DaVita Inc. (NYSE:DVA) Q4 2023 Earnings Call Transcript

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Lisa Clive: Hi. Just two questions for me. Number one, we’re 18 months since the Marietta ruling, your commercial mix and pricing seems pretty stable. So just wanted to know if you have any thoughts on what that ruling has meant over the last few years and whether you’re expecting any changes? And then also just a clarification in terms of the fact that you don’t need to spend on ballot initiative and obviously, your wages are going up in California. So, it seems like a reasonable truce with the SEIU. Is this something that we should expect to continue, or is it really just this election cycle? Or it would be obviously nice for you guys to be out of this two-year cycle of fighting ballot initiatives? Thanks.

Javier Rodriguez: All right. Thank you, Lisa. So, let’s start with Marietta. As we have discussed in the past, we have not seen a lot of employer groups change benefits, which is absolutely great. It would be terrible for employers to not give their employees that have end-stage renal disease choice. That said, we continue to be very mindful, and of course, work with the kidney community and disability groups, because it is sort of a dangerous risk out there that we want to make sure is not taken advantage of. And so, the analogy I say in a town hall when someone asks me if I have — why I have so much passion on it, it’s like saying the door in your house, the lock is broken. And you said, yes, but no one’s broken in or very little.

And you say, well, you still want to fix it. And so, from our perspective, it’s something that the Supreme Court said. It needed to be clarified and the Champions and Congress and others believe it should be clarified. Now we just got to work the process. I also think, and we’ve discussed that our verification process admissions has helped in that we had an example of an employer group that actually did apply this, and when they found out that their employees didn’t actually have a network, then they changed their benefits again and basically reverted back to a network benefit. So, I think sometimes people explore ideas without really understanding the full ramifications, and in that case, it worked out well. And so we will continue to put a lot of energy on that.

Your second question was around the ballot. Of course, what we liked about it is that we were spending money on making sure that our patients and our teammates didn’t suffer from what we call a very dangerous ballot process, but it takes a lot of money to educate the broader state on how to think about that. And so, we are extremely happy that at the end of the day, instead of spending the money on that, our teammates get the benefit of that. As it relates to is it just this election cycle, we talked about two election cycles and that would be a good time to hopefully iron out and revisit our relationship with labor.

Lisa Clive: Great. Thanks for the clarification.

Javier Rodriguez: Thank you, Lisa.

Operator: And our next caller is Justin Lake with Wolfe Research. You may go ahead.

Dean Rosales: Hi. This is Dean on again for Justin. My question is on center closings. And I’m sorry if you’ve touched on it already, but how much more is there to do here? And could you speak or can you parse out the impact to the P&L from the center closing, right, so revenue versus cost savings from lower fixed costs and efficiencies? Thank you.

Joel Ackerman: Yeah. So, I appreciate the question. We are thinking that the year will have roughly 50 centers either closed or merged into other centers. And thinking about roughly in the ZIP code of 20 new centers, so net 30. As it relates to the P&L, I’m not sure I understood your question. Could you try it again?

Dean Rosales: More just the moving parts impact to the P&L, just could you speak to how you guys [indiscernible] center closing?

Joel Ackerman: I think a good healthy way to think about it is you will have a little volume loss on patient choice. But when you strip all of that, these centers tend to be inefficient. And so, what you do is you consolidate the management and the leadership. And then, you have some savings on fixed expense in particular, rent and medical director fees. And so, at the end of the day, that’s where the savings come from, inefficient center with some fixed expenses that get eliminated.

Dean Rosales: Got it. Thank you so much.

Joel Ackerman: Thank you.

Operator: Thank you. Pito Chickering with Deutsche. You may go ahead, sir.

Pito Chickering: Hi, guys. A few follow-ups here. To Joanna’s question, what was the commercial mix in the quarter? And what are you seeing for 2024?

Joel Ackerman: Commercial mix for the quarter was 10.9%, and we expect it to stay flattish.

Pito Chickering: And then free cash flow conversion was very strong in ’23, the guidance is about 54% in ’24. Is there anything changing within cash flow conversion? Or is this simply the DSOs that you got, what, 12 days in ’23 which won’t repeat in ’24?

Joel Ackerman: Yeah. You’ve got it right. ’23 was a really impressive decline in DSOs. ’24, the free cash flow conversion remains well above net income, and that’s really driven by two things. One is just structurally our CapEx is lower than our depreciation and amortization. And second is share-based comp, stock-based comp. And those two things should persist, and that’s why, call it, 125% of net income that we’re driving in free cash flow for this year, we would expect to persist for some time.

Pito Chickering: Okay. Like any updates on AB 290?

Javier Rodriguez: There is a little update. There is some activity on it. But at the end of the day, maybe the best way to summarize it is that the judge hasn’t had a final ruling, but gave some color. And in that color, basically both parties won some points and both parties lost some points. And so therefore, the odds of an appeal are quite high when there is a final ruling. And so, the next question is probably if you were to say what will be the financial impact we had guided to in the past, something in the $25 million to $40 million range. And as less people are on the AKF, I think that number is likely to be lower, more like a $0 million to $25 million would be a good range.

Pito Chickering: Okay. Great. And then last question, I’m going to ask the center closure question differently. What was center [indiscernible] at the end of, I guess, in the fourth quarter of ’23? And what do you assume that goes in fourth quarter of ’24?

Joel Ackerman: I’m sorry, Pito, did you say capacity utilization?

Pito Chickering: Yes. I mean just thinking about a combination of centers closing and patients coming back and there’s overall center [indiscernible], where do you exit the year in ’23? And where do you think that can get to by the end of ’24?

Joel Ackerman: Yeah. So, we’re exiting the year at about 58%. And I would expect picking up 1 point, maybe a little bit more over the course of the year.

Javier Rodriguez: And just as a point of reference, like if you want to go back pre-COVID, I’m going to go back several years in the 2016 or so range, we would be in the 65%-or-so range. And then just so you see the impact of all of this California conversation that we’ve had. California, because how difficult the operating environment is, is roughly in the 70% range because people aren’t opening centers. So all these very expensive propositions and poor conduct have had an impact and the people do not want to open centers there.

Pito Chickering: And then just out of curiosity, if over a multi-year period to get back to 65% kind of, is this worth like 300 bps of G&A leverage here? And kind of if you can size up that for me, that would be wonderful.

Joel Ackerman: Yeah. So, the leverage you’d see would be in our patient care costs, it’s not in the G&A because there’s a fixed cost associated with the clinic that’s in the patient care cost. So, you’d see it there. I think the best I can do to help you with that math would be to think about our patient care cost per treatment number, right? So, running at $255 for 2023, that is roughly two-third variable, one-third fixed. So, if you imagine us growing that volume without building as many centers, and just to be clear, we would have to build some centers because even though capacity utilization is low, the capacity may not be exactly where in the country you need it to be. So, depending on what assumption you make there, recognizing that a third of that PCC per treatment is fixed, I think that will give you everything you need to do to do the math on what it could be worth.

Pito Chickering: Great. Thanks so much, guys.

Javier Rodriguez: Thank you, Pito.

Operator: Thank you. At this time, I’m showing no further questions.

Javier Rodriguez: Okay. Thank you, Michelle, and thank you all for your interest in DaVita. Just in summary, we had a strong close to the year and that, combined with our guidance 2024, we are now back on a path to recuperate our pre-pandemic financial trajectory. We will continue to work hard to deliver strong results, innovate, and most importantly, provide a great clinical care for our patients. Thank you all for joining the call. Be well.

Operator: Thank you. This concludes today’s conference call. You may go ahead and disconnect at this time.

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