This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: 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 Davida First Quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two. Thank you Mr. Eliason. You may begin your conference.
spk06: Thank you and welcome to our first quarter conference call. We appreciate your continued interest in our company. I'm Nick 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 gap financial measures. A reconciliation of these non gap measures to the most comparable gap 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.
spk11: Thank you, Nick. 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 David is helping to address the systemic challenges of kidney transplant. The first is patient referrals to transplant centers. We recently achieved our highest monthly rate with more than two thirds of the Vita 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. 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 were 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 8000 to Vita patients received a kidney transplant in 2023 the highest number of annual transplant 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 picket needs. This is an exciting first step as society aspires to a future where organ availability is no longer constraint 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 dollars in adjusted earnings per share from continuing operations was $2 and 38 cents. 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 dollars. Within these consolidated results, our international business is a growing piece of Davidas 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 this principles in March, we signed an agreement to invest 300 million dollars 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 healthcare professionals. In 2024, we expect international growth to contribute approximately 20 million dollars or about one percentage point to devide as 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 healthcare 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 US dialysis claim went through the change platform. Similar 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.
spk09: 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. US 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 one to 2% treatment volume growth. Revenue per treatment was down approximately $2.25. This is primarily due to typical seasonality related to patient co-insurance 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 .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.
spk05: Thank you, sir. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. One moment please for the first caller. Andrew Monacliff-Barkley, you may go ahead, sir.
spk08: 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? What sort of visibility do you have on that and what's going to drive that from here? Thanks.
spk09: Yeah, thanks, Andrew. So, 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 24 had an extra Tuesday and it also had 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 half a point of volume swing. So, I think of Q1 year over year as a positive number, 40 or 50 bips 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 24 is a drag on volume early in 24, 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 23 versus what we're expecting in 24, 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.
spk08: 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?
spk09: 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 till 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.
spk08: 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 to call out there that helped drive the strong result? Thanks.
spk09: 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 23 by lower contract costs and also a productivity pickup in the quarter.
spk03: Great, thank you.
spk02: Thank you. Our next caller is Pito Chickering with
spk05: Georgia Bank.
spk12: Hey, good afternoon guys. Revenue for treatment really strong in the quarter. Was that due to sort of HICS enrollment or any other one timers in there? Usually goes up sort of $4 to $5 sequentially as we burn through copayage and deductibles. Is that the right way of thinking about it for the rest of the year?
spk09: 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 is a pretty clean number off of which to model the rest of the year.
spk12: Okay, so that's for tracking above above your guidance. Like if you look back to kind of where you guys are guiding revenue for treatment, you're basically guiding sort of almost missing digits. I mean, above sort of the 3% range, it discontinues, right?
spk09: 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.
spk12: Okay, fair enough. Was the street miss modeling the first quarter operating incomes looking at the adjusted operating income beat of 39 million? And the raise of 25 million, you know, it looks like you didn't raise the high point of the range. Just curious if you're missing it. And then is there any reason why I can't analyze the first quarter OI at 23% to get us to sort of 2 billion? I guess, why would that? So where things could go if first quarter trends continue?
spk09: 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 pick up 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 23, some real negative seasonality in Q4. That's all around US 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.
spk12: 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.
spk09: 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.
spk04: Great. Thank you.
spk05: Thank you. Our next caller is Kevin Sushbeck with Bank of America. You may go ahead, sir.
spk13: Great. Thanks. You know, I guess it does kind of seem like, you know, 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?
spk09: We're not raising it assuming that this beat persists throughout the year. The quarter came in better than expected, but I don't think you can multiply that by four to get to the new number.
spk13: So why is that the case? It sounds like you're saying there's something unusual on it. So why, Vito's question before, like, why isn't it the seasonal kind of growth for this base and then therefore flows through every quarter?
spk09: 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.
spk13: Okay, so you had a higher year end number and you're just getting there faster, according to what you see in the Q&A? Yes. 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 you're experiencing to be a little bit different than Medicare Advantage broadly, but just love to kind of hear you. How you're seeing utilization play out under your managed programs there.
spk11: Let me grab that one. I think the question that comes often is why are the M.A. players and kidney saying different things? And the reality is, is that utilization in the broader M.A. 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 M.A. 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.
spk13: Okay. Does that answer your question? Yeah, no, it does. But I guess you're basically saying that it's coming in, in line. It's not higher or lower than what you were predicting so far in Q1.
spk09: Correct.
spk13: Okay. And then maybe just last question. You know, 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 scaled player comes in, like, how do you think about what you can add to those assets or how did you think about, you know, what the opportunity was there if someone else in theory had similar optionality felt like a better option? It was time to get out.
spk11: Yeah, it's a great question. And we're not arrogant enough to say that we're better operators. What we 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 sixth part of the business was levered in a in a more meaningful way. And so I think that that's how how one one entity can exit and the other entity can see it as an attractive asset. But as we said in the beginning, we look at our normal filters of clinical differentiation. We wanted to scale and this helped with the scale and we thought we could get to a good attractive risk adjusted return.
spk08: All right. Thank you.
spk03: Thank you.
spk02: And our next caller is Justin Lake with Wolf Research. Justin, your line is open.
spk10: Thanks. This is Dean Rizal Hasan 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.
spk09: Yeah, so on 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.
spk10: 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.
spk11: Thanks, Dean.
spk10: I think the number
spk11: will be somewhere in the 30 or so closure sort of net. That would be the right number to have on the net build and
spk03: closures.
spk02: Would you like to go to the next question?
spk03: Yes, please. Thank you, Dean.
spk02: Gary Taylor with Cohen. You may go ahead, sir.
spk04: Hey, good evening, guys. Maybe just to follow up on that last one. That's a 30 net for the next three quarters or that's the full year number?
spk11: That's a full year number.
spk04: Got it. I just wanted to ask, first, I'm going to commend you for producing margin growth well in excess of what the street is able to model. I think there's a third quarter in a row where you've produced 30 to 50% OI growth on 6 to 8% revenue growth. So, it's really stunning. Cost management, productivity, all the things you guys are doing. Once we anniversary that, so maybe there's another quarter there, but when we get it to the back half of 24, are there still some good reasons to believe that that operating leverage can sustain something above your long term 3 to 7 OI guidance? What would be a couple key swing factors to be optimistic about some level of operating margin leverage continuing?
spk09: Yeah, so first, thank you, Gary, for those kind words. You know, as we look forward, I don't think we're changing our long term OI growth number from 3 to 7%. So, I'd start with that. That said, I also don't think we're running out of opportunities to continue to run the business well and deliver high quality clinical care to our patients and continue to improve our bottom line and potentially our margins. We've done this not just on the back of cost cutting, I would highlight, right? We've done a lot on the revenue side that has kicked in nicely, but I think there are other opportunities as well. Continued progress on IKC would be on the list. I think capacity utilization improvements would be another important one that I point to. I think there are other components of our cost structure, which could be productivity, could be other things, non-labor related that we can continue to manage. So, I don't feel like we're running out of ideas. That said, we're also not ready to raise our long term OI guidance above 3 to 7%.
spk04: Maybe last one for me, I just want to maybe understand tenor consolidations a little bit. When we look at average patients per center, certainly multi-year high and just in the last couple years, I think patients per center is up 9% in a couple years and your margins improved, I think, nearly 300 basis points as that's happened. Some of that's the consolidation, some of that is expansion of your home programs, driving that. Is this still a key lever going forward or beyond the 30 centers Javier talked about?
spk11: I think, let me clarify, because a couple of those numbers didn't resonate, but maybe we can clarify them here. I think the better way to think about it is how are we doing in utilization of our centers and pre-closing of these centers, pre-the excess mortality, we were in the mid-60s of utilization and right now we're at 58-ish percent utilization. We have more capacity available and therefore we're less likely to have a need to deploy capital to build centers. While our home has improved, it hasn't improved that much. Our mix continues to be around 15% of our patients at home. Hopefully that clarifies a couple
spk09: of those points there. Gary, just to add one thing on to what Javier said, we can improve capacity utilization without closing any more centers. We're just absorbing treatment growth in our existing footprint.
spk03: Adding shifts, adding machines. Right. Okay, thank you.
spk02: Thank you. Thank you.
spk05: Once again, if you would like to ask a question, you may press star 1. Our next caller is AJ Rice with UBS. You may go ahead,
spk07: sir. Thanks. Hi, everybody. First, maybe just to ask on the trajectory on IKC, I know you were forecasting for 24, a loss of about $50 million. I think in the first quarter you're at $26 million. I know there's seasonal factors and a variety of things going on, but I just wonder if you would say you're on track or you're running a little better or how should we put that in perspective?
spk09: Yeah, I would say we're largely on track. There's a lot of seasonality in this business and obviously you learn more as the year progresses, but there was nothing surprising to us in the Q1 results.
spk07: Okay. And then another thing coming off the fourth quarter, I think we had triangulated, I don't think it was your specific guidance, but triangulated that you were sort of expecting share repurchases to be in the billion to billion and a half range for 24. And then, sir, with your comments about how the first quarter played out, do you think you'll still get to something that maybe approximates that or should we just assume that the first quarter share repurchase activity is gone and you'll continue the last three at the previous rate?
spk11: I think we still aspire to that goal. There's obviously a timing component to it and we'll watch it, but we're still aspiring to get it all done.
spk07: Okay. And just lastly, following the question and comments about the international acquisition, I guess it sounds like that is in your mind more of an opportunistic deal that came along that allows you, like you said, to leverage in certain markets and enter some new ones. Is there anything that's happening on the international front that makes you think that the pace of activity there could step up?
spk11: No, I think you've got it in the right light, which is we are opportunistic and we're always looking for a transaction that meets the criteria that we've outlined. And if we don't find it, we don't execute. And if we find it, we do. And so there's no urgency or rush, but rather just doing business with discipline and according to our plan.
spk07: Okay, great. Thanks a lot. Thank you.
spk05: And our next caller is Lisa Clive with Bernstein. You may go ahead.
spk01: Hi, a few questions for me on the utilization figures that you mentioned. That's just looking at your in-center population, right? I'm just trying to think about how to layer in home patients on top of that, assuming that population continues to grow faster than your in-center patients, whether essentially that improves the number of patients per clinic. But then in terms of utilization, you just think of the in-center. And then second question, could you tell us what percentage of your patients are on Merceras today? Just trying to understand how much more costs you could potentially squeeze out from that transition. And then lastly, do you have any preliminary thoughts, comments on online hemodial filtration? I assume in your European centers you use that technology. It obviously remains to be seen how quickly FMC can launch those machines and ramp up scale to be able to sell them in the US, but just would love your thoughts on that.
spk11: Sure. Let me take an order. And if I miss anything, please remind me on utilization. That number is the chronic center utilization. And the way to think about a home is, of course, it can add patients much easier and with much lower capital deployment. And so you've got it right that that utilization that we gave is in-center. As it relates to Merceras, pretty much the vast majority, if not all, are now on Merceras. And so that's played out. And then on hemodial filtration, I think it'll be interesting to see how that plays out in the United States because it's, as you know, it's allowed in many different countries. And the numbers that we have are really all over the place, meaning in some countries the vast majority of patients get it, while in others it's a tiny percentage of the patients that get it. And so while there's one or two studies that say that it could be better because it gets the mid molecules through, there's a lot of holes that you can poke in those studies. And so we'll have to see how that plays out. And then, of course, the FDA approved the machine, but we don't have any reimbursement guidance. So at the end of it, you'll have to incorporate, A, what the doctor wants, what the patient wants, because it might take more time to do that treatment and then put the economic model on top of that. So we've got too many variables there that are still to be defined to be able to size it in a helpful way.
spk02: Thanks for that. Very helpful.
spk03: Thank you, Lisa.
spk05: And at this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for any closing comments.
spk11: Okay. Well, thank you, Michelle, and thank you all for your questions and interest in DaVita. As we discussed on the call, we're off to a strong start of the year, and of course, we'll continue to work hard to stay on this trajectory. First and foremost, we will remain vigilant in providing great clinical care for our patients. Thank you all for joining the call, and be well.
spk05: And thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Disclaimer