德維特 (DVA) 2015 Q2 法說會逐字稿

Welcome and thank you for joining the DaVita's second-quarter earnings conference call. At this time, all participants are placed on listen-only until we start the question-and-answer session.

(Operator Instructions)

I'll turn the call over to your host, Mr. Jim Gustafson. You may now begin.

Welcome, everyone, to our second-quarter conference call. We appreciate your continued interest in our Company. I'm Jim Gustafson, Vice President of Investor Relations. With me today are Kent Thiry, our CEO, Jim Hilger, our Interim CFO and Chief Accounting Officer, and LeAnne Zumwalt, Group Vice President.

I'd like to start with our forward-looking disclosure statement. 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 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 SEC filings included in our most recent annual report on Form 10-K and quarterly report on Form 10-Q. 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 for any reason.

Additionally, we would like to remind you that during this call, we will disclose some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website. I will now turn the call over to Kent Thiry, our Chief Executive Officer.

Thank you, Jim. Solid results in Q4 for both Kidney Care and HCP. But, we'll start by discussing our clinical outcomes first as we always do. 176,000 dialysis patients in America, about 35% of the patients in America. 98% with a Kt/V of 1.2 or greater. 73% of patients with fistulas placed for access, and we'd like to talk a little bit about our VillageHealth metrics where we're at the cutting edge of integrated care for these Kidney Care patients with numbers like a hospitalization rate 26% better than the US ESRD average.

Re-admission rate 31% better than the US ESRD average and as low as 5% catheter rates in our special needs plans. Less than one-half are already industry-leading Company-wide rate and 70% better than the US ESRD average. These are wonderfully exciting numbers with incredible clinical and economic benefits for society. Cannot be scaled until we have a new government program, and we are hopeful in that regard and continue to work collaboratively with the government to try to move us there.

On the clinical side with respect to healthcare patients and our 830,000 patients there for whom we provide true population, health management, care of individual by individual, but also across the entire population. If you look at 2014, HEDIS-- HEDIS clinical metrics, and you stare at California, our largest legacy market. We once again exceeded the Medicare fee-for-service benchmark on all metrics. And, we were four or five star across all MA patients on eight of the nine HEDIS metrics that are directly applicable to providers. The clinical outcomes for both Kidney Care and HealthCare Partners compared favorably to national averages which means healthier patients, higher patient satisfaction, and savings to taxpayers.

But, now, back to those solid results. In Kidney Care that translated into $409 million in OI and HealthCare Partners, $72 million. Jim Hilger will elaborate on the Kidney Care numbers, but I'll provide a couple of highlights. The biggest good news is that our commercial mix and our rates both went up a bit. The biggest bad news is that our NAG, our non-acquired growth, went down.

The commercial mix numbers -- particularly significant in that it shows that up to this point at least, exchanges are not hurting us as we continue to hold our commercial prices constant for this commercial segment in our mind. One reason we're able to do that is because more and more payers are paying more and more attention to the total value proposition, which is to say our ability to reduce hospital rates, to reduce care -- cost of care in other areas continues to grow as a factor in determining the prices for the core treatment itself.

Now, on to HealthCare Partners. Solid performance, but there were some one-time favorable and unfavorable items. You shouldn't actually take the $72 million as the normalized number. Better to think of it as normalized at about $65 million which is in line with our annual guidance after some of those one-time puts and takes.

On the business development front in HealthCare Partners, we are getting better. We have actually added full-time folks in the last few months. The first time since we did the deal. We are not satisfied yet, but we are getting to be pretty darn competitive. We're in some high-potential conversations, and our status as a leading independent medical group in America is one that puts us in incredibly good position for some of the high quality conversations we're having. Separate from thinking about potential transactions, we are sitting at an MA Lives number that is 8.3% higher than the same time last year. So, very nice growth stream underneath those numbers.

Moving on to guidance for the balance of 2015 or for the total of 2015, depending on how you want to look at it. Our enterprise guidance is now $1.825 billion to $1.925 billion. What this means is we raised the bottom end of Kidney Care guidance by $25 million. It is consisting of Kidney Care being $1.6 billion to $1.65 billion, and HCP being $225 million to $275 million.

If I were to step back for a moment and just comment on our outlook, we have two strong business positions. Both enjoying some steady unit growth. Each with reasonably stable economics, although there is always some to-ing and fro-ing, and we are investing significantly for our future in improving our value proposition in ways that others will matter. And then, specifically with request to HealthCare Partners, we're continuing to make very good progress in creating a highly differentiated physician experience, a highly differentiated patient experience, and more of a growth capability outside of the historical markets. I'll now turn it over to Jim Hilger.

Thanks, Kent. Starting with Kidney Care, our Kidney Care operating profits increased $38 million sequentially, driven primarily by three main positive factors. Number one, higher number of treatment days in the quarter. Number two, improved revenue per treatment due to improved commercial mix and commercial rates. And, three, lower payroll taxes. These positive factors were partially offset by higher dialysis pharmaceutical expenses driven by higher average unit costs in the quarter and increased losses in our strategic initiatives and the international business.

Our non-acquired dialysis treatment growth was 3.7% normalized in the quarter. This is the lowest in quite some time. While there was no single cause for this decline in our NAG, some of the reasons include higher mistreatments during the flu season earlier in the year and efforts to improve the profitability of our acute business. This has put -- we have been putting a tighter screen on our new and existing relationships, and in some cases, exiting some hospital relationships where rates were too low to be sustainable.

As an example, we recently lost a hospital chain acute service contract to a competitor because we were not willing to accept the low rates the hospitals offered. These efforts have improved acute revenue per treatment and OI but have had an adverse impact on our growth.

Now, moving to G&A. G&A in our dialysis business was down from Q1 by about $2 per treatment, driven by seasonal declines in payroll taxes and in more treatment days in the quarter, and also higher levels of legal and consulting spend that occurred in the first quarter. Please note that due to this higher legal spend in the first half of the year, we anticipate dialysis G&A per treatment to be slightly above last year's levels.

International losses were $15 million in the quarter which includes an asset impairment of $4 million. Including this non-cash charge, we now expect international losses in 2015 to be close to $50 million.

Moving now to the overall enterprise, our debt expense was $104 million in the second quarter which is a good run rate for debt expense in future quarters. Our income attributable to non-controlling interest was $37 million. Next, the effective tax rate attributable to DaVita HealthCare Partners in the second quarter was 39.2% after excluding the $8 million tax adjustment related to the finalization of the Vainer settlement. We expect the full-year tax rate for 2015 to be in the range of 39% to 40%, again, excluding the impact of the Vainer settlement. And, during the quarter, we repurchased $14 million in stock, but none subsequent to our last earnings announcements.

Turning to cash flow, we continue to generate strong cash flows. Our operating cash flow was $335 million in the second quarter excluding the after-tax impact of payments made in connection with the Vainer settlement. And, we now expect our 2015 operating cash flow to be between $1.6 billion and 1.75 billion, again, excluding the Vainer settlement. As always, this guidance range captures the majority of probabilistic outcomes, but we could be above or below the range. With that, Operator, let's go ahead and open it up for Q&A.

(Operator Instructions)

Kevin Fischbeck, BofA Merrill Lynch.

This is Steve Baxter filling in for Kevin. I wanted to ask about the proposed managed care consolidation. I wanted to -- if the plans have largely talked about just enabling them to drive a shift toward value-based payment models. Do you think this could help move markets that are traditionally more fee for service down the value chain? How do you think about this as impacting HCP down the line?

We hope what they're saying is true, but directionally we think this additional consolidation of market share is an unambiguous negative. Hopefully for us, because of where we sit with respect to our value proposition on both sides of the house, we can make some lemons out of -- make some lemonade out of the lemon. But, we worry a lot about what that combination or those combinations can mean for network adequacy and access for consumers as well as rates for consumers. So, we have a lot of concern, and we'll do the best we can. And, hopefully, there will be some opportunities created, particularly for us.

Okay. That makes sense. I definitely see how you could perceive it as a negative on the dialysis side, but you see it that way for HCP as well?

Absolutely. In general, that kind of increased consolidation just leads to more market pricing power and leveraging rate power, which often then if successful doesn't flow through to the consumer because of the marketing pricing power. So, we hope that it will create market-specific opportunities for us because we think some of those folks do want to move to a more value-based world. But, the dominant directional effect is one that is scary both in the rate to consumer side and the leverage of our provider side.

Okay. Thanks.

Thank you. Gary Lieberman, Wells Fargo.

Thanks for taking the question. You had mentioned that the pharmaceutical costs being up in the quarter were one reason that impacted profitability. I guess going back to the Investor Day, you had made some fairly vocal comments in terms of, I guess, what your thoughts were in terms of pricing for Epogen as new competition came to the market. Fresenius discussed moving a number of patients to Mircera. I wanted to get your updated thoughts on where you thought the pricing was headed, and if you had any conversations that maybe you could share with us?

There haven't been any significant developments since the last call, Gary. We still have our hopes for how competitive market forces will unfold in that sphere, but there has been nothing noteworthy that has actually happened yet. Nor, did we expect anything noteworthy to happen within this time frame. I don't know if Jim or LeAnne would want to add anything. No, I think that's pretty much it, Gary.

The assumption that we should be working under would be that you would need to see perhaps Hospira's drug come to market before there is enough of a dynamic in the market to bring down pricing?

Well, certainly -- I think my response would be just pretty generic. The more people that come to market the better, and we'll do everything we can to encourage it, as will other people. And, at the same time, of course, we have a lot of respect for the clinical efficacy of what we use right now, but certainly the more the merrier, the sooner the better.

Okay. And then, to follow up on the comments about the lost hospital business, and, I guess, some competition on price. Can you give us any more color on that? Was that a large national player that competed on price? Or, a local provider?

On a spectrum, it was a lot closer to the large size than the small size, and it was a significant account. And, it went for a price that we would not agree to, and it wasn't that difficult a decision. So, it's just important that shareholders know that there is some of those pressures out there, so you can worry about them at the same time that we are.

Should we be more worried about them? Do you see that increasing? Or, do you see this as an aberration?

Don't know.

Okay. All right. Thanks very much.

All right. Thanks, Gary.

Margaret Kaczor, William Blair.

Good afternoon, everyone. Couple of questions for me. First, as we think about the non-acquired dialysis patient growth as we go over the next several quarters, is that 3.7% treatment growth similar to the patient growth? And then, in terms of the lower growth, how can we attribute it between the two buckets you had mentioned? The higher mistreatments versus the lower increase in the acute business?

Let me handle the second one first. We're not breaking it out because it is just a single quarter, and there is a fair amount of noise in the data. And so, both factors are material, and there is some other stuff at play as well. Only we didn't want to break it into four, five, six pieces. I think for the quarter, at least, we'll just keep at letting you know what a couple of the bigger drivers were, and that's as much as we can say now. And, in each case that effect may continue. As to the outlook going forward, we hope we can do better than how we did this quarter, but right now we can't guarantee that.

Okay. And then, you had mentioned that the commercial mix had increased. As we look at your guidance, what do you include in terms of the commercial mix? Are you expecting that to continue to increase as we go on throughout the year? Or, stay pretty stable with where you are today?

Unfortunately, on that one, it is another answer of we don't know. Certainly, there has been a nice trend now for a number of months that's comforting, but we watch each and every month the earliest minute we can to see what happened to that number, and at this point, we're not willing to predict that it is going to keep going up, but we sure hope so.

Okay. But, you're not assuming that it continues to go up in the guidance as you've got it out right now for operating income?

I think in this case our operating income guidance we had never specified exactly what we were presuming on commercial mix. And, we're not changing whatever we had in there, so there's no change to our guidance driven by what's happened with mix. Probably the right way to think about it is the movements we've had on mix are either consistent with whatever forecast we had or have moved us up within the range of guidance that we have.

Okay. I hate to sneak one more in, but if I could -- Kent, now that you've got HCP and then you have gotten your hands wet in different models. You're increasing the business development group, expanding the business. What have you learned in terms of what deals are more or less accretive versus the initial expectations when you had acquired HCP? Is there a model in which you've narrowed in on that is more beneficial for you to pursue more aggressively?

Very fair question. I think what we like most is investing in growth in our legacy markets, and that's consistent with what we said we would like a couple of years ago and we continue to like that. That's through organic growth and tuck-in acquisitions, and things like that.

Second, we really like buying quality medical groups or partnering in some serious capacity with major medical groups like we did in Colorado Springs, and as we are in a few conversations as we speak. So, that's probably our second favorite option for growth. And then, third and finally, we still have a lot of excitement around our payer joint venture in Philadelphia with IBC, and for those in general and for our health system partnerships as we have with Centura in Colorado. But, we continue to emphasize that that is R&D. These are new types of arrangements and will take some time to emerge. So, we're positive on them, but at this point if we had to rank the risk-adjusted, timing- adjusted attractiveness of different segments of growth, we would put good old legacy markets and partnering with major medical groups at the top.

Thank you.

Kevin Ellich, Piper Jaffray.

I jumped on late so I apologize if I missed some of this. Just want to go over the ESCOs. If you covered it already, I can go back and check the transcript. What are your thoughts -- we've heard of ESCOs being delayed, is that something that you have considered? And, what's your thoughts going forward with that program?

On ESCOs, a couple things. Number one, they haven't started, yet. Number two, we don't know when they will start. Number three, we're working very collaboratively with CMS to get the design buttoned up, and the good news is we and a lot of other people in the community and a growing number of people in CMS are quite positive. But, to go any further than that would just be speculating and not a good use of your time.

Okay. Thank you.

At this time, we don't have any further questions on queue.

(Operator Instructions)

I'll go ahead and add one other comment, Operator. I'm sorry I didn't catch your name at the top of the call, but I may have been a little bit off in one of my comments a moment ago. We're not quite expansive enough that we had provided guidance previously that our total treatment growth would be in the 4.5% to 6% range, and we are still comfortable with that expectation. Operator, are there other questions?

Gary Lieberman,

Thanks for taking the follow-up. I didn't want you to get off that easy. (laughter)

We'll get our revenge, Gary.

Wanted to go back to some of your comments on HCP and the growth and what you're seeing and what your expectations are for additional deals you might do this year?

On -- and I'm sorry, I may have been talking over you at the beginning telling you that we're going to get revenge for provoking -- prolonging the question period.

I look forward to that.

But, on HCP, we were in some high potential, promising conversations. Having said that, none of them are going to close quickly. If we succeed, it will be a very exciting beginning of our next chapter, but it's not going to happen in the next couple of months. And so, I think there's nothing dramatic we can say about what will close or not close this year. All I can say is we are very substantively engaged with some groups that we really like.

Okay. That's helpful.

Thank you. Lisa Clive, Sanford Bernstein.

Just a question on your VillageHealth program, you started your prepared remarks with some interesting statistics on that. Could you remind us how many patients you have within VillageHealth? And, I'm assuming the vast majority or almost all of them are Medicare Advantage. Could you give us some idea of what proportion of your total Medicare Advantage patient population are currently going through VillageHealth?

The definition of VillageHealth that we're using now is a broad one which is to say the number of patients where there is some form of value-based payment. So, using that broad definition, which in its most extreme form is global capitation, and we have a nice chunk of that both in the Kidney Care side and on the HealthCare Partners side. And then, down to having some kind of performance bonuses, shared savings arrangements with individual payers or health systems, and so that total number of patients where we're in some form of value-based payment is about 20,000. So, it is significantly higher than what it was a few years ago.

And, is that -- yes, because I remember the last time I looked at the numbers, I thought it was more like 9,000. Is that largely because you've included those categories where it's not a full capitation model? Could we assume that one-half of that 20,000 are less than full capitation?

Well more than one-half. I don't know if we've disclosed the amount of globally capitated ESRD patients we have, but it is probably in the neighborhood of 1,800 or so which is probably significantly more than anyone else. But, that gives you a sense of the mix.

Okay. That's very helpful, thanks.

Thank you. At this time, we don't have any questions on queue.

I'm sorry, Operator, what did you say?

We don't have any further questions on queue.

(Operator Instructions)

We'll hold for about 10 seconds or so just to give folks a chance. This is perhaps the most uneventful quarterly call we have had in 16 years, and so we will work hard to hopefully make the next one just as uneventful, and hopefully positive for everyone involved. Thank you very much for your interest in DaVita. Operator, are there any other ones?

No questions on queue, sir.

Okay. Thank you all very much.

Thank you. So, that concludes today's conference call. Thank you all for participating. You may now disconnect.