DaVita Inc.

Ladies and gentlemen, good evening. My name is Kath, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DeVita First Quarter 2020 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 then the number one on your telephone keypad. If you would like to withdraw your questions, Press star, then the number two. Thank you. Mr. Gustafson, you may now begin your conference.

Thank you, and welcome, everyone, to our first quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and joining me remotely today are Javier Rodriguez, our CEO, Joel Ackerman, our CFO, and Leanne Zumwalt, Group Vice President. Please note that during this call, we will make forward-looking statements within the meaning of the Federal Security Clause. 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 and subsequent quarterly report for the first quarter of 2020 on Form 10-Q, which will be filed today. 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. Reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in our earnings press release, submitted to the SEC, and available on our website. I will now turn the call over to Javier Rodriguez.

Thank you, Jim, and good afternoon, everyone. I hope that you and your families are healthy. Let me begin by expressing my sincere appreciation for the 65,000 nurses, patient care technicians, social workers, dieticians, and other caregivers worldwide, including many non-clinical workers who are on the front lines of care with our physician partners. These people are living up to the meaning of DaVita, which is to get life during this global crisis. Their courage and dedication to helping others is a source of energy and inspiration. I want to extend that gratitude to all healthcare organizations and caregivers around the world. For today's call, I'll discuss three topics, our response to the crisis, the impact of COVID on our business, and our decisions relating to the CARES Act. At Capital Market, I talked about the strength of our platform and our ability to provide continuity of care of dialysis patients across all sites of care, from the hospitals to patients' homes and in our clinics. Our response to COVID highlights the resilience and the strength of our teammates and demonstrates the power of connecting the multi-site platform. Let me give you a few examples to bring it to life. First, we're leveraging our national scale with resources, teams, and our geographic footprint to open and operate dedicated clinics and assist the dialysis patients who are or are suspected to be COVID positive, which has helped to free up precious hospital resources. The dialysis industry, in partnership with the government, has joined together to help maintain continuity of care for dialysis patients by creating isolated cohort capacity that can be accessed by other providers. Next. Our physician is a national leader in home dialysis who served our patients well by supporting continued growth of home dialysis during this crisis and helping to provide continuity of care for all of our patients as they may have moved between dialyzing at home, in hospital, or in center due to the virus. In addition, we've been able to utilize our leading telehealth capabilities to allow us to expand the treatment of our patients in the safety of their home while maintaining access to their care provider teams. With the support of the government, we're now using that telehealth platform to provide further support for in-center patient care. Finally, in our over 900 hospitals where we deliver acute services, we've been able to allocate resources and shift caregivers to areas in most need to help support patients and our hospital partners. Next, let me address some of the trends we're seeing while covering the expectations for the short and long-term business impacts of COVID. On the spread of the virus, we're experiencing similar geographic waves of COVID impact as you've read about in the news. Initially, the CDC wanted all COVID-positive patients treated in the hospital. As the pandemic spread, however, the CDC quickly recognized this was not possible in terms of providers like DaVita who've been able to focus on infection control well before COVID to alleviate the burden from the hospitals and to treat stable patients in an outpatient setting. Today, nearly 70% of DaVita patients who are either COVID positive or suspected to be COVID positive are treated in one of our outpatient settings. The operational task of maintaining treatment three times a week for these COVID positive or suspected to be patients on cohort shifts and clinics has been nothing short of extraordinary, all while maintaining continuous care for over 230,000 patients who show no symptoms of the virus but are at risk with multiple other comorbidities. The near-term impact on our business is still dynamic and somewhat uncertain. However, we're able to affirm our guidance for 2020 at this time. This may be in contrast to what you've heard from other providers who may be facing volume or liquidity issues due to the significant drop-off on elective procedures. As you know, dialysis is not optional. It is life-sustaining treatment that our patients need multiple times each week. The long-term impact is where we have less visibility. We believe the economic impact of COVID on our business will lag the impact of the broader economy. The scope of the impact of COVID on our business will be based primarily on the duration of this devastating virus and its impact on unemployment generally. We expect that these factors would have a greatest impact on volume and mix. Volume, as the growth of dialysis population, is more uncertain due to the potential impact when the virus on the late-stage CKD population and on the health status of our existing ESRD patients, and on commercial mix because the insurance mix of our patients could be negatively impacted by a weakening of the broader economy. Next, I want to acknowledge the administration's swift response in this time of crisis. The administration collaborated with the dialysis industry by modifying certain policies and regulations to facilitate our ability to treat COVID-positive patients in cohortships or clinics where necessary. The administration also acted swiftly by distributing funds to healthcare providers in an effort to ensure that patients, uninsured and insured, have access to the care they need during this time of crisis. We believe that the spirit and the intent of the government's action with the relief fund was to prevent healthcare providers from closing their doors, not to help a company make their earnings targets. The VITA has been and will be able to continue to provide care for our patients, including the uninsured, without the need for this federal funding. As a result, although we have incurred costs that fall within the parameters of the relief fund under the CARES Act, the VITA has decided not to accept this government's financial support at this time. We believe that it's in the best interest of our company, shareholders, and our country to allow these dollars to be redistributed to other individuals, organizations, or healthcare providers that truly need it. ESG has been an increased focus over the last year, and doing the right thing matters. In our opinion, the current healthcare crisis is an opportunity for companies to lead and contribute for the greater good of society, and we are happy to do our part. Let me conclude with a comment on DeVita's culture. In this crisis, the fact that our frontline caregivers know that they're part of something bigger, the village, has been a key part of our resilience. They are true heroes, and they know that our entire company, or as we say, our village, is doing what we can to support them. We know we still have an unpredictable future with this virus, but we're thankful that we're village strong. Now, on to Joel to provide an update on our Q1 results and to discuss our financial outlook.

Thanks, Javier. I want to start by thanking all of our teammates who selflessly provide life-sustaining dialysis care to our vulnerable patients. I am proud to be a part of this Evita Village. Q1 was a strong quarter with relatively little impact from COVID. The details are in the press release, and I can answer any questions during Q&A. I'll focus my remarks on financial details related to COVID. To start, the level of uncertainty that we face going forward is significantly higher than usual. The factors driving this include the severity and duration of the COVID pandemic, the impact on our patient population resulting in a potential decrease in treatment volume, and the impact on unemployment and commercial health insurance coverage. As a result of this uncertainty, financial outcomes are harder to forecast than usual, and the range of possibilities is wider than usual. Our treatment volumes have remained fairly steady so far. For the rest of 2020, we expect volumes will be impacted by any changes in mortality, transplants, and or new patient admits resulting from COVID. On expenses, we're incurring elevated costs as a result of additional compensation and reimbursement for certain of our teammates to help offset some of the personal financial impacts of the crisis, enhancements to our overtime PTO and benefit policies, the creation of dedicated shifts to care for patients with confirmed or suspected COVID, redistribution of teammates, machines, and supplies across the country, labor hours needed to screen patients and teammates who enter our clinics, increased purchases and pricing of personal protective equipment for patients and teammates, higher investment in and utilization of telehealth and development of educational materials for patients. Offsets to these expenses could include the suspension of sequestration beginning May 1st, which we expect to add about $50 million to our revenue in 2020, as well as other cost reductions in our business. At this time, we're maintaining our 2020 guidance ranges for adjusted earnings per share, revenue, operating income margins, and free cash flow, but recognize the increased uncertainty given the rapidly changing dynamics related to COVID. The longer-term impact of COVID is uncertain and difficult to quantify. We believe that the two main factors to consider are growth and mix. First on growth, Our long-term growth could be impacted by changes in mortality in both the late-stage CKD and ESRD populations due to COVID. This will depend primarily on the infection rate, case fatality rate, and age and health status of the patients affected. Second, increased unemployment levels will likely lead to fewer patients having commercial insurance, which creates earnings headwinds because of the higher reimbursement rates we receive from commercial insurance plans. We can't predict the net impact at this time, but I will highlight four important dynamics. First, when you consider the sensitivity of our business to a recession, we believe that the peak level of unemployment matters more than the shape of the recovery, as many of our patients have a preference to retain coverage in the near term, but may be slower to return to work in a recovery. Second, when estimating the peak unemployment, It's important to recognize that a large number of individuals currently included in unemployment numbers are actually furloughed and are still receiving health benefits from employers. Those furloughed patients who eventually return to work may not face any disruptions in coverage. Third, a significant number of our commercially insured patients have coverage that is not tied to their current employment. This includes patients with individual insurance as well as patients on co-work. This should help mitigate the potential change in our mix relative to the increase in unemployment. Finally, if our patients lose their employer-based coverage, they have several coverage options, including exchange plans where many patients can access tax credits and cost-sharing reductions, which was not available as it came out of the 2008 recession, COBRA, and Medicare and or Medicaid. Looking at our balance sheet and cash generation, at this time, we do not see material near-term negative impact from COVID. Out of an abundance of caution, in March, we drew down $500 million from our revolving credit line, which is reflected on our first quarter ending balance sheet. Given our current cash balance and near-term outlook, we expect to repay the revolver shortly. We also suspended share repurchases in March and have not repurchased any stock subsequently. In the near term, we expect to use caution with regards to capital deployment and will look to preserve financial flexibility and liquidity in the face of uncertainties. We believe that our cash flow generation and our balance sheet put us in a solid position to weather financial and operational challenges brought on by the current pandemic. This will allow us to continue to focus on what is most important, the health and safety of our teammates, and delivering high-quality care to our patients. With that, operator, please open the line for Q&A.

Thank you. We will now begin the question and answer session. Participants, if you want to ask a question, please press star and then the number one. Please record your name clearly when prompted. And if you want to withdraw your question, please press star number two. Speakers, one moment, please, as we wait for the questions. All right, speakers, our first question is from Justin Lake of Wolf Research. Sir?

Good afternoon. Appreciate all the detail. a few things here. One, obviously a really good first quarter. I was hoping you can kind of walk us through what you saw relative to your own kind of internal expectations there and maybe delineate, you know, what you think core growth was versus kind of any items we should think about.

Sure. So let me take that. Hello, Justin, it's Joel here. I'd call out three things, although I would say it was broadly a strong quarter across many dimensions in terms of what stood out. One, RPT was a bit higher than expected, although not in a way that would lead me to change any of my views about the full year. Second, costs were well managed very broadly. I'd highlight productivity, pharma, G&A as three things, although it was a broad strength. And finally, international was a strong contributor. Part of that was strong fundamental growth. International just had a good quarter. But I would highlight there was about $10 million in of foreign exchange gain from our Asia joint venture that is non-recurring.

That's helpful. So you talked about RPT being a bit higher than expected, but not in a way that changed the views in the full year. Was there something that we should think about that benefited the quarter that doesn't reoccur? Anything particular?

Nothing in particular. The RPT number will change. will bounce around a little bit from quarter to quarter. So nothing worth highlighting.

And the cost side, I mean, again, like I'm getting – do you guys have a core growth number that you kind of think about, X moving parts? Because I'm getting something in the team.

Well, I think it's a tricky quarter. Are you thinking Q1 over Q1?

Yeah, year over year.

Yeah. Yeah, well, Q1 last year was not a particularly strong quarter, and then Q2 came on well, so I'd say there was some variability there. This year, the typical quarterly seasonality is going to be a little turned on its head. Usually Q1 is a weak quarter this year. you've got the positive calcium emetics, and then in the back half of the year, you'll see some negatives from ballot initiatives and as the COVID impact grows. So I think as you think about a full year number, the margin you're calculating there is, or the growth rate you're calculating there is something that I would be hesitant to focus on.

Okay. And then before I jump back in the queue, can you give us that counselor medics benefit in the impact in the first quarter, maybe both the RPT and to operating income? And then it looks like the number has been cut in the second quarter by CMS. So how should we think about that for the rest of the year? Thanks.

Sure. So I'd say for the full year, I wouldn't I wouldn't change anything we've said about calcium emetics, which is $40 to $70 million of OI for the full year. The Q1 number was $35 million of OI benefit. The RPT numbers, I'm looking for those. The RPT number was $9.50 in Q1 and the cost per treatment $4.90 and change, so $9.56. of RPT $4.94 of cost per treatment.

Thanks for the detail.

Thank you as well, Mr. Lake. Our next question is from Andrew Mock of Barclays. Sir?

Hi, good afternoon. Just wanted to follow up on the commercial rates. Looking back at the last recession, it looks like your commercial revenue mix held up better than your commercial treatment mix. Is that something that could play out again through potentially higher negotiated rates on a lower base of commercial patients should we see more permanent job losses?

Let me grab that one, Andrew. I think it's difficult to compare. At the end of the last recession, of course, we had a different dynamic going on. This one is very, very unique. And so we have – Number one, as Joel said, we now have the exchanges. And so we don't know what's going to happen there and how many people will pick the exchanges. We still have COBRA. And then we still have all of these people that have been furloughed. And so when you look at this as opposed to the last recession, where we didn't have a whole bunch of people on what appears to be paused or furloughed for a bit, we don't know how that dynamic will play out. Last time, there was not a lot of change in the rate dynamic, meaning the rate dynamic stayed similar to what it had been in the past, and I have no information to inform that that would change.

Okay, great. And then just a follow-up question. Yeah, that's good. Just a follow-up question on home dialysis. Are you seeing any uptick in interest within your patients to pursue home therapy? And second, longer term, do you think this crisis will potentially accelerate the shift to home dialysis? Thanks.

Yeah, it's an interesting dynamic. Many people are asking that same question. For now, and again, it is so early in this that we don't know what the long-term implications are. But for now, we saw a slight downtick, so a little weakness. But then when you look at it, it's the placement of catheters that really impacted it. And then once the administration deemed it essential, that started to pick up. In addition, as we talked about it, our platform really matters, meaning that there's a lot of patients that start in-center and then through education go home. Well, we saw that that number went down a bit because we didn't have a lot of educators and non-essential personnel in the centers, so we would not spread the virus. So therefore, we had less of our patients in-center move home. And so when you add it all together, there's still a lot of energy. We reached our 25,000 patient mark at home, and we think that over time we will go back to the patterns that we saw pre-COVID, which is roughly 10% or so growth.

Okay, great. Thanks.

Thank you, Andrew.

Thank you, Andrew. Speakers, our next question is from Kevin from Bank of America. Kevin?

Great, thanks. I guess I wanted to ask about the, you guys announced kind of a big hiring push earlier in the year. And, you know, you guys obviously highlighted a bunch of potential pressures and uncertainty as the year goes on, including the impact of the economy. So just trying to understand, you know, what the purpose of that what the large increase in hiring was and how you thought about taking on additional costs potentially heading into a recession.

Yeah. Thanks, Kevin. I think when you think of hiring people, you got to put it into two categories. One is the GNA that gets spread out through all the clinics and then you have the frontline caregivers. And so what we announced, which was a big hiring was for frontline caregivers and And so what you're seeing is that sometimes in times like this, where you've had a nursing shortage and you've had a robust economy, that it's a great opportunity to have a stable workforce. And so that's what you really saw. We had openings across the country. And so we want to fill them now while there's a lot of people looking for jobs.

Okay. This is more about kind of backfilling open positions than it was about trying to add the fuel growth in some new segment or anything like that.

Correct.

Okay. And then I guess there's been a lot of press about patients with COVID in the hospital needing more dialysis. Has that impacted your business in any way, either by managing, you know, the hospital outpatient dialysis clinics themselves or hospitals trying to clear out their dialysis clinics, pushing volume in your direction? Is there any dynamic there?

In general, the short answer is that it is lumpy from geography to geography. And so in some geographies where the hospitals, because of all the elective procedures, have seen a big decrease in census numbers, are acute, have seen that as well if COVID hasn't hit that area. Of course, there are other areas where COVID is quite active where we have seen an increase. But when you net it all out, it is nothing that you would notice in the economic models, if that's what you're asking.

Yeah, no, perfect. And then you mentioned... a number of the headwinds around the recession. Any offsets you can think of? I guess you kind of mentioned labor might be easier to come by in a recession. How do you think about the cost save opportunity versus the potential revenue pressures in a recession?

Yeah, Joel, you want to grab it?

Sure. So, yeah, I think there are really two ways to think about the cost mitigation, and it really comes in two buckets. One is what you would expect to naturally occur in the context of a recession, which, you know, could be higher productivity because of lower turnover, lower training costs, other things related to salary, wage, and benefit. So that would be one bucket. And then second is the levers we could pull proactively to take costs out of the business, recognizing that if there is mixed pressure or volume pressure that that we have things we can do. We've got a resilient business model, so there are actions we could take to mitigate some of those pressures as well. So there's a natural component to it and a proactive component as well.

I mean, did we read anything? It's the fact that you kind of mentioned the headwinds without kind of these offsets. Would you expect that during a recession you would grow maybe below the normal range of LI growth or just a

I would say it is too early to tell. There's just so much we don't know yet about how this recession is likely to play out in terms of what the peak job loss will look like, how much of that is true job loss.