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spk01: Good evening. My name is Darren, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Dutvita Second Quarter 2019 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. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two. Thank you. Mr. Gustafson, you may begin the conference.
spk08: Thank you, Darren, and welcome everyone to our second quarter conference call. We appreciate your continued interest in the company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today are Javier Rodriguez, our CEO, Joel Ackerman, our CFO, Leanne Zumwalt, Group Vice President, and Jim Hilger, our Chief Accounting Officer. Please note that during this call we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties, that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our second quarter earnings press release, our most recent quarterly report on Form 10-Q, and any subsequent filings with the SEC. Our forward-looking statements are based upon information currently available to us, and we do not intend and undertake no duty to update these statements. 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 submitted to the SEC and available on our website. I'll now turn the call over to our CEO, Javier Rodriguez.
spk04: Thank you, Jim, and good afternoon, and thank you for joining the call today. It's nice to be with you as I host my first earnings call as the CEO of the enterprise. As I reflect on my first 60 days, it's been a dynamic time. In that short period of time, the President of the United States issued an executive order on kidney health. We closed the DMG transaction. We bought back $350 million of stock. We commenced the tender process to purchase up to another $1.2 billion of stock. We launched a new bank financing, and most importantly, our team of dedicated caregivers performed over 5 million life-sustaining dialysis treatments. Hard to believe that it's only been 60 days. Before providing financial details on the quarter, let me start with a clinical highlight. DaVita has had a long commitment to helping as many patients as possible receive kidney transplants. We have created award-winning educational programs to support our patients to increase their chances of receiving a transplant. These programs include peer testimonials and animated videos on how to prepare for a transplant evaluation how to stay active on the wait list, how to find a living donor, and what to expect after transplant. We're encouraged by the interest of our current administration to try to improve on the biggest challenge, which is actually organ supply. We will continue to support the efforts to help patients on the wait list receive a transplant so they can join the estimated 50,000 DaVita patients who are living with a transplant today. Now let's move on to the quarterly performance, which we previewed with you in a press release last week. We saw strong financial performance in the second quarter. On the positive side, we had a sequential increase in revenue per treatment and a sequential decrease in our costs. On the negative side, non-acquired growth was disappointing. Joe will walk through the numbers, but I thought it would be helpful to provide you with qualitative views of the drivers. Our year-to-date revenue for treatment continues to be in line with revenue guidance we provided at the beginning of the year. Commercial rates are slightly up year-over-year, and Medicare rates are growing in line with our expectations. The team performed well on cost management with solid improvement in the quarter, primarily due to productivity improvements. Transitioning to growth, We're disappointed with our performance of non-acquired growth, which continues to fall below our expectations. While some of the decreases related to the slowdown in industry patient growth, there is no getting around the fact that we're underperforming the industry. The question we've been working through are, what is the potential for improvement and when will we see the result? Unfortunately, our response is dissatisfying. We're not ready to commit to specific numbers or timing. On a local market basis, it's proven challenge to differentiate between true underperformance and just good decision-making. We're evaluating opportunities market by market and trying to balance the sometimes conflicting goals of growth, productivity, and capital efficiency. Let me drill down through an example to bring the point to life. A common decision in any given clinic is whether to open a new shift. Most new shifts are temporarily cost inefficient due to the low capacity utilization. If the market has scale, capacity constraint, robust growth, the decision is pretty easy. You open the shift. If the market is small or the growth rate is inconsistent, it might make sense to trade the growth for productivity efficiency. Another example that's playing out in real time is in California. We have only signed two new leases in California this year, which compares to a typical four-year of closer to 25 to 30. This will have a negative growth consequence in the future, but will reduce capital deployment in a market where we feel it is not prudent to invest at this time, given the threats of disruption from SEIU. These examples illustrate the trade-offs between growth, productivity, and capital, which highlight why we're not looking at any metric in isolation. Now let me comment on President Trump's executive order. My high-level takeaway on the executive order is we are aligned, we are well-positioned, it's early, and the economic impact is uncertain. Now let me expand on each. First, We're well aligned with the administration overarching goal to provide better education to patients to increase home dialysis and to increase the number of transplants. We agree that early education of patients is critical to slowing progression of kidney disease and to increase the chances that more patients will be able to choose the best treatment option for their lifestyle. Second, in partnership with nephrologists, we believe we're well positioned across the continuum of patient care. We're the largest provider of home dialysis in the country and have a full integrated technology platform to make it easier for patients to treat at home. We have a robust education resource offering over 12,000 education classes to CKD patients this year alone to empower more patients to choose home as their preferred modality. We have strong partnerships with over 900 hospitals across the country, and we believe that we have a head start in building necessary capabilities to manage full risk in an integrated care environment. Third, with respect with the economic model, the administration announced the intention to pilot five new programs for kidney patients, one mandatory and four voluntary. A few details have been provided on the voluntary models, so we're not in a position to provide much insight into our strategic approach to drive growth or profitability from these models. What we know about the mandatory model is that there is that there will be an increased payment tied to home penetration and transplant rates. This will consist of two major components. First is a rate increase of 3% in year one for home dialysis. We expect this to result in approximately $5 to $10 million revenue pickup for us in 2020, which will decline in subsequent years as the rate increase goes away. The second component, which is probably the most important, is the potential for higher or lower revenues based on tiering of clinics driven by performance on home and transplant. CMS expects this to have a negative impact on Medicare reimbursement to the dialysis industry. Given that the dialysis industry already loses money on Medicare reimbursement, we will have to work with CMMI to ensure sustainability long-term economics. However, if it remains as announced and if 50% of our clinics nationwide are part of the demonstration, we should expect to also have some negative impact on our Medicare reimbursement. The community is working hard to better understand the rule and its implications. We intend to provide input in the 60-day comment period to highlight where the regulation may be improved. Now on to Joel to provide some additional detail on the quarter.
spk03: Thanks, Javier. Operating income for the quarter was strong. Let me walk you through some of the details, starting with the components of the U.S. dialysis and lab segment. Non-acquired growth for the quarter was 2.1 percent. Given the first half of the year performance, we now expect non-acquired growth to be between 1.75 and 2.25 percent in the second half of the year. which would put the full year between two and two and a quarter percent, falling short of the guidance we provided earlier this year. Revenue per treatment was up sequentially by $1.60, driven by some positive fluctuations in rate, partially offset by a decline in calcium emetics reimbursement and a slight decline in commercial mix. Excluding the impact of calcium emetics, and incremental Medicare bad debt revenue recognized in 2018 on the adoption of the new revenue standard, year-to-date revenue per treatment is in line with our full-year guidance. Patient care costs were down approximately $9 per treatment quarter over quarter, driven primarily by improved productivity, seasonal declines in payroll taxes, lower benefit expenses, and lower costs for calcium medics. We do expect some of this favorability to reverse in the second half of the year. Dialysis and lab segment G&A was up quarter over quarter, $1.68 per treatment, due to increases in professional fees, the timing of our annual national meeting, and increased compensation expense. This increase in compensation expense in the quarter is mostly formulaic, as it is driven by the improved operating income expectations for 2019. We expect GNA per treatment for the second half of 2019 to be relatively flat with this quarter. Moving on to calcium emetics. We've benefited year to date from multiple launches of generic oral drugs, which have led to declining acquisition prices. Because the reimbursement methodology lags these cost decreases by approximately six months, we have temporarily benefited until reimbursement declines. In Q2 2019, we generated operating income of approximately $40 million from Calcimimedics. This is approximately $14 per treatment of revenue and costs of about $9 per treatment. For 2019, we think the most likely range for the net operating income benefit from Calcimimedics will be $125 to $150 million. We do not expect this to recur in future years. Our current estimate is that the future operating income contribution from Calcimimedex will be roughly breakeven. In international for the quarter, we generated approximately $1 million of operating income, and we continue to expect to generate positive adjusted operating income for the year. Our effective tax rate on adjusted income attributable to DaVita from continuing operations for the quarter was 27.9%. We continue to expect our effective tax rate on adjusted tax... We continue to expect our effective adjusted tax rate attributable to DaVita for the full year to be between 28.5% and 29.5%. Now on to cash flow. Operating cash flow from continuing operations for the second quarter was $574 million. DSOs for the U.S. dialysis and lab business declined sequentially by one day to 63 days in Q2 2019. Reported CapEx for continuing operations for the quarter was $156 million. For 2019, we expect to report approximately 120 de novos. This represents the number of new centers that are certified in the year and is primarily the result of decisions that were made approximately two years ago. The actual number of centers that we are building in 2019 is significantly lower. Our current forecast for new center construction for 2019 is approximately 80 centers. This will result in fewer certified centers reported next year. As noted in our release last week, we increased our adjusted operating income guidance for the year to $1.64 billion to $1.7 billion. We're also increasing operating cash flow to $1.45 billion to $1.625 billion, consistent with a tax-affected change to our adjusted operating income. As always, our guidance is built to incorporate the impact of expected swing factors, although there are scenarios in which we could end up above or below this range. Now I'll turn it over to Javier for some closing remarks.
spk04: Thanks, Joe. While it's too early to provide guidance for 2020, there are three specific call-outs regarding next year above and beyond the normal puts and takes. Number one, we expect the operating income from CalceMedx to go away, as Joe mentioned earlier. Number two, we expect a potential headwind from union-driven ballot initiatives. And number three, CMS preliminary proposed net market basket update for 2020. is approximately 1.7. I am looking forward to providing more color on our strategy on our upcoming Capital Markets Day, which is now September 10th in New York. So that is it. Darren, if you could open the line for Q&A.
spk01: Certainly. Participants, if you would like to ask a question, you may press the star followed by the number 1 and record your name at the prompt. Your name is required to introduce your question. To cancel your question, you may press the star followed by the number 2. We have one question in queue from Kevin Fishbeck. Your line is now open.
spk12: All right, great. So I guess I can ask all the questions that I want. So I guess you mentioned, I guess kind of in the preannouncements, that the substantial majority of the increase in guidance was due to calcium medics. Were there other dynamics that came in favorably that you're now expecting to come in favorably for the rest of the year that are contributing to the guidance rate?
spk03: As I look at the rest of the year, obviously there are ranges in there, but I'd say the core business, the general dynamics are revenues coming in as expected, labor is favorable, growth is unfavorable. You put that all together, the core is relatively in line with what we were expecting.
spk12: Okay. And then, you know, the volume growth numbers, obviously, you kind of now feel like there's a market share loss that's going on there. And I appreciate you can't at this point yet say when it will improve. But I guess kind of almost definitionally, if you're talking about doing fewer de novo, doesn't that mean that it's not going to get better next year and it's going to get worse? Or is there some offsetting dynamic to that that we should be thinking about volume being similar or better next year?
spk03: So on the de novo issue specifically, it depends a lot on what the rest of the industry builds. Our expectation is that as the industry growth slows and there's a shift to home, We'll be building fewer centers. What the rest of the industry chooses to do, it's hard to predict. So that's the dynamic there. In terms of industry growth looking forward, again, hard to predict. You look at the USRDS data, which has a few quarter lag. You certainly see a slowdown there. You layer onto that the more real-time numbers we're seeing in terms of transplants, And that growth seems, I mean, it's still early, but it seems to be accelerating for 2019. So you put that all together, and it's, again, hard to predict what will happen to the industry, but it's not hard to see that continuing to slow as well.
spk04: So, Seth, another way on the first point, Kevin, the question is, will the industry operate at a higher utilization, and therefore the de novo count doesn't equal non-acquired growth.
spk12: I guess when you decided to slow down your de novo growth, my impression was it was in large part due to a view that the industry growth was slowing. Now you don't think the industry growth is slowing as much. I guess that might mean that you are in fact going to be opening fewer de novos than your competitors next year.
spk03: We do think the industry growth is slowing. That's what we've seen over the last few years. You see it in the USRDS data. So I might have created some confusion, but we do expect the growth to slow down.
spk12: Okay. But that was not the only reason why you slowed it down. It was also a view that there would be a shift to home as well.
spk03: Definitely.
spk12: All right. And then I guess, you know, you talked about how the new payment model, you know, is going to have incentives around shift to home. The, and then you mentioned that you thought that you would be negatively impacted because the industry overall was going to be negatively impacted. What is your thought process, at least as far as your initial review of the criteria for that bonus payment? Is it that you're such a big part of the industry that it's hard for you to be anything by average or is Do you feel like, based on what you know right now, you're probably going to be better than average but still not enough to overcome the rate cuts? How are you seeing that shape up?
spk04: Yeah, we have very little information on it other than directionally what they want to do or what they mention is to move the curve to the left, if you will. And when you're as big as we are, you know, 37%, you assume that at some point you're going to look a bit like the curve. And so they have not given us much color. There's a point system, et cetera, but we don't know how it will work. And that's one of the things that we're trying to shape in the 60-day comment period because, of course, we would like that to have some upside for those that outperform.
spk12: All right, and then maybe my last question. I think you've talked about that shift to home over the next five years. I guess what exactly is your expectation for total industry growth during that time period? Because I think that initially with the shift to home hemo or home dialysis, there's been some concern that if there's a big shift to home that it will create negative leverage on your sites. Does that shift to home hemo or home dialysis that you're assuming over the next five years Does that still assume core growth on the in-center business and therefore no negative leverage, or is there a potential scenario where you are successful in shifting to home and there's some positive profitability from doing that, but then there's a negative offset at the in-site performance? Thanks.
spk03: Yeah, so, Kevin, you'd have to look at this market by market, and there could be some markets where our in-center capacity is becomes less utilized as a result of this. But if you look at it in general across the country, we don't expect to create any sort of trapped GNA or under-leveraging of the centers through the growth of home. We think there'll be enough industry growth to satisfy the increased shift to home without emptying out centers.
spk04: And it's important to remember, Kevin, that roughly 80% of patients that are home end up in center. And so the continuum of care is necessary throughout a patient's journey.
spk12: All right, great. Thanks.
spk04: Thank you.
spk01: Thank you. Next, we have Justin Lake from Wolf Research. Your line is now open.
spk04: Hey, Justin. Justin, you might be on mute.
spk01: Hello, Justin, your line is now open. Is it better, guys?
spk03: Now we can hear you.
spk06: Sorry about that. So first off, obviously a much better quarter in 2Q. I don't think I've ever seen costs decline sequentially like that without some bigger picture in a kind of item changing. So I was hoping you can give us some color. on the cost per treatment in the second quarter. A little more color on what drove it and how sustainable is it into the back end of the year?
spk03: Yeah, so Justin, the two biggest drivers were labor productivity and calcium emetics. The calcium emetics I think we've called out, that number should continue to decline over the rest of the year. In terms of labor productivity, it was a big jump. It was great performance by the team. As we think about how that plays out for the rest of the year, we think there is certainly the possibility that some of that reverses itself. We're looking carefully at seasonality in the current environment. There is some seasonality to turnover, which generates seasonal patterns of training that can be higher in the back half of the year. And as training goes up, labor productivity comes down.
spk06: Okay. And then in terms of your updated guidance, when I try to put, you know, pen to paper on the back, you know, runs the back of the envelope map, you know, When I think about the increase in calcium emetics year over year, the contribution there is obviously enormous. You look at some other moving parts, and I wanted to kind of get your viewpoint here, but I think you guys kind of agreed in the first quarter your core growth was down about 3% to 4% X moving parts, and it looks like it's about plus 4 in the second, so maybe flat for the year to date. And then the guidance seems to imply about flat, maybe even down slightly here. moving parts in the back half of the year. So I just wanted to get an idea. Is that kind of ballpark to how you've seen the business in terms of what you saw in the first half and the implied guide for the back half in terms of core growth?
spk03: Yeah. So if you stick with the middle of the range for the full year, you would just for calcium and medics, both 18 and 19. And then in just for the four things we called out in 2018, You get OI that's flattish year over year, so I agree with your math. In terms of what's driving it, I'd call out two things. The biggest one is wage rates versus RPT growth. That is a headwind. We have some offsets to it, but with our biggest cost item growing in the ballpark of 3% and RPT 1% or below, that's a headwind. The other is largely the result of calcium emetics, and this gets a little technical, so let me try and explain this. Some of our variable comp is a long-term incentive program. Those targets for next year get set in 2017, and we're accruing against that LTIP payout this year as well as last year. Because of the OI generated by calcium emetics, it's led to a much larger accrual this year than last year, and that creates a headwind in 19 over 18. So that's a second component of what's holding back the OI growth year over year.
spk06: Okay, that's interesting. I mean, as we think about the back half of the year, the implied guide of flat continuing, Does that assume that the labor productivity kind of goes away or remains at existing levels? Can you give us some color there?
spk03: Yeah, I'd say there are two things driving that. One is there is some reversal on the labor productivity. And second, there is some G&A timing that we think will hit in the second half of the year that leads to basically, again, at the middle of the range, a flat second half of the year. versus the first half of the year, that again backs out calcium emetics.
spk06: Okay, and if I can just ask one last question on calcium emetics. You gave us the 125 to 150 that is going to go away at some point. So one, can you give us the slope of the line that you think that's going to kind of go back to break even over the next year or two? I know it doesn't look like it's going into the bundle for next year. So I assume, you know, it goes to zero. Am I right in thinking that it goes to zero when it goes into the bundle and that they'll just be some smaller spread next year? And how should I think about that? And then do you want to give us that number on the accrual that should maybe reverse itself in 2020 that maybe offsets some of this $125 to $150 million headwind that you've highlighted to us?
spk03: No, I wouldn't call that out as a major tailwind next year over this year. I'd call it out as a headwind. last year. There's a little bit in each, but it's not something, it's not of a magnitude that I'd want to call out. On the calcium emetic slope, first I'd say there's still uncertainty about how calcium emetics plays out, so we've given you a range there, and it could be above or below that range. The expectation is Q3 will be higher than Q4, and going into 2020, we're expecting it to be pretty close to zero.
spk06: Got it. Thanks for the caller. I'll jump back in the queue.
spk01: Thank you. Next is Peter from Deutsche Bank. Your line is now open.
spk02: Good afternoon, guys. Thanks for taking my questions. On the organic treatment growth of 2.1%, as you look at your data, a few questions on this one. Number one, Has the turn rate from losing live patients changed? Number two, has your acquisition of new patients changed? Or number three, has the mortality of your current patients changed?
spk04: Okay. Well, let me grab and I unfortunately didn't write the first one down.
spk02: On mortality. Turn rate from losing live patients.
spk04: Losing live patients. I don't know what that means. Are you saying are patients transferring out of our centers?
spk02: Correct. Has that changed in the last year or two?
spk04: Yeah. The short answer is not that we know of. We are not hearing from patients transferring from one center to another. On mortality, the mortality rates had plateaued, and so what happened was for an extended period of time in the past, Mortality got better year over year, so in essence, that helped the growth, but that line has plateaued. It hasn't gotten any better or worse. It's just been very stable, so that impacts growth. Did I get all of your questions, or did I miss one?
spk02: Yeah, so basically, the underperformance is not from losing patients. It's effectively you are gaining new patients slower than you have in the past.
spk04: That is correct.
spk02: Okay. On the cost for treatment, besides labor and calcium medics, which you've highlighted, how much did EPO pricing have an impact on costs? And I ask because Amgen reported a large decline, about 11%, due to lower selling prices, and they referenced prices continuing to decline through 2019.
spk04: Yeah, so we're restricted for talking about pricing on our Amgen contract. But we are a very large customer, so I think you can do some back-of-the-envelope math on pricing.
spk02: Okay. And then a follow-up on that one for commercial pricing. You guys guided to, in January, commercial pricing of down 1% to up 50 basis points. The commentary on today's call was more positive. Can you provide an updated view of where commercial pricing is now that we're halfway through the year?
spk03: Sure. We're not updating that. We currently expect roughly to continue to be in the range, but you can certainly imply from the comments that we're likely to be at the higher end of it.
spk02: Great. And then last question for me, actually on CapEx, you guys are not changing your CapEx guidance of 800 to 840 million. You're earning about 45% at this point of the year. I guess why are you guys maintaining the CapEx guidance, and are you really telling us you're going to step up CapEx growth in the back half of the year?
spk03: There's a lot of timing swings that can go into CapEx from one quarter to the next, so I wouldn't read too much into the fact that the first half of the year was a bit less than half of our guidance.
spk02: Great. Thanks so much.
spk01: Thank you, Peter. Thank you. And next we have Steve Tunnell from Goldman Sachs. Your line is now open. Hey, good afternoon, guys. Can you hear me?
spk00: Yes, yes.
spk11: Great. Thank you. So I guess the one thing I'm just trying to put, the $14 RPT from Calcimimedics came down from $16 last quarter, so call it sort of 12% or so down sequentially. I think the Tdapa reimbursement is down about 4%. So just trying to understand how to bridge those numbers. Is there any change in sort of the utilization rate or, you know, the percent of patients using Satsapar utilization being, you know, from DaVita versus sort of the percent of the patients using it? Is that all pretty stable or what explains that difference?
spk03: The patient utilization is relatively stable. There are changes in the move from oral to IV that can impact the number as well. But overall, the OI from calcium emetics Q1 to Q2 was pretty consistent.
spk11: Got it. So maybe more oral this quarter, moving from an intravenous potentially.
spk03: Is that reasonable? No. I believe the IV number is up a bit. So, I think we should take this offline. Maybe we can help you with your math after the call.
spk11: Got it. Okay. That'd be helpful. And I just wanted to clarify, did you actually say that the calcium and medics cost for treatment should be down in the third quarter? Yes. Got it. Okay. That's good to hear. And so, then I guess with the guide being 125 to 150 for the year, it's like about $80 million that have happened in the first half. So, I guess that would imply the TDAPA rates, I guess, for 3Q would be down more to bridge that gap. Okay. All right. I think that makes sense. And then I guess just with TDAPA going to extend in 2020, at least as proposed from CMS, does that sort of suggest that the earnings benefit could potentially continue, or do you guys just think reimbursement is going to come down enough to offset it? Is that sort of what you're implying?
spk03: Yeah. The ASP has this lag relative to the cost coming down, and we expect by 2020 it will effectively have caught up.
spk04: The reason why they expanded the Tadapta is because they're trying to calculate what, if anything, they do to the bundle. And the fact that not all patients get this drug and the fact that the pricing continues to change and the fact that oral is so much cheaper than IV makes that math complicated. So they just said, Let's extend the year and do it a plus zero.
spk11: Yep. It's helpful. Okay, great. And, Javier, I think you mentioned that you expected ballot initiatives again next year. Can you elaborate on that?
spk04: Yeah. The short answer is we don't have any visibility, but we know that the union is trying to just throw sand in the gears and make it difficult. And so just being that 2020 is a ballot year, we just are calling it out so that we're not surprising anyone.
spk11: Got it. Okay, perfect. So nothing specific. And then maybe two more quick ones. So one is you acquired, I guess, five international clinics in the quarter. So I guess the question would be, what's your level of interest in doing, you know, maybe larger deals or more, you know, clinics outside the U.S. at this point?
spk03: Yeah, I don't think we're going to comment on any large M&A that may or may not be happening in international. We continue to look at growing international. We want to do it in a capital-efficient way, but we're not going to comment on any specific transactions.
spk11: Okay, that's fair. And just like lastly, I guess bigger picture, how are you guys thinking about organic growth and OI going forward, or how would you frame it? Sort of like from an algorithm perspective, if you do think about it that way, you know, what kind of growth rates do you think are reasonable or sustainable over time? And how do you get there, you know, working RPC versus expenses and such?
spk03: Yes, Steve, look, it's a great question. We're not going to give any long-term guidance on the earnings call today. It's a more appropriate topic for discussion. capital markets day, so hold on a few weeks and we'll address that.
spk11: Okay, that's fair. And actually, maybe if I could slip one more in, just thinking about the 2021, you know, the ESRD change for Medicare Advantage, you know, it sounds like the MA rates in the market are materially higher than fee-for-service right now. I guess, could you help us sort of understand, are they sort of closer to commercial rates than fee-for-service, or how does that generally look on average?
spk04: Yeah, I would say that we don't like to talk about rates, but just to give you an orientation, they do have a premium to Medicare, but it is way closer to Medicare than it is to commercial rates. Got it.
spk11: Okay, that's helpful.
spk01: Thank you, guys.
spk04: Thank you.
spk01: Thank you. Our next question comes from with Mayo UBS. Your line is now open.
spk07: Hey, thanks. Just maybe a couple quick ones here. I think, Joel, you referenced higher professional fees as one of the drivers pushing your GNA up this quarter. Can you maybe elaborate a little bit more on that?
spk03: There's nothing too interesting there that we've got some higher legal fees in there and a couple other things, but Nothing worth calling out.
spk07: Okay. And then maybe just California for a second, the union initiatives, you're flagging that as a headwind. Can you maybe elaborate a little bit more on why this is sort of crystallizing your mind more as like a definitive headwind?
spk04: I don't know if it's crystallizing, but rather it's not going away. And so we just know that the unions are very present and they want to be disruptive. And obviously they were disruptive last year, so we think that it's in their playbook. Right.
spk07: My last question, back to MA and 2021, not so much the reimbursement side, but we're hearing the HMOs talk more about 2020 and 2021. they seem to suggest, you know, on one hand, they're not exactly excited about this since they lose money on these patients or their members. But on the other hand, you know, I have to think presumably there's a very large premium in these special needs programs. And if they can find the right clinical partners and have alignment that you could really put something interesting together. So I just wanted to hear maybe from your side of the table, you know, what you see in terms of the conversations and the collaborations and the potential partnerships over the next year or so with some of the VMA plans? Thanks.
spk04: Yeah, well, you've got your finger right on the pulse, which is people start off a bit nervous, and then when we start talking and seeing what we can do with that patient population together, some very constructive and productive conversations usually flow thereafter. So right now, the regular MA population in the country is in the mid-30s. In dialysis patients, it's somewhere in the mid-20s. And so the first thing they think about is like, oh my gosh, volume expansion. But of course, what MA is so good about doing is adding value to patients that actually consume a lot of services. And our patients are that, very sick and they consume a lot of services. So once we sit down and we explore different methodologies, we're coming up with some win-wins. And so that's the conversations we're having around the country.
spk07: Okay. So do you think we'll be talking about any partnerships? I mean, it seems unlikely from my point of view that if someone really wanted to build out, you know, call it a special needs plan, you know, how can you ignore that? a DaVita that has such a significant presence in the market and the ability to really help control and manage the cost. Do you think this translates into some partnerships before we get to 2021?
spk04: It's an interesting way to look at it. I think in general, the big structural advantage that you should think of is that the patients are with us 12 hours a week. And we could do a lot in center. We could do a lot of coordination. And so we have a strategic structural advantage, if you will. And so that's one of the things that puts us in the center of it. And that doesn't mean that we have to do everything. So that might open up to some of the things you're talking about and some partnerships with others. But the big Uber, the big sort of game changer, is actually having the patient 12 hours. Got it. I'm good, thanks. Thank you.
spk01: Thank you. Next, we have Gary Taylor from J.P. Morgan. Your line is now open.
spk09: Hi, Gary. Hey, good afternoon. Just want to go back to the quarter a little bit, just struggling to understand what was a really good OI number. As Justin talked about, we haven't seen, I think in 20 years, expense down $9 a sequentially was bigger than even, you know, the first year of 2011 under the bundled payment. And, you know, it sounds like the calcium medics OI contribution was $40 million this quarter, was $38 million last quarter, so pretty much unchanged, but U.S. dialysis OI is up $82 million sequentially, and it's, you know, seems to be so much driven by this expense number and in the productivity. So, I mean, can you maybe frame that in the historic context a little bit? And when you talk about productivity, did, you know, DeVita have markets where you had layoffs or is this just, um, uh, as you, you know, um, as, as, uh, uh, teammates turned over, you just, you know, you didn't fill those positions and got some operating leverage and, and that's why some that'll normalize in the back half, but it just looks like a huge sequential increase in, um, an OI off that expense per treatment number.
spk04: Gary, I think I might have heard a compliment in there. I'm not sure. It was great. Hey, it was great. No, look, to answer the question, there was no big layoff or anything like that. It was literally amazing operational discipline across the country, and this is one of those things, 2,600 centers with operations just to just doing great work. And you see the calcium emetics price decrease. We can't take credit for that. They're just new entrants and generics. And as someone mentioned on the call, there's other pharmaceuticals that are moving downward as well on some pricing, sometimes utilization. And so it was just a good quarter on that front, and we're very proud of it.
spk03: Gary, the only thing I'd add is Q1 was a bit light, and if you think about how to think about run rate of where we are, our guidance for the back half of the year, as I said before, would imply that Q2 isn't the run rate, but the average of Q1 and Q2 is the run rate. So I think part of the improvement was Q1 was a bit light, and Q2 was particularly strong.
spk09: I mean, it's helpful, I guess. I mean, anything you learned and repeatable about this, or some of it was just, you know, sort of the stars aligned on this productivity and it even surprised your expectations?
spk04: Yeah, I wouldn't say that there's anything you learn other than a reminder of how diligent you have to be when you go across such a wide system. In addition, you know, the dynamic that we talked about, the interlink between productivity and growth is one of the things that we're continuing to debate, which is if you run very, very lean and efficient, you know, sometimes you might not have the staffing if that new patient's coming to open up a shift. or you might not be as agile as you want. And so sometimes you might actually go too productive, and so what we're evaluating is should you build a little slack in the system and build more labor, and what is the economic tradeoff between that and NAG, and how does that all net out? And as you can imagine, that depends on the type of insurance of the patient. It depends on whether there's more patients coming to that shift. et cetera, et cetera, and all that assumes that we're in full control of labor. Sometimes, of course, someone goes on leave or someone quits, and it's a tight labor market. So all those dynamics are in interplay, and so we had good productivity and bad NAG, and we're trying to figure out how we feel about the whole thing, but OI was good that quarter.
spk09: Yeah, it was great. Two more quick ones. Joel, last quarter you told us on the councilman medics benefit, you gave us what it was in the comparable quarter. So for 2Q of 18, do you have a number? Is it still up roughly 20 million year over year?
spk03: I'm trying to do the quick math in my head. It would be up a little bit more than that. I'm thinking about 25 million, although someone's going to Flash me the exact number year over year.
spk09: Okay. So then my last one, Javier. Before this Trump executive order, was the industry engaged with the administration, or did the administration seek much industry input? I know this very complex one mandatory for voluntary work. sort of set up does not look like the sort of simplistic capitated rate that the industry has advocated for, you know, for Medicare fee-for-service patients. That leads me to think maybe you didn't have a lot of input ahead of time, but is there any comment you can make on that?
spk04: Sure, Gary. We've had a lot of input. We have had many discussions, many meetings, Of course, when you give your opinion, it is just that, an opinion, and they take it into account and they listen to all the different constituents. And so you never know exactly how your opinion is landing or your input's landing, but we did a lot of education for an extended period of time.
spk09: Okay.
spk04: Thank you very much.
spk03: Thank you, Gary. Gary, I was a few million light on my year-over-year, so... Calcimimetics was up roughly $28 million year-over-year in Q2. Thank you.
spk01: Thank you. Next, we have Matthew Gilmore from Baird. Your line is now open.
spk05: Hey, thanks. I just had a couple follow-ups. So for the potential advocacy costs in 2020, if the unions do move forward with the ballot initiative, would it be fair for us to assume that it would drive about $60 million in higher costs, which I think would put you back to 2018 levels? or would that number be sort of bigger or smaller?
spk04: Yeah, thanks for the question, Matthew. The short answer is it is literally impossible to estimate, but a couple of things to help you think through the variables is what state it's in, because media and other things to educate the voters vary substantially in price, number one. Number two, the ballot initiative last year was very, very off balance and weighted in its language, so therefore we had to spend more money educating people. So if the language can be at least more neutral, that would really offset a lot of the cost. And then, of course, well, those are the variables. I'll stop there. And then, of course, the number of states would be the last variable. How many fights are you taking on?
spk05: Got it. That's helpful. And then maybe on the slowdown in NAG, does that have any implications or influence on your commercial mix since it's the new patients that are more likely to have commercial coverage, or is it not enough to move the needle from a mixed perspective?
spk03: I don't think the slowdown in industry growth itself has a material impact on mix. there's the demographic headwind that we've called out in the past, but that really isn't about growth. That's just about the age at which a patient ages into or requires renal replacement therapy.
spk04: But, Matt, let me make sure we remind you that last quarter I said that the guidance we gave on mix at J.P. Morgan was too tight at that plus or minus five basis points, that it moves up and down more than that. And if you had me guess, we'd probably be down slightly by the end of the year, but all that is incorporated in our guidance.
spk05: Got it. Fair enough. And then, Joel, could you help us out on the interest expense and maybe where that will land with the debt repayment and the refi? Just give us some sort of indications where that would be going forward.
spk03: Sure. So obviously it'll come down as the total leverage number comes down. The financing is in process now, so it's hard to predict where ultimately we will wind up with rates, but we will be more skewed towards bank versus bond as a result of this, and that would likely bring the weighted average interest rate down a bit. Lower rate likely combined with a lot less debt.
spk01: Got it.
spk02: Thank you.
spk04: Thank you, Matthew.
spk01: Next, we have Matt Laro from William Blair. Your line is now open.
spk10: Hi. Good afternoon. You mentioned that you're the market leader right now in home dialysis, but So I wonder if you have a sense for what percentage of new patients entering the home today you're getting and what percentage of, you mentioned CKD training programs you might be leading, whether that's commensurate with your share on in-center dialysis.
spk04: I don't know that number off the top of my head, but what we can tell you is our aspiration And our goals right now is to have roughly 25% of our patients by 2025, which would mean that we, of course, would have to really accelerate because it's roughly double what we have now. So we would have to really accelerate the incoming going home. And there are a lot of hurdles on that because it's the way that the physicians practice. It is a patient's choice. There's a lot of things going on in that variable, but what we want to do is be aspirational. Right now, our rough math has that home selection is growing about four times what in-center is growing at, but again, the total mix is materially lower.
spk10: Okay. Thanks for that. Just a question on capital allocation. Obviously, you do have the tender right now, the buyback you just announced. But just in light of some of the deceleration of growth, the lower de novo activity, and the rationalization of some of the OUS footprint, how do you think about deploying capital to accelerate top line growth?
spk03: So we're always interested in investing in the business and investing in growth. What I hope we've made clear is we need to do that in a capital-efficient way. So we'll continue to invest in de novos that give good returns. We'll continue to do acquisitions that give good returns, although those are fewer and far between. We've talked in the past about our willingness to make investments outside of the kidney care industry, and we have not given up on that, but We haven't changed our view relative to what we've said over the last few quarters, which is our appetite for a multi-billion dollar acquisition is very low. And if we do something there and there's no, it's not at all a foregone conclusion that we will, it'll be something of a much more limited scale. So that's how we're thinking about deploying capital for growth.
spk10: Okay, appreciate the question.
spk01: Thanks.
spk03: Thank you.
spk01: Thank you. Back in queue, we have Whit Mayo from UBS. Your line is now open.
spk07: Hey, Whit. Hey. No, I thought somebody might ask this. I don't know if Leanne's on the call or not, but the CPA reg that's sitting at the OMB, any updated thoughts on the content of that regulation? Just wasn't sure if you had a new thought on it.
spk04: Leigh Ann is on the phone, but my understanding, Leigh Ann, you can jump on, is that we don't have any additional information.
spk01: That's correct. Yeah, we don't have any details.
spk04: Perfect.
spk01: Thanks.
spk04: Thank you.
spk01: Thank you. Speakers, we show no further questions. Thank you.
spk04: Okay, well, we had a good quarter. We're going to continue to work very hard, and we look forward to seeing you all in a couple weeks at Capital Markets. Have a great day, everyone.
spk01: And that concludes today's conference. Thank you for your participation. You may now disconnect.
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