DaVita Inc. (NYSE:DVA) Q1 2024 Earnings Call Transcript

DaVita Inc. (NYSE:DVA) Q1 2024 Earnings Call Transcript May 2, 2024

DaVita Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer period. [Operator Instructions] Thank you, Mr. Eliason, you may begin your conference.

Nic Eliason: Thank you. And welcome to our first quarter conference call. We appreciate your continued interest in our company. I’m Nic Eliason, 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 first 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 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 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, Nic, and thank you all for joining our call today. Through the first quarter, we continued building on the momentum generated through 2023, demonstrating operational discipline while continuing to find opportunities to invest, innovate and most importantly deliver clinical excellence. Today, I will cover our first quarter results, provide color on our expanding international business and wrap up with an update on Change Healthcare claim disruption. Before we get into our first quarter performance, I’ll start as we always do with a clinical highlight. One of our strategic goals is to provide solutions for patients at every stage along the kidney care journey, including helping to support transplantation.

Our aspiration is to enable as many patients as possible to receive this life-changing gift. Let me highlight three ways that DaVita is helping to address the systemic challenges of kidney transplants. The first is patient referrals to transplant centers. We recently achieved our highest monthly rate with more than two-thirds of DaVita patients under the age of 75 years old being referred for transplant. The second is living donation. The number of living donors in the United States has essentially been flat over the past two decades. To encourage more living donors, we partner with the National Kidney Foundation on its Big Ask, Big Give campaign to educate the community on living donation. We also offered patients a range of resources to support them through the conversations about living donation.

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Q&A Session

And finally, because there is a gap on transplant rates across race and ethnicity, we created a new health equity learning lab. By deploying transplant navigators, we’re testing novel approaches to drive a more equitable distribution of patients succeeding on their quest to receive a transplant. Through these and other efforts, more than 8,000 DaVita patients received a kidney transplant in 2023, the highest number of annual transplants in our history. Unfortunately, the largest challenge continues to be constrained organ supply. You may have seen recent stories about compassionate care cases involving genetically engineered pig kidneys. This is an exciting first step as society aspires to a future where organ availability is no longer constrained for patients living with kidney disease.

It is still in its early days for this technology as human trials will take some time. In the meantime, we will continue to invest in transplant and participate in innovations that will improve access to this life-changing outcome. Transitioning to our first quarter performance. Adjusted operating income was $463 million and adjusted earnings per share from continuing operations was $2.38. We had a strong quarter across our core financial trilogy with treatment volume and patient care costs performing in line with our expectations and incremental upside driven by revenue per treatment. Our Q1 performance provided increased confidence in our full year expectations and therefore, we’re raising the bottom of our adjusted operating income guidance, putting our updated range at $1.875 billion to $1.975 billion.

Within these consolidated results, our International business is a growing piece of DaVita’s portfolio. As a reminder, our International strategy is focused on three primary principles. First, identify markets that enable us to invest in clinical differentiation and provide excellent standards of care to our patients. Second, operating countries where we have a path to achieve meaningful scale led by strong local management teams. And finally, hold ourselves to the same discipline of capital efficient growth and attractive risk adjusted returns that we use for all of our business segments. Following these principles, in March, we signed an agreement to invest $300 million to expand our operations in Brazil and Colombia and enter Chile and Ecuador through the acquisitions of high quality centers in those four markets.

The Chile acquisition has closed and the transaction in Ecuador, Colombia and Brazil remains subject to each country’s respective antitrust and regulatory approval process, which we expect to be completed at various times throughout 2024. Opportunistic transactions such as this one are consistent with our overall enterprise capital allocation strategy. Going forward, we will continue to monitor the market for acquisition opportunities that meet our investment criteria and we otherwise expect international investment to be roughly consistent with our historical levels. Upon completion of these transactions and combined with our existing business, we would be the largest dialysis provider in Latin America. Once these acquisitions close, we will provide care in 13 countries outside the United States with more than 500 centers treating approximately 80,000 patients and employing nearly 20,000 health care professionals.

In 2024, we expect International growth to contribute approximately $20 million or about 1% point to DaVita’s overall enterprise growth in adjusted operating income. Most importantly, our International clinical outcomes continue to excel. We outperform the clinical benchmarks of every international market in which we operate and we have reduced hospitalization across all countries by 11% since 2021, which has driven a reduction in unnecessary health care expense and represents a meaningful improvement to our patients’ lives. And finally, let me cover our experience with the Change Healthcare outage and where we stand today. Historically, the vast majority of our U.S. dialysis claim went through the Change platform. Similar to many providers, this presented a challenging situation in the back half of Q1 as we were unable to submit claims through this channel.

As reflected in our first quarter balance sheet, the increase in our day sales outstanding and borrowing on our revolving credit facility were entirely related to the Change outage. Joel will provide more detail, but to summarize, we have resumed billing activity and we’re collecting cash well in excess of our typical levels as we catch up from the claims backlog. As of today, we believe that the operational impact from the Change Healthcare disruptions are largely resolved. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Joel Ackerman: Thank you, Javier. First quarter adjusted operating income was $463 million, adjusted earnings per share was $2.38 and free cash flow was negative $327 million. Our Q1 results reflect strong core operating performance, as well as the impacts from delayed submission and payment of claims due to the Change Healthcare outage, which I will expand on shortly. With that, let me dive into the detail for the quarter. U.S. dialysis treatments per day were slightly lower in Q1 as compared to Q4, consistent with our expectations for the quarter. Q1 was our fifth consecutive quarter of year-over-year new to dialysis admissions growth, although mortality remains elevated relative to pre-COVID levels. For the full year, we maintain our expectations of 1% to 2% treatment volume growth.

Revenue per treatment was down approximately $2 quarter-over-quarter. This is primarily due to typical seasonality related to patient coinsurance and deductibles offset by typical rate increases, contracted escalators and mix improvements. We continue to see strength in RPT as the result of revenue cycle improvements and we’re trending towards the top of our original RPT range of 2.5% to 3% growth year-over-year. Non-GAAP patient care cost per treatment declined $8 sequentially down from the seasonally elevated fourth quarter. As a reminder, Q4 seasonality was higher than typical and we see this reflected in the sequential quarterly change. International adjusted operating income increased $15 million sequentially, a return to normal from a low in Q4 related to higher bad debt reserves.

Additionally, Q1 benefited from foreign exchange tailwinds. As Javier mentioned, this quarter we announced acquisitions in four Latin American countries, including our entrance into Chile and our anticipated entrance into Ecuador. These acquisitions are expected to close at various points during 2024 and we anticipate that their partial year operating income in 2024 will largely be offset by expenses related to the acquisitions. Transitioning to cash flow and capital allocations. As you’ll see in our quarter end numbers, U.S. dialysis day sales outstanding increased by 19 days and at the end of the quarter we were drawn $765 million on our revolver, reflecting an increase in our leverage ratio to 3.3 times at the end of Q1. As Javier noted, these increases are directly attributable to the Change Healthcare outage.

Since the Change platform has come back online, these metrics have improved dramatically. We have caught up and are now current on primary claim submission cash receipts are catching up and we have fully paid down the $765 million of revolver draw through a combination of strong April cash flow and interest-free funding from United Health Group, Change’s parent company. By the end of Q2, we expect the majority of the DSO increase to have reversed. In Q1, we repurchased 2.1 million shares, but out of an abundance of caution, we temporarily suspended our share repurchases in March in light of the Change disruption. Given where we are today, we expect to resume share repurchases subject to our typical capital allocation considerations. As we look to full year 2024, we are updating adjusted operating income guidance to $1.875 billion to $1.975 billion, a $25 million increase in the midpoint relative to our previous guidance.

We are also updating EPS guidance to a range from $9 to $9.80. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

Operator: Thank you, sir. [Operator Instructions] Andrew Mok with Barclays. You may go ahead, sir.

Andrew Mok: Hi. Good afternoon. Thanks for the question. Treatments per day. I want to follow up on that on those comments. I think you said they were in line with your expectations. They were down sequentially and the normalized growth was up 40 basis points year-over-year. So, one, trying to understand if there was any impact, whether it’s weather or other seasonal impacts, on the quarter. And two, any confidence on your levels to get back to 1% to 2% treatment growth for the year, like, what sort of visibility do you have on that and what’s going to drive that from here? Thanks.

Javier Rodriguez: Yeah. Thanks, Andrew. The big difference between the year-over-year number on treatments per day versus the NAG number or the treatment number is actually a day mix. So Q1 in 2024 had an extra Tuesday and it also had a New Year’s Day on a Monday and what happens then is about half the volume gets pushed to Sunday. Those two things combined can lead to more than 0.5 point of volume swing. So I think of Q1 year-over-year as a positive number, 40 bps or 50 bps of year-over-year growth. But as you highlighted, below the 1% to 2% range. As I think about how do you bridge the range of 1% to 2% versus the Q1 number, I’d point to two things. First is clinic closures. The timing of clinic closures in the back half of 2023 and the pattern we’re expecting for 2024 is a drag on volume early in 2024, but much less so towards the next three quarters.

That would be one. The second is there’s a lot of seasonality both in new to dialysis admits, as well as to mortality and that could move from month-to-month. And just looking at the pattern of what we saw in 2023 versus what we’re expecting in 2024, we still feel good about the 1% to 2% growth, but we think it’s going to come a little later in the year than anticipated. So I’d emphasize again Q1 was in line with what we were expecting. The general pattern of new to dialysis admits being strong, offset by continued challenges on mortality. None of that has changed and we feel good about the 1% to 2% for the year.

Andrew Mok: Got it. And then I think on that mortality comment, I think, you said, mortality remains elevated relative to pre-COVID levels. Any trends on how that’s been tracking kind of year-to-year or quarter-to-quarter post-COVID?

Javier Rodriguez: It has generally come down significantly since its peak. It does move around from quarter-to-quarter and it’s frankly still a little early to know exactly where Q1 landed. As you know, we don’t find out mortality until a few months after the period. So we’re keeping a careful eye on it. It’s — as I said, it’s come way down but remains elevated.

Andrew Mok: Got it. Okay. Then maybe just one more on patient care costs. Cost per treatment were down another 1% year-over-year and I think 3% sequentially. Anything in particular call out there that helped drive the strong result? Thanks.

Javier Rodriguez: Yeah. So sequentially, it’s a lot about the higher seasonality we saw in Q4 that we called out. Year-over-year, wage pressure continues as we’ve said. It’s offset versus Q1 of 2023 by lower contract costs and also a productivity pickup in the quarter.

Andrew Mok: Great. Thank you.

Operator: Thank you. Our next caller is Pito Chickering with Deutsche Bank.

Pito Chickering: Hey. Good afternoon, guys. So revenue per treatment really strong in the quarter. Was that due to sort of HICS enrollment or any other one-timers in there? Usually it goes up sort of $4 to $5 sequentially as we burn through copay and deductibles. Is that the way of think — is that the right way of thinking about it for the rest of the year?

Javier Rodriguez: Yeah. I think that is right. The seasonality of call it $5 a treatment that we typically see in Q1 we saw this quarter. So we’d expect to pick that up in RPT in Q2 and the rest of the year. In terms of anything unusual in the quarter, nothing that I would highlight. I think the Q1 number is a pretty clean number off of which to model the rest of the year.

Pito Chickering: Okay. So that’s for tracking above your guidance, like, if we move back to kind of where you guys are guiding revenue per treatment, you’re basically guiding sort of almost mid-single digits. I mean sort of above sort of the 3% range if this continues, right?

Javier Rodriguez: We’re right around the high end of the range, right around the 3%. If you think of the guide as being up $25 million at the midpoint and you attribute that to RPT, which is I think a fair way to think about it, that would put you right around 3% year-over-year.

Pito Chickering: Okay. Fair enough. Was the street missed modeling the first quarter operating incomes looking at the adjusted operating income beat of $39 million and the raise of $25 million? It looks like you didn’t raise the high point of the range. I’m just curious if you’re missing it. And then is there any reason why I can’t analyze the first quarter OI at sort of 23% to get us to sort of $2 billion? I guess why would that, assuming trends don’t change, why would that not be the right way of thinking about sort of where things could go if first quarter trends continue?

Javier Rodriguez: Yeah. So, look, seasonality is something that’s — I think there are clear patterns in our seasonality, but it does vary from year-to-year. The RPT pickup from Q1 I think is probably the clearest part of our seasonality. Other things would be wage pressure tends to grow over the course of the year as does other parts of RPT, but the wage pressure tends to be higher. And then we often see Q4 expenses going up for year-end and other items. So we’ve seen, as we did in 2023, some real negative seasonality in Q4. That’s all around U.S. dialysis. IKC is tougher to call out. We tend to do a little bit better in the back half of the year, but as you know, that can move around from year-to-year. So annualizing Q1 I don’t think is the best way to get you there.

I think actually if you annualized our OI, you’d come in a little bit below our range. So I think you’ve got to adjust for the RPT. You’ve got to think about the Q4 seasonal weakness and you’d get a number in our range.

Pito Chickering: Okay. Great. And then one quick numbers question. Can you quantify the number of new patients to dialysis in this quarter versus where there was this time last year? Thanks so much.

Javier Rodriguez: I don’t have a number for you. That number typically grows with around the volume growth — around our historical volume growth numbers and I think it’s right in there with that this quarter as well.

Pito Chickering: Great. Thank you.

Operator: Thank you. Our next caller is Kevin Fischbeck with Bank of America. You may go ahead, sir.

Kevin Fischbeck: Great. Thanks. I guess it does kind of seem like let’s go back to the RPT that, like, it feels more like you’re raising the guidance for the outperformance in the quarter on that rather than a continuation of that higher rate sustaining. Is that true or you’re saying the guidance now assumes that this higher rate is actually sustained throughout the rest of the year?

Javier Rodriguez: We’re not raising it assuming that this beat persists throughout the year. We are — the quarter came in better than expected, but I don’t think you can multiply that by 4 to get to the new number.

Kevin Fischbeck: So why is that the case? It sounds like you’re saying there’s something unusual in it. So why is it? Pito’s question before, like, why isn’t it the seasonal kind of growth up of the space and then therefore flow through every quarter?

Javier Rodriguez: I think it’s — I think part of it is how we were modeling it for the year and it came in, the pattern came in a little bit different than we expected.

Kevin Fischbeck: Okay. So you had a higher year-end number and you’re just getting there faster according to what you see in the QRs [ph].

Javier Rodriguez: Yes.

Kevin Fischbeck: Okay. And then, I guess, just on the IKC business, obviously, there’s a lot of focus on cost trend within Medicare Advantage. Companies seem to be all over the place on it. I know that your experience is going to be a little bit different than Medicare Advantage broadly, but just love to kind of hear how you’re seeing utilization play out under your managed programs there?

Joel Ackerman: Yeah. Let me grab that one. I think the question that comes often is why are the MA players and kidney saying different things? And the reality is, is that utilization in the broader MA population has more volatility. Our patients, while have many comorbid conditions, they’re more predictable, so we have less volatility. In addition, as you know, broader MA had some coding changes that didn’t apply to our population and so that, again, removes some of the volatility that they’re experiencing. And so our trends are a lot more stable in our population.

Kevin Fischbeck: Okay.

Joel Ackerman: Does that answer your question?

Kevin Fischbeck: Yeah. No. It does. But I guess you’re basically saying that it’s coming in line. It’s not higher or lower than what you were predicting so far in Q1.

Joel Ackerman: Correct.

Kevin Fischbeck: Okay. And then maybe just the last question, International business acquisition, it sounds like you guys are really excited about it. We always just kind of wonder though sometimes, like when one large-scaled player exits an asset and another large-scale player comes in, like how do you think about what you can add to those assets or how did you think about, what the opportunity was there if someone else in theory had similar optionality, felt like it was time to get out?

Javier Rodriguez: Yeah. It’s a great question and we’re not arrogant enough to say that we’re better operators. What we’re looking at is that there’s some efficiencies to be gained by economies of scale. We were present in these countries and we had offices that we could leverage. So in essence, the fixed part of the business was levered in a more meaningful way and so I think that that’s how one entity can exit and the other entity can see it as an attractive asset. But as…

Kevin Fischbeck: All right.

Javier Rodriguez: As we said in the beginning, we look at our normal filters of clinical differentiation. We wanted the scale and this helped with the scale, and we thought we could get to a good attractive risk adjusted return.

Kevin Fischbeck: All right. Thank you.

Javier Rodriguez: Thank you.

Operator: And our next caller is Justin Lake with Wolfe Research. Justin, your line is open.

Dean Rosales: Thanks. This is Dean Rosales on for Justin. Any color you can share on wage inflation? What are you assuming for the year? And my second question would be any update on how mistreatment rates are tracking sequentially, yearly? Any trends there? Thanks.

Joel Ackerman: Yeah. So on wage inflation, we called out at the beginning of the year, we were expecting something around 5% and it’s tracking pretty consistent with what we were expecting. So not a lot to update on that. In terms of mistreatment rate, it’s doing what we had largely expected, which is slowly improving year after year post-COVID. Not a lot to call out. It’s a pretty small magnitude. We think we’ll get back to our historical mistreatment rate over a few years. So in any given year, it’s not really a significant number.

Dean Rosales: Got it. Thanks so much. And last one, what should we expect in terms of center consolidations for the remainder of the year? Thank you.