DaVita Inc. (DVA) on Q1 2021 Results - Earnings Call Transcript
Operator: Good evening. My name is Sheila and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2021 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. Thank you. Mr. Gustafson, you may begin your conference. Jim Gustafson: 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 today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Javier Rodriguez: Thank you, Jim, and good afternoon. Over the last several months, we have made incredible progress in our efforts to combat the COVID-19 pandemic, and it’s with continued optimism that I provide several updates today starting with vaccination, followed by a summary of the first quarter performance, then an update on our improved outlook for the year, and finally an overview of our ongoing commitment to ESG. Q1 brought a lot of smiles as a kidney care community administered hundreds of thousands of vaccines to its patients. Providers worked closely with the Biden administration, the CDC, and state governments so the dialysis patients could be vaccinated in a trusted and convenient side of care. We knew that this would help our patients overcome transportation and other access challenges getting to third-party sites. And we had confidence that the hesitancy rate would decline when they received education from a trusted caretaker. Thanks to all the hard work by our teams and the government partners, I’m proud to say that as of yesterday, 72% of our patients nationwide have received at least one vaccine dose. We also saw an opportunity to positively impact health equity by administering COVID vaccine in our clinics. Similar to the early results in the broader U.S. population in the first few weeks of the vaccine rollout, we saw the vaccination rates for black and Hispanics were approximately 40% below that of white and Asian Americans. This did not sit well with us. We got to work and mobilize our care teams including social workers, dietitians, and medical directors to have one-on-one conversations with patients to address common causes of hesitancy. Our Hispanic patients have now been vaccinated at nearly the same rate as white patient and the gap for our black patients has been reduced to 10%. We are not done. Our pursuit for health equity continues. Joel Ackerman: Thanks, Javier. Q1 was a strong start to the year with solid financial performance. For the quarter, we recorded revenue of approximately $2.8 billion operating income of $443 million and earnings per share of $2.09. As Javier referenced, treatment volume was a large headwind and our non-acquired growth was negative 2.2% compared to negative 0.3% in Q4. While COVID presented the main challenge to NAG in Q1. Winter storms, particularly Uri were responsible for about 30 basis points of the NAG decline, treatments per day bottomed out during the first quarter. So we expect to start seeing quarter-over-quarter growth in Q2. We continue to expect that NAG will be negative for the year, although we expect to see an acceleration of NAG in 2022 and 2023 as mortality rates may be lower than the pre-COVID levels for a few years. U.S. dialysis revenue per treatment grew sequentially by almost $3 this quarter, as a result of the Medicare rate increase, higher enrollment in MA plan, a slight improvement in commercial mix and higher volume from our hospital services business. Partially offset by the seasonal impact of coinsurance and deductible. U.S. dialysis patient care costs declined sequentially by approximately $6 per treatment, although we continue to experience elevated costs due to the pandemic, such as higher PPE, and certain clinical level expenses from continued infection control protocol. Operator: Thank you. We will now begin the question-and-answer session. Our first question will come from Pito Chickering with Deutsche Bank. Your line is open. Pito Chickering: Good afternoon, guys, and thanks for taking my questions. First one is on the operating income guidance that you raised it by 3.5% or about $63 million at the midpoint. And you talked about some of the gives and takes sequestration and/or impact in COVID and lower sort of costs in the back half of year. Can you sort of help us quantify which were the drivers of those? Joel Ackerman: Sure. Hello, Pito, it’s Joel here. So I would think about three things really. We beat this quarter, so obviously that helps with the full year. Sequestration was the biggest driver here and that’s about $50 million. And then looking towards the back half of the year, we’ve taken down some of the COVID offsets that we were expecting from G&A and T&E. As things get a little bit better, we were not expecting as much offset in Q3 and Q4. So you put that all together and that’s where you’ll wind up. Pito Chickering: Okay. And then the treatment growth declined 1.3% sequentially and 2.2% year-over-year. I understand there are a lot of missed treatments from host relations from the storms. They’re offset by your acute business and obviously the mortality issue. With that being said, is there any chance you can give us monthly treatments during the quarter and through April? Or just help us understand the pace of recovery and how you plan to get back to patient census to pre-COVID levels by the end of the year. Joel Ackerman: Yes. Pito, I appreciate the question. We’re not going to give monthly, but let me try and help out a little bit. February was the bottom. And that was driven largely by the mortality issue, but also Uri the storm resulting in about 25,000 missed treatments. We saw recovery in March both as the mortality issue got better as well as the recovery after the storm, and then April trended a little better from there as well. I think it’s a little early to quantify it and try and use a number to draw a trend line. These numbers can bounce around a bit. So that’s where we are. Pito Chickering: And the last question, the revenue per treatment was pretty strong, with all the items you laid out. So two quick questions. The first is how much did co-pay pressure did you see in the first quarter? So what would be a good assumption for revenue per treatment in 2Q? And as you look forward for the next couple of years, is there a reason why a 2% revenue per treatment growth wouldn’t be the right assumption to make? Joel Ackerman: Yes. So a couple of things I’d highlight about Q1 RPT. In terms of quantifying the co-insurance and deductible, that’s somewhere in the $5 to $6 of treatment range. So you’d add that to what you’d expect to see in Q2. We also had a pickup in Q1 over Q4 as a result of calcimimetics. I’ll remind you, calcimimetics OI in 2021 will be similar to 2020, but the seasonal pattern will be very different. So we picked up $2 – about $2 of RPT in Q1 over Q4 from that. In terms of looking forward about what RPT will look like, we’ve moved away from guiding on RPT as you’ll remember. In terms of what’s a reasonable number, is 2% reasonable? I wouldn’t say it’s unreasonable, but it might be a little on the high end of the range that I probably think about, but we’ll have more to say on 2022 RPT obviously later in the year. Pito Chickering: Great. Thanks so much. Operator: Thank you. Our next question… Joel Ackerman: I’m sorry, operator. Pito, just to jump in on that, that my comment, obviously, you’d have to adjust for sequestration, which would go away presumably between 2022 and 2021 and that would be a big number. Pito Chickering: Yes, of course. It’s more so just excluding sequestration to gives and takes within the overall market demand, the shift to MA, was a 2% reasonable. Joel Ackerman: Exactly. Operator: Thank you. Our next question will come from Kevin Fischbeck with Bank of America. Your line is open. Kevin Fischbeck: Great. Thanks. Maybe just staying on the RPT for a second. Is it fair to say that when you listed the things that throw RPT in the quarter, that they were listed in the order of importance that the rate update was the biggest one? Joel Ackerman: I’d say there are four things and they’re roughly all about the same order of magnitude, and that’s the Medicare rate update, calcimimetics, the mix changes – commercial mix change and then MA. They’re roughly in the same order of magnitude. Kevin Fischbeck: Okay, that’s helpful. And then I guess, when we think about the improvement in volumes that you expect to see as the year goes on, how should we think about that from a mix perspective? Is that volume improvement, disproportionately commercial improvement? And does that have any implications for margins or profits? Joel Ackerman: Yes. So I’d say the likelihood is that the mix will be more Medicare than commercial. Remember, the mortality we’ve seen as a result of COVID was disproportionate in the older population as you would expect, and our older population is disproportionately Medicare. So as you see the unwind happen from COVID over the next X number of years, we think that would lead to a lower kind of our commercial mix trending down a bit. In terms of the implications for margin, there’s an offset to that, recognizing that these new patients will be filling unused capacity and that would have a tendency to drive margins up. How those two – those countervailing forces play forth, remains to be seen and it’s a tough number to predict its dependent on a lot of the some of the underlying assumptions. Kevin Fischbeck: Okay, that’s helpful. If it wasn’t 100%, clear to me, what you were saying as far as your bridge to the guidance. You’ve said he took down some of the COVID offsets, does that – are you basically saying that you were prepared for things to get worse, and you had cost cuts all lined up and now that things are coming in better you don’t feel the need to push that as much as that? Joel Ackerman: No, our T&E is down. And it’s been down since the beginning of COVID, as teammates travel less, and we had modeled that continuing through the end of the year. And now we think, for example, that T&E in Q3 and Q4 could return closer to pre-COVID levels. So the offset, the benefit we got from lower T&E is probably going to be less than we anticipated. Kevin Fischbeck: Okay, that’s helpful. And I guess last question, can you give an update on your contracting outlook for Medicare Advantage. Are there any large books of business that are up for renewal next year? And how are things going on as far as rates and conversations around going to more value based models? Javier Rodriguez: Yes, Kevin, this is Javier. How are you? Thanks for the question. Let me just start off by saying that there is no spike or change in volume of renewals or anything like that it’s in its normal cycle. The conversations continue to be highly, highly aligned and trying to make sure that we add more value to the patients and help in the care continuum. So, and the fact that we’re doing more complicated contracts, instead of a fee-for-service, means that it takes longer. So as it relates to that there’s nothing sort of there to talk about, because the outlook is kind of unchanged, and it’s incorporated in our guidance. Kevin Fischbeck: All right, thanks. Javier Rodriguez: Thank you. Operator: Thank you. Our next question will come from Justin Lake with Wolfe Research. Your line is open. Justin Lake: Thanks. Good afternoon. Few questions to you. First, in terms of the guidance change, it looks like you talked about things getting a little bit better on the COVID front, I think you said $50 million when you knit it all together, and that’s basically we took up or what you took the guy by? So does that imply that the first quarter looked better than my model and I think better than consensus? So does that mean that the quarter was actually kind of in line with your views? Or was the first quarter kind of materially better from an OI perspective? Joel Ackerman: Yes, I’d say Justin, the, the Q1 was within the range of what we were expecting, I’d say it’s a little bit on the positive side, but it’s early in the year to start tinkering with our full year guidance and our full year forecast. So despite what I would characterize as a strong quarter, we chose to keep things in line. Justin Lake: Okay. And then the $150 million, I think you said Joel, was the net COVID headwinds? Joel Ackerman: Correct, for the year. Justin Lake: For the full year. Okay. So, but it looks like that has a bunch of different components, right? If I think about it, there’s COVID costs right, as a part of it, there’s the negative impact on treatments, then there’s the benefit of sequestration, which it sounds like you put in there. And then there’s some cost offsets. So, I’m just trying to think about, is there any way to help us understand those four buckets? Joel Ackerman: Yes. So you’ve got it right. And I think it ultimately, it’s a pretty simple calculation. You take the excess costs associated with PPE and that roughly offsets with sequestration. And then everything else is a wash and what you resulted in is basically, the negative impact of mortality, which is in that $150 million range. So there are a lot of moving pieces, but net-net, they mostly cancel out and leave you with the impact of mortality. Justin Lake: Okay. And then as you think about the impact on mortality, obviously to your point, we probably saw a bottom in the first quarter, and things are expected to get better through the year. So, I’m just trying to think about the pace of that, $150 million, right? Because it’s the exit rates going to be important coming out of fourth quarter, to think about the impact on next year. So, can you help us think about that, in terms of where you think that impact is in this quarter? And where you think that impact will be kind of in the fourth quarter? Joel Ackerman: Yes. So this stuff gets pretty technical, pretty quickly. But let me try and help you out. I think the way I would think about it to simplify it as you start with what our typical NAG is. And if you want to grab a number, go back pre-COVID and pick something in the low 2%s, 2.2%, something like that. And you really see that impacted by any continued excess mortality. But again, we think that’s declining rapidly, you’ll probably see some in Q2, but going down quickly, again, assuming COVID plays out the way we expect on its way out. But obviously things could be different. So start with NAG, add excess mortality then adjust for what could be a challenge to the pipeline, if you want to assume there’s any CKDs for impact. We don’t have data on that. But if we look at what we see in terms of new agonists, we don’t see any impact there that we don’t see any impact from that right now, but you’d have to incorporate that. And then we see a tailwind coming up as patients who otherwise would have died in the next quarter or two passed away as a result of COVID. And that’s a hard one to measure. So that’s how I’d model it. If you want to get kind of simplistic and I realize I’m throwing a lot of numbers and a complicated story at you. I think… Justin Lake: I’m begging you to get the perfect Joel. Joel Ackerman: You add back the tailwind associated with lower mortality post-COVID. And that’s how you start modeling what NAG looks like going forward. Justin Lake: All right, I’ll not smart enough to figure that out. But we’ll talk about it offline. Just last question. The – can you give us the commercial mix change from kind of, what you were looking at in the fourth quarter kind into the first quarter here? Joel Ackerman: It went up a small amount, not much, but it was up a little bit. Justin Lake: All right. Thanks, guys. Operator: Thank you. Our next question will come from Pito Chickering with Deutsche Bank. Your line is open. Pito Chickering: Hey, thanks for taking my follow-up questions. A couple quick ones here. It’s been a pretty fun two years from a share repurchase perspective, I’m just curious, what we think about is the right leverage ratio for the business at this point, it kind of where should we deploy the rest of that into share repo is it around 3.5, at this point so want to just get a feeling for how we should think about leverage ratios versus share repo? Joel Ackerman: Yes. So look, I think we’ve been pretty consistent on this. And nothing has really changed; we want to be in that three to 3.5 times where we’re at 3.39. Right now, we did a $1 billion bond deal during the quarter. Cash flow for the rest of the year is likely to be relatively strong. You saw cash flow in Q1 was weak. And we think we’ll make that up over the course of the year, but no reason to think our philosophy and approach to leverage ratio and buybacks is going to change over the near future. Pito Chickering: Second one is quicker one, what was the percentage of your Medicare Advantage penetration, this year versus last year? Joel Ackerman: We disclosed last time as our expectation is in line, what we said was mid-to-high 30% and markets roughly around 43%. So, we’re slightly below the rest of the market still in the mid-to-high 30s. Pito Chickering: Okay. So what percent of your patients were treated in the home this quarter, if you see that accelerating, sort of in this post-COVID environment? Joel Ackerman: The percentage hasn’t changed much because with NAG decreasing, but that segment of our business did increase in particular PD, PD grew around 4%. Home hemodialysis, the HH part of it decreased, but net-net that’s the segment of the businesses that continues to grow. We think that there is appetite from the physician community and the patients to have more flexibility and freedom. And we are innovating and creating a lot of technology so that the patients feel more comfortable and more confident, more convenient, being connected to our care site. So, we do expect that the modalities will continue to grow. Pito Chickering: Okay, great. Thanks so much guys. Joel Ackerman: Thank you. Operator: Thank you. We are showing no further questions at this time. Javier Rodriguez: Okay, well, hopefully that short means that it was pretty clear. Let me just say some closing comments. Q1, 2021, in my mind, and in my heart and in many of our caregivers will always be remembered and come with a lot of fulfillment for vaccinating literally 10s of 1000s of patients, in many instances not being dramatic or overstating it literally life sustaining. Second, the quarter financials are pretty straightforward and pending a shift in the virus. We begin a path toward our historical normalization. And then lastly, our teams continued unwavering commitment towards caring and innovating to improve the lives of our patients. We thank you for your interest in DaVita. And we look forward to talking to you soon. Stay safe. Operator: Thank you. That does conclude today’s conference. Thank you for participating. You may disconnect at this time.DVA Ratings Summary
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DaVita Upgraded at UBS, Shares Gain 3%
UBS upgraded DaVita's (NYSE:DVA) rating from Neutral to Buy, revising the price target upwards from $100.00 to $142.00. As a result, shares gained more than 3% yesterday.
The firm’s rationale hinges on notable positive revisions to the 2024 forecasts for EBIT, which is now anticipated to reach $1.793 billion, and EPS, projected at $9.00. Both these estimates significantly surpass Street consensus figures.
The bank’s viewpoint underscores the anticipation of a turning point in treatment growth, expected in the second and third quarters, followed by a more pronounced surge in 2024. This growth trajectory is reinforced by improved pricing strategies and a more streamlined cost structure, integrating savings from the End Stage Renal Disease Seamless Care Organizations (ESA) and clinic closures.
