt capacity do we need to make sure. We can stay in that range as EBITDA grows.
Kevin Fischbeck: Okay, and in theory, that capacity would be used for share repurchase, is that?
Speaker Change: Okay and in theory that capacity will be used on share repurchases.
Speaker Change: Or is there anything else I mean.
Joel Ackerman: I mean, it would be used according to our capital allocation philosophy. So the first thing we would love to do would be to invest it in growth, recognizing that it needs to be capital efficient growth and hit our return threshold. Barring that, share repurchases would certainly be on the top of the list of how we would use excess capacity to maintain our level.
Speaker Change: It would be used using our capital allocation philosophy. So the first thing we would love to do would be to invest in growth.
Speaker Change: Recognizing it needs to be capital efficient growth and hit our return.
Speaker Change: Thresholds barring that.
Speaker Change: Share repurchases would certainly be on the at the top of the list of how we would use excess capacity to maintain our leverage level.
Kevin Fischbeck: Okay, and then I guess just on that point as well, the change in line of credit. How do we think about that? I mean, it doesn't impact your free cash flow, but I guess that would be a use of free cash flow to pay that back, or do you just collect less from United? No, I just think of it as debt, and it's included in our net debt number today. And if we had, you know, if we drew an extra $400 million on the revolver, or we did a bond deal, and we used it to pay down the change debt, it would, it's just one form of debt exchanging for another form of debt.
Speaker Change: Okay, and then I guess just on that point as well.
Speaker Change: The change line of credit how do we think about that.
Speaker Change: <unk> going.
Speaker Change: <unk> B.
Speaker Change: In fact, I guess your free cash flow, but I guess that would be.
Speaker Change: Use of free cash flow to pay that back or you just collect less from United No I, just think of it as debt.
Speaker Change: And we it's included in our net debt number today and if we had if we drew an extra $400 million on the revolver or we did a bond deal and we used it to pay down the change that it would it's just one form of debt exchanging for another.
Kevin Fischbeck: So it wouldn't hit free cash flow; it wouldn't change our leverage ratio. Okay. And then I guess just going back to the mortality point, because it is, it is hard to understand why it's such an issue now. And I mean, it's hard to say you don't fully know the reasons behind it. It's hard to say when it will normalize, but is there any thought about why things won't get back to normal over the next couple of quarters, and I guess what it is that you're looking for to kind of know that you're on the other side of that?
Speaker Change: Form of debt so it wouldn't hit free cash flow it wouldn't change our leverage ratio.
Speaker Change: Okay, and then I guess, just going back to the mortality because it is it is hard to understand.
Speaker Change: Why it is such an issue now.
Speaker Change: And.
Speaker Change: I mean.
Speaker Change: Yes, it's hard to say you don't you don't.
Speaker Change: Fully know the reasons behind it it's hard to pick one it would normalize but is there any thought about.
Speaker Change: Well I think it wouldnt get back to normal over the next couple of quarters and I guess.
Speaker Change: What is it that youre looking for to kind of.
Speaker Change: I know that you're on the other side of that.
Javier Rodriguez: Well, you know, predicting it is not a good idea, I don't think, because the odds of being wrong are probably one hundred percent. But the reality is that we do agree with you that we don't think it's structural and that it will revert back to normality. And again, I've highlighted some of the improvements that we think can happen from mortality. And many people say, well, why don't you know exactly what happened
Speaker Change: Well.
Speaker Change: Predicting it.
Speaker Change: Not a good idea I don't think because the odds of being wrong probably 100%.
Speaker Change: But the reality is that we do agree with you that we don't think it's structural and that it will revert back to normality.
Speaker Change: And again I've highlighted some of the improvements that we think can happen from mortality and.
Speaker Change: And many people say well why don't you know exactly what happened and the assumption is that that happened while they're in dialysis and the reality is there's a lot more moving pieces.
Javier Rodriguez: And the assumption is that death happens while they're in dialysis. And the reality is that there are a lot more moving pieces and that people can relocate, can go to a SNF, et cetera, et cetera. And so you don't actually get the full story. You have to follow up, and there's a lag in time. And so that's why we're having to piece it together and work hard to get the information. And we'll be back to you, but we've talked to a lot of nephrologists, and no one seems to think that there's any systemic trend that we can identify.
Speaker Change: That people can relocate can go to sniff et cetera, et cetera, and so you don't actually get the full story you have to follow up and there is a lag in time and so that's why.
Speaker Change: We're having to piece it together and work hard to get the information and we'll be back to you, but we've talked to a lot of Nephrologist and no. One seems to think that there is there is any systemic trend that we can identify.
Kevin Fischbeck: Okay, last question. Since Revity for Treatment seems to be a big part of the...
Speaker Change: Okay, and then maybe just last question.
Speaker Change: Revenue per treatment seems to be like a big part of the.
Kevin Fischbeck: The guidance raised, it sounds like everything that's happened so far, you think is sustainable, I guess, mix, maybe moves around a little bit, but Can you talk a little bit more about the commercial contracting? It sounds like that has come in a little bit better maybe than you thought it was going to, at least as far as that is capturing recent inflation. How should we think about commercial contracting in 2025? Is that still going to be a tailwind similar to what you're seeing now? Or is that going to normalize for some reason?
Speaker Change: The guidance raise it sounds like everything that's happened. So far do you think is sustainable I guess mix moves around a little bit but.
Speaker Change:
Speaker Change: Can you talk a little bit more about the commercial contracting.
Speaker Change: It sounds like that that's kind of in a little bit better maybe than you thought it was going to be as far as.
Speaker Change: Better capturing recent inflation.
Speaker Change: How should we think about commercial contracting into 2025 is that still going to be a tailwind similar to what you're seeing now or is that going to normalize for some reason.
Javier Rodriguez: Well, on RPT, basically, you have to think of three dynamics. You have negotiations, and you have the revenue cycle. And so you're asking about the negotiations, and I think to think about the future, you have to kind of put yourself into the future, which is, what is the environment like? Is it still inflationary?
Speaker Change: Well on RPT basically you have to think of three dynamics you have mix.
Speaker Change: Negotiation when you have revenue cycle.
Speaker Change: And so you are asking about the negotiations and I think.
Speaker Change: To think about the future.
Speaker Change: To kind of put yourself into the future, which is what is the environment is it still inflationary.
Javier Rodriguez: What contracts are up for negotiation, et cetera? As we've explained in the past, we are comprehensively contracted, and our big contracts usually come up every three to four years. So in any given year, you don't get many at bats.
Speaker Change: What contracts are up for negotiation et cetera, as we've explained in the past we're comprehensively contracted and are big contracts, usually come up every three to four years. So in any given year you don't get many at bats, but we're focused on is to be a really great partner to our payors and what that mean.
Javier Rodriguez: What we're focused on is being a really great partner to our payers, and what that means is having a great clinical solution at the best cost. Now, so I can't predict what that looks like. We don't foresee anything that dramatically would change what happened in 2024. That said, if you wanted to just kind of answer the question, how do you feel about margin, i.e., bringing in cost considerations to the conversation? I think that the margin strength will likely to remain in 2025.
Speaker Change: Did that have.
Speaker Change: Great clinical solution at the best cost.
Speaker Change: Now so I can't predict what that looks like we don't foresee anything that dramatically change what occurred in 2024.
Speaker Change: That said if you wanted to just kind of answered the question. How do you feel about margin I bring and the cost considerations to.
Speaker Change: To the conversation.
Speaker Change: The margin strength is likely to remain in 2025.
Javier Rodriguez: helpful. I guess maybe just maybe ask a little differently. If you're doing a little bit of commercial contracting, you feel like there's a shift in the negotiations that are, you know, managed care companies realize they need you more for network reasons, or they are appreciating the value you provide more, and that's giving you stronger negotiating power, or it's just more deflation. And so Rising Tide, Lift South Shift. Well, I think the conversation should go on.
Speaker Change: That's helpful. I guess, maybe just maybe ask a little bit differently.
Speaker Change: Youre getting a little bit of commercial contracting you feel like there is.
Speaker Change: A shift at all in the negotiations there.
Speaker Change: Hum.
Speaker Change: Just care companies realize they need you more for network reasons or are they are appreciating the value you provide more and that's giving you a stronger negotiating power or it's just more replacement is higher and so.
Speaker Change: Rising tide lifts all ships.
Javier Rodriguez: Well, I think the conversations are the same, meaning everybody's trying to do their fair share and contain costs. Everybody's trying to add value to the patient community and have an expansive network and just do the best we can. And, of course, we have to take into account costs and inflation and all those types of things. But those dynamics haven't changed other than the consideration for inflation.
Speaker Change: So I think the conversations are.
Speaker Change: The same meaning everybody is trying to do their fair share and containing costs and everybody is trying to add value to the patient community and have an expansive network and just do the best we can and of course, we have to take into account.
Speaker Change: Cost inflation and all those types of things, but those dynamics havent change other than the consideration for inflation.
Speaker Change: Alright, great. Thanks. Thank.
Speaker Change: Thank you.
Ryan Langston: And our next caller is Ryan Langston with TD Cowen. You may go ahead.
Speaker Change: And our next caller is Brian Langston for TD Cowen you May go ahead.
Ryan Langston: Hi, good evening. Thank you. On the lower census growth, maybe I missed it, but is that isolated to any particular geographies, or maybe there just certain geographies that are maybe performing below kind of the average and maybe pulling that down a little bit?
Brian Langston: Hi, Good evening. Thank you just a couple from me on the lower census growth growth, maybe I missed it but is that isolated to any particular geographies or maybe are there certain geographies that are may be performing below kind of the average and maybe pulling that down a little bit.
Joel Ackerman: No, Ryan, we're pretty much seeing that across the board.
Speaker Change: No Ryan we're pretty much seeing that across the board.
Ryan Langston: Got it. And then just to clarify, maybe on the RPT improvement sounds like obviously you're still working through that, and some of that will annualize into 25. Is it fair to assume that may end up, year on year, maybe closer to three and a half to four you're guiding this year as opposed to maybe the two and a half to three percent?
Ryan: Got it and then just to clarify maybe on.
Speaker Change: On the RPT improvement it sounds like obviously youre still.
Speaker Change: Working through that and some of that will annualize into 25 is it fair to assume that may end up just from a year on year, maybe closer to three five to four you're guiding this year as opposed to maybe the 2.5% to 3%.
Ryan Langston: I'm sorry. Are you asking about 2025 RPT?
Speaker Change: I'm sorry are you asking about 2025 RPT.
Ryan Langston: Yeah, I'm asking if, you know, you're guiding to 3.5% to 4% this year, but some of it will annualize into next year. Is it fair that, you know, the growth rate might be higher or closer to, you know, 3.5% to 4% in 2025 versus maybe prior, when we would have thought maybe closer to two and a half. Yeah, I it's early.
Speaker Change: I'm, asking if youre guiding to three 5% to 4% this year, but some of it will annualize into next year is it fair that the growth rate might be higher closer to three 5% to 4% in 2025.
Speaker Change: Versus maybe prior we would've thought maybe closer to two and a half to three yes.
Joel Ackerman: Yeah, it's early for guidance, but I would not go to three and a half to four for next year. I think that would be a real stretch to perform at this level for another year.
Speaker Change: Yes.
Speaker Change: It's early for guidance, but I would not go to three five to four for next year I think that that would be a real stretch too.
Speaker Change: Perform at this level for another year.
Speaker Change: Yes.
Speaker Change: Okay. Thanks.
Speaker Change: Thank you.
Peter Chickering: Thank you. Peter Chickering with Deutsche Bank. You may go ahead, sir.
Speaker Change: Thank you Peter Chickering with Deutsche Bank, You May go ahead Sir.
Peter Chickering: Hey guys, just a quick follow-up here. What percent of your treatments were home treatments this quarter? And what was your center in liquidation this quarter, and how did it compare versus first quarter?
Speaker Change: Hey, guys just two quick follow ups here.
Speaker Change: What percent of your treatments were home fragrance this quarter and what was your center.
Speaker Change: Liquidation this quarter and how do you compare versus the first quarter.
Joel Ackerman: Yeah, home utilization is still running in the mid to high 15s. In terms of capacity utilization, we're somewhere between 58 and a half and 59, somewhere right around that.
Speaker Change: Yes home utilization is still running in the mid to high teens.
Speaker Change: In terms of capacity utilization, we're somewhere between 58, and a half and 59 somewhere right around that.
Peter Chickering: Okay, and on the international business, the margin looks to be about 7% range, I guess. How do you think that will evolve over the next couple of years?
Speaker Change: Okay.
Speaker Change: Looking around the business the margin looks to be about 7% range I guess, how do you think that evolves over the next couple of years.
Speaker Change: <unk>.
Joel Ackerman: I think growth in international for the next couple of years, especially next year, is likely to be higher than it's been in the past, largely driven by the acquisitions that we've done in Latin America.
Speaker Change: I think.
Speaker Change: The growth in international for the next couple of years.
Speaker Change: Especially next year is likely to be higher than it's been in the past largely driven by the acquisition debt.
Speaker Change: That we've done in <unk> and Latin America.
Peter Chickering: I'm sorry, for the OI margins, like tracking around 7% OI margins for national, I guess. How does that evolve over time?
Speaker Change: Sorry for Oi.
Speaker Change: <unk> tried to around 7% NOI margins.
Speaker Change: Margins for National I guess, how does that evolve over time.
Joel Ackerman: Yeah, I think it will continue to tick up. I don't have a view on whether it could ever go down.
Speaker Change: Yes, I think it will continue to tick up.
Speaker Change: I don't have a view on could it ever get to the U S margins, but I would say that that's highly unlikely.
Joel Ackerman: The margins internationally have a couple of dynamics. Number one, there is no such thing as international competition. 12 to 13 countries.
Speaker Change: Alright last one Brian.
Speaker Change: The margins internationally have a couple of dynamics number one there is no such thing as international there's.
Joel Ackerman: And of course, they wait differently. And in some of these, you have one payer, the government, and so they will go in periods where there's no increase, and then they will have a lump increase. And so it's got a little more unusual dynamics and harder to predict the margin.
Speaker Change: 12 to 13 countries.
Speaker Change: And of course, the way differently.
Speaker Change: And in some of these you have.
Speaker Change: One payer the government.
Speaker Change: And so they will go in periods, where there is no increase and then they will have a lump increase and so it's got a little more unusual dynamic and harder to predict.
Speaker Change: Margin.
Peter Chickering: So then, you know, if margin is, I guess, harder, I guess, you know, why is that a better use of cash flow than doing share repel?
Speaker Change: So if margin is I guess harder I guess.
Speaker Change: Why is that a better use of cash flow and then doing share repurchase.
Peter Chickering: Well, we're confident in the adjusted return. But you're asking a different question, which is, are we seeing a margin increase?
Speaker Change: Well we're confident.
Speaker Change: Adjusted return.
Speaker Change: But you are asking a different question, which is are we seeing margin increases.
Peter Chickering: Okay, fair enough. And the last one, for IKC, you put about 3,000 lives this quarter, which is the last quarter, but the medical spend per life is, you know, about half of what it was, I guess, on the average, the last quarter or so. As you're bringing new patients into IKC, can you sort of talk about what type of patient dynamics they are versus who you have currently in there? Thank you very much.
Speaker Change: Okay Fair enough and then last one for Ikea U C.
Speaker Change: So you can forget about 2000 lives this quarter versus last quarter, but the medical spend per life is about half what it was I guess on the average of last quarter. So as you're bringing new patients on <unk> were talking about what type of patient demand dynamics. They are versus who you have currently in there. Thanks so much.
Joel Ackerman: Yeah, I am. I would be cautious with that ratio of medical cost per life. A lot of the lives you're talking about there, their medical costs don't actually flow through our P&L. It's only the SNP lives where the medical costs flow through. So I probably wouldn't go there with that calculation.
Speaker Change: Yeah.
Speaker Change: <unk>.
Speaker Change: I would be cautious with that ratio of medical cost per life, a lot of our lives you're talking about there. There are medical costs are not don't actually flow through our P&L. It's only the SNP lives, where the medical costs flow through.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: I, probably wouldn't go there with that with that calculation.
Peter Chickering: All right. Thanks, guys.
Speaker Change: Alright fair enough thanks, guys.
Peter Chickering: Thank you Peter.
Operator: And at this time, I'm not asking any further questions.
Speaker Change: And at this time I am no showing no further questions.
Javier Rodriguez: Okay, thank you Michelle, and thank you all for the questions. To conclude, it was another strong quarter for Davita, resulting from our investments in recent years to build a great team, strong systems, and enhance our capabilities. As we look ahead, while it's a little early to offer guidance, we believe that the underperformance, the underpinnings of our margins are sustainable. With this foundation, we're excited about the future we can achieve to benefit our patients, partners, communities, and teammates. Thank you for your continuous interest in Davita. Be well.
Speaker Change: Okay. Thank you Michelle and thank you all for the questions to conclude it was another strong quarter for Davita, resulting from our investments in recent years to build a great team strong systems and enhance our capabilities.
Speaker Change: As we look ahead, while it's a little early to offer guidance, we believe that the underperformance.
Speaker Change: Underpinnings of our margins are sustainable with this foundation, we are excited about the future we can achieve to benefit our patients partners.
Speaker Change: And teammates. Thank you for your continued interest in Davita and be well.
Speaker Change: Yes.
Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Speaker Change: Thank you. This concludes today's conference call you May go ahead and disconnect at this time.