DaVita Q2 2024 Earnings Call Transcript

Sure. Thanks, Pito. So through the quarter, what we really saw was miss treatments were elevated relative to what we expected, and our census growth was below expectations the pattern there has continued, new to dialysis admits remain strong, and the growth there is consistent with what we had seen pre-COVID and mortality remains elevated.

In terms of the back half of the year, I'd point out one thing that gives us confidence, which is we've got an extra treatment day in the second half of the year relative to the second half of the year last year. So that, in and of itself, is about 30 bps of additional growth. Other than that, we really haven't modeled in a whole lot of changes for the back half of the year. We haven't built in much census growth, and we're expecting miss treatment rate to continue to be challenging.

So, if you really think about the back half of the year, year-over-year growth, it's really about treatment days rather than any change in any of the underlying assumptions.

Sure. So I'd start with revenue per treatment, where we moved the guide from what essentially last quarter was 3%, now to 3.5% to 4%. So at the midpoint, 75 bps is worth roughly $85 million. So that's number one. And that's coming from a combination of continued success on the revenue operations, strength in contracting that we've seen through the year so far and then a little bit of mix improvement. So that's the dominant factor and worth $85 million. Contributing to that as well is some improvement we're seeing in labor costs. I'd highlight two things there.

First, some of the premium pay, whether it's over time or spot bonuses have come down. And second, we are seeing a little bit better productivity in the year than expected. Those two things combined are worth about $30 million, and offsetting that is about $20 million of OI headwind from the lower volume that we've called out. So plus $85 million from RPT, plus $30 million from labor, minus $20 million from volume, that will get you to $95 million increase before taking into account the $60 million change in center closure costs.

That's right, Justin.

Yeah. I would say, as we were thinking about it, we probably weren't internally modeling as of last quarter that we'd be at the midpoint. So you'd probably get to a little bit of a lower -- you'd have to start at a slightly lower volume number to bridge to that $20 million..

Yeah, you're in the right ballpark there [Speech Overlap].

Yeah. I would -- I probably -- if you would ask me just standalone, what's 50 basis points of volume worth, I probably would have told you $50 million to $60 million. So not more [Speech Overlap] slightly lower number.

Oh, I'm sorry -- I'm sorry. The team here is correcting me. 1% is worth $50 million to $60 million. So you're in the right ballpark there.

Yeah for 2025, I think the number will be in that range.

And just to be clear about that, when you're modeling center closure costs, it's important to realize that not all the costs come right when we close a clinic. Some of them like lease acceleration costs, for example, can have a delay from when we close the clinic. So I think by next year, our clinic closure rate should actually be back to what it was pre-COVID level, call it, 20 clinics a year, somewhere in that range, but the costs we're calling out will be a holdover from what we've seen -- some of them will be a holdover from the clinic closures in 2024.

Yeah, something like that. This year, I think last quarter, we had called out 50 for the year. We're probably running light. And I would guess, at the end of the year, we'll probably have closed only about 40 for the year and getting back to a more normal pace for next year.

Mix was down a drop in Q2, but it's hanging right around 11%. It's right where it was at the beginning of the year. Our commercial mix at the end of Q1, which I don't think we disclosed was a little bit harder to estimate because of some of the changes -- some of the challenges with change health care, as some of the claims were delayed. But I don't think there's been a lot of movement on commercial mix between Q1 and Q2, that would have any real financial impact.

Yeah. The number is up about 200 basis points.

Thank you.

Thanks for the question, A.J. You've got the numbers right, meaning we're at negative $60 million and change for the up to year-to-date, and we still expect the year to come in that $50 million range. But it's not necessarily because there's a big change in the business, but rather revenue recognition on the back end of the year. So that's the big difference there. And as you know, this business, and we've asked you to look at it more on an annual basis because quarter-to-quarter fluctuation can be a bit more dramatic, but that still holds on the range.

Yeah. A.J., just on the quarterly spread between Q3 and Q4, it can be hard for us to predict when the revenue will land. That said, I would expect in Q3 to be a loss-making quarter again and Q4 to be a much, much stronger quarter. Then again, depending on when we get information some of the Q4 revenue could pull forward to Q3.

Yeah. So -- the short answer is mortality is definitely higher than we expected. And maybe it would be helpful to step back for a second and just give you a sense of how we're thinking structurally about where we are on volume for the year.

And as we step back, the question we are -- have been asking ourselves is we are behind on volume growth, call it, 150 bps relative to pre-COVID, relative to where we'd like to be. And we are -- we spent a lot of time trying to quantify that. We are limited by the information we have, both the quality of the data, as well the timeliness of the data, recognizing we're playing with relatively small numbers here, right, 100 bps, 150 bps with inputs that have a decent amount of volatility or variability. That said, as we try and quantify it we think the $150 million gap between where our volume growth for the year is relative to where it was pre-COVID, it is really made up of two things. About 50 to 100 bps of that gap is related to mortality. Mortality is just running higher than it was. It's actually up this year relative to where it was six months ago. And we think structurally, that's the biggest component of why we're not 150 basis points higher.

The second thing we believe relates to the capital-efficient approach we took to managing our clinic footprint. You go back three or four years, volume for us and the whole industry was beginning to decline. We recognize that our capacity utilization was going down and we were very focused on getting back to a healthy capacity utilization, one that could support our investment in our teams in clinical quality and in information technology. And the result of that was we pulled back on de novos before others did, and we closed roughly 200 clinics over the last few years.

The result of all that was a decline in our clinic share over the last few years, of call it, a point and a quarter roughly. And with that, we believe we have lost some volume. It's hard to quantify, but if we had to put a range on it, it would probably be somewhere in the range of 40 to 60 basis points. So you put those two things together, set a [Phonetic] 50 to 100 basis points of mortality higher than historical combined with 40 to 60 basis point impact from our clinic footprint management, and we think that explains the majority of the 150 basis point gap.

I will note one important thing, new to dialysis admits is not on our list of the gap. As I've said before, those remain strong. The growth in new dialysis admits is consistent with the growth we saw pre-COVID and remains at a healthy level. So I hope at the beginning, I answered your question about the year and then gave you a bit more color on the bigger picture.

Javier, anything to add?

Yeah. I'll add one thing. First of all, at the beginning of the [Indecipherable] Joel, inadvertently said $150 million, and he was talking about 150 basis points just to make sure that the record reflects that the rest of the conversation, I was clear on the 150 basis point. But I think while he walked you through a lot of numbers, at the end of the day, the question that you and all of us are trying to ask ourselves is, is there a structural change that is going to change the growth rate.

And to the best of our ability on the work that we've done, the answer that we come up with is no. It appears that we are in a bit of just a, let's call it, a period of time where mortality is elevated that we see through these new to dialysis patients that the volume should come back to normality over time.

Thank you.

Yeah. Your question is one that we've been asking a lot, and we've been talking to our physician community and trying to understand what is driving it the reality is that people come up with hypothesis, and you can actually support it a bit a higher elevated flu season, etc., but the real quantifiable answer is not one that we could say with confidence. And if you were going to say on the other side of the equation, we're starting to see improvement, something that should have an impact on mortality like the Integrated Kidney Care, managing people, upstream, new drugs, SGLT2 and GLP-1, etc. And so we are scratching our head and we will be working on it. And as soon as we get something with confidence, we will share with you.

Yeah. I would say there's certainly going to be more in 2025 from nothing else than just the annualization of the improvements we're anticipating in the back half of the year. Looking forward from there, I think it's safe to say that any benefits from this are going to decline over time. And what I mean by that is their contribution to RPT growth will combine over time. I think everything we've achieved so far is sustainable. That said, it's hard to predict how much more there is and over what time period we're likely to capture it. I think it is fair to say relative to when we started this a few years ago and when we started talking about it with the Street in Q2 of 2022, it has certainly exceeded our expectations.

Yeah. So we've done a lot of work on this. And interestingly enough, that the data we have on clinic -- clinics is actually better clinic share is better than the data we have on treatment share. And we believe that the midsized and smaller dialysis operators have actually gained share over the last few years. They have closed fewer clinics. They have built more clinics. And the result of that is probably picking up some volume as a result of that.

And the question on that -- and we ask ourselves, is that good or bad? In general, of course, you start to think of market share. And in this one, it's clinic share. And the way that we looked at it, and of course, time will tell is that we led the way in stopping de novos as the mortality escalated during the pandemic. So if you see DaVita build it was very aggressively stopped. And then we led the way in rightsizing the capacity. And so if you were just going to do shorthand, you would say we've closed roughly 200 centers, and depending on the math, you could say it's roughly $100 million to $150 million of fixed expense reduction. And the loss of volume is roughly in that $50 million. So you would say that just with that math, it looks like we're making the right trade-off.

Of course, there's a lot of other dynamics of patient access the local relationship with physicians and all the normal considerations that we have to go into, but I'm just giving you the money side of it.

Sure. Before we take the next question, I just want to come back to an answer I gave to Justin on the exchanges. I talked about 200 basis point increase from the exchanges. I just wanted to clarify, that's 200 basis points of revenue, not 200 basis points of mix increase that came from the exchanges. So I just wanted to make sure that was clear.

Yeah. I'm not sure we're going to -- I don't think we're going to give that number, Kevin.

Yeah. So I wouldn't use the phrase lever up because what we're really targeting here is maintaining the leverage range of three times to three and half times. And if our goal was to get our leverage range or our leverage multiple above that, that's what I would characterize as levering up. I think the reality is as our EBITDA grows in order to maintain that leverage range of three times to three and half times, recognizing we're at the low end of that range right now, we need more debt capacity. And it's just using the middle of the number as EBITDA goes up, you multiply it by 3.25%, and that's the capacity you need. So we're thinking about how much debt capacity do we need to make sure we can stay in that range as EBITDA grows.

I mean it would be used using our capital allocation philosophy. So the first thing we would love to do would be to invest it in growth, recognizing it needs to be capital-efficient growth and hit our return thresholds. Barring that, share repurchases would certainly be on the -- at the top of the list of how we would use excess capacity to maintain our leverage level.

No, I just think of it as debt. And we -- it's included in our net debt number today and if -- we had -- if we drew an extra $400 million on the revolver or we did a bond deal, and we used it to pay down the change debt, it would -- it's just one form of debt exchanging for another form of debt. So it wouldn't hit free cash flow, it wouldn't change our leverage ratio.

Well, predicting it is not a good idea, I don't think because the odds of being wrong are probably 100%. But the reality is that we do agree with you that we don't think it's structural and that it will revert back to normality. And again, I've highlighted some of the improvements that we think can happen from mortality. And many people say, well, why don't you know exactly what happened. And the assumption is that death happens while they're in dialysis. And the reality is that there's a lot of more moving pieces and that people can relocate, can go to a SNF, etc., etc. And so you don't actually get the full story, you have to follow up and there's a lag in time. And so that's why we're having a piece it together and work hard to get the information, and we'll be back to you. But we've talked to a lot of nephrologists and no one seems to think that there's any systemic trend that we can identify.

Well, on RPT, basically, you have to think of three dynamics. You have mix, you have negotiations and you have revenue cycle. And so you're asking about the negotiations. And I think to think about the future, you have to kind of put yourself into the future, which is -- what is the environment? Is it still inflationary? What contracts are up for negotiation, etc. As we've explained in the past, we are comprehensively contracted. And our big contracts usually come up every three to four years. So in any given year, you don't get many of that. What we're focused on is to be a really great partner to our payers.

And what that means is to have great clinical solutions at the best cost. Now -- so I can't predict what that looks like. We don't foresee anything that dramatically would change what occurred in 2024. That said, if you wanted to just kind of answer the question, how do you feel about margin, i.e., bring in the cost considerations to the conversation, I think the margin strength is likely to remain in 2025.

No, I think the conversations are the same, meaning everybody is trying to do their fair share in containing costs. Everybody is trying to add value to the patient community and have an expansive network and just do the best we can. And of course, we have to take into account cost and inflation and all those type of things. But those dynamics haven't changed other than the consideration for inflation.

Thank you.

No, Ryan. We're pretty much seeing that across the board.

I'm sorry, are you asking about 2025 RPT?

Yeah. It's early for guidance, but I would not go to 3.5% to 4% for next year. I think that would be a real stretch to perform at this level for another year.

Thank you.

Yeah. Home utilization is still running in the mid- to high 15s. In terms of capacity utilization, were somewhere between 58.5% and 59%, somewhere right around that.

I think growth in international for the next couple of years, especially next year is likely to be higher than it's been in the past, largely driven by the acquisition that we've done in Latin America.

OI margins.

Yeah. I think it will continue to tick up I don't have a view on could it ever get to the U.S. margins, but I would say that's highly unlikely.

The margins internationally have a couple of dynamics. Number one, there is no such thing as international. There's 12 to 13 countries. And of course, they weigh differently. And in some of these, you have one payer, the government, and so they will go in periods where there's no increase, and then they will have a lump increase. And so it's got a little more unusual dynamic and harder to predict, the margin.

Well, we're confident on the adjusted return. But you're asking a different question, which is are we seeing margin increases.

Yeah. I would be cautious with that ratio of medical cost per life. A lot of the lives you're talking about there, their medical costs are not -- don't actually flow through our P&L. It's only the SNF lives where the medical costs flow through. So I probably wouldn't go there with that calculation.

Thank you, Peter.

Okay. Thank you, Michelle, and thank you all for the questions. To conclude, it was another strong quarter for DaVita resulting from our investments in recent years to build a great team, strong systems and enhance our capabilities. As we look ahead, while it's a little early to offer guidance, we believe that the underperformance -- the underpinnings of our margins are sustainable.

With this foundation, we're excited about the future we can achieve to benefit our patients, partners and teammates. Thank you for your continued interest in DaVita and be well.