DaVita Inc. (DVA)
Q4 2009 Earnings Call Transcript
February 11, 2010 9:30 am ET
Rick Whitney – CFO
Kent Thiry – Chairman and CEO
LeAnne Zumwalt – VP, IR
Darren Lehrich – Deutsche Bank
Kevin Fischbeck – BofA Merrill Lynch
Kevin Ellich – RBC Capital Markets
Andreas Dirnagl – Stephens Inc.
Gary Lieberman – Wells Fargo
Justin Lake – UBS
Andrea Bici – Schroeder
Previous Statements by DVA
» DaVita Inc. Q3 2009 Earnings Call Transcript
» DaVita, Inc. Q2 2009 Earnings Call Transcript
» DaVita, Inc. F1Q09 Earnings Call Transcript
And now, I would like to introduce Rick Whitney, our Chief Financial Officer, who is going to start off the presentation.
Good morning. Okay. Roadmap for today. We’ll start with our comments on the fourth quarter performance, move on to an overview of DaVita, then we’ll have a discussion of the risks and opportunities of investing with us, on to a deep dive in our business fundamentals, financial review and then we’ll wrap up with a summary and taking your questions.
Q4 results. First of all, non-acquired growth continued to be solid at 4.8%. It was a nice bounce back from a low of 3.8% back in Q3 of 2008. The other comment I’ll make on treatments you may notice they are a little bit light sequentially this quarter and that’s due to two things. No. 1, the way the calendar fell, more Tuesday, Thursday, and Saturdays in this quarter, which tend to be light treatment days for us as well as the holidays.
Revenue, almost $1.6 billion, up 7%, on about 5% volume growth and 2% revenue per treatment growth. Revenue per treatment, as I said, up 2.1% from last year and then sequentially down $3.71, a little more than 1%.
A couple of factors drove that. First of all, lower physician prescribed intensities of pharmaceuticals. That was about 60% of it. About 20% of that change were rate changes. Most notably a reduction in ASP rates, medical reimbursement of drugs. And then the final 20% was due to a continued deterioration in our private pay mix.
Operating income, up 7% from last year’s Q4, up 8% for the full-year which was in line with our guidance and then sequentially down 3%. And that was driven by the revenue per treatment decline, the impact of the calendar on treatment volumes as well as a sequential increase in G&A spend, which is typical for us in the fourth quarter.
And finally EPS, up 13% from last year. That was driven by the operating income growth, the impact of our balance sheet leverage, lower interest rates and lower share count. And then operating cash flow continued consistent cash generation.
2009 results, very similar set of numbers. Revenue up 8%, operating income up 8%, EPS up 15%. Underlying cost trends generally stable as were margins at 15.4% in both periods. Revenue per treatment, the full year over the full year was up 2%.
Three components there. About a half of that was the Medicare composite rate increase as well as ASP rate increases year-over-year and then another 40% was due to commercial rate increases, partially offset by mix decline we’ve been talking about the last few quarters. And then finally about 10% of that is due to increases in physician prescribed pharmaceuticals year-over-year.
And then operating cash flow, $667 million growing in line with our operating income growth and above our guidance of $600 million as we indicated last quarter that it likely would be.
Okay. On to our 2010 outlook. Operating income guidance of $950 million to $1.20 billion remains unchanged from last quarter and that represents a range of 1% to 9% growth off of where we finished 2009.
We are launching our cash flow guidance, operating cash flow and free cash flow. As you can see generally expected to grow in line with our operating income. Growth CapEx plus or minus 250 million. Of course as we always say, the final number is dependent upon the availability of projects with attractive returns. Maintenance CapEx plus or minus $125 million which is pretty consistent with history. And on to the DaVita overview. Kent?
Come up I want to say one more thing and that is what we always say about Q1, we want to make sure you keep in mind Q1 is a seasonally weak quarter as a result of fewer treatment days, higher payroll taxes the beginning of the year and the impact of co-pays and deductibles. As is typically the case we would say that we would expect it’s quite possible that Q1 could be down a little bit sequentially. So please keep that in mind as you think about 2010.
Okay. Good morning. Good to see many of you again and it’s a new folks as well. Our objective today is the same as it is every year, which is to provide you with analytically thorough, intellectually honest characterization of our industry situation, our Company situation and hopefully in terms of meaningful dialogue about the risk reward relationship in those situations and also try to facilitate your ability to evaluate our coherence and competence in taking advantage of the rewards and avoiding the risks. So that’s the spirit in which we come here today and hopefully you will help us pull that off.
It is important for us to start with a mission particularly for those of you that are new, our mission is to be the provider partner and player and choice the way we think about it. And the way we think about is first is as if you were one of our patients. And it is our first priority to please you in that scenario, in that scenario which you are in one of our centers being taken care of first and then secondarily as shareholder.
In addition, the employer choice is our third and final component of the mission that we take a lot of pride in being able to provide 34,000 people with a suite of benefits and hopefully a life sustaining income. And so these are important elements of what we’re about and what our people are focused on while simultaneously bringing amazing intensity to our fiduciary responsibilities.
We also think over the long-term the fact that we are maniacally focused on providing superb care, ever improving care and compassionate care will rebound to our shareholders benefit, although in our system find that be a directly casual relationship in the short-term, but hopefully with the work we are doing in DC that will become increasingly so. In the meantime for the full disclosure it’s important for you to know that we always put the mission slide first, because that is in fact how we guide our decision-making.
This is a patient, for those of you haven’t been in our center being taken care of. The simple slide describes is just its worth going over quickly for those that are new. When you have kidneys all of us are going to go to the bathroom today and urine out the toxins that you are accumulating with the coffee you are drinking and the cream cheese you are eating and your bagels and things like that.
Once your kidney fails your body can’t urinate out those toxins, so we’re the substitute for that urination. We take your blood out, we take the toxins out of blood and we put the blood back in. If we don’t do that, you die. And this is I would say this is not a typical center. This is what a typical center would look like if there weren’t a lot of people working here all the time and we had it sitting around perfectly clean.
And this is worth about 1500 of these and here’s how an average one looks, to give you a sense of the decentralized nature of our service business. And then in aggregate, you can see that we have continued to gain share. We are now up to about three patients out of every ten patients in America as opposed to going back a decade ago and it was about, whatever, nine or so out of every 100. This is very, very good for our shareholders looking backwards and is very good for our shareholders looking forward and you know our equity market cap better than us.
On to investment highlights. So, what we are trying to do here is to try to help you characterize for your partners who aren’t here the pros and cons associated looking at the upside and downside in our space. First, from an industry perspective independent of us, the Company, what are some of the things one might want to say to summarize to your partners some of the positives around this space? First, it’s wonderfully stable demand growth. Looking backwards, looking in 2010, looking in the out years. And we will elaborate on each of these briefly. The steady cash flow, it’s in the numbers historically and also for a whole bunch of structural reasons which we will elaborate on in the course of the conversation today, looks awfully steady going forward.
The consolidation has been steady throughout the decade with some spurts of acceleration when people do things like our buying Gambrel and FMC buying RCG and it will continue. At the same time there’s going to be small independents for a very long period of time and that, in fact, is an important structural safety net for our shareholders, which we’ll touch on later.
The Government is uniquely accountable for this space. There is no other program like the ESRD program. There is no other program as uniquely carved out as the ESRD program in America. And therefore the government has differential accountability for that reason. It also has differential accountability because we are so discrete. And so our microeconomics, our clinical decision making are uniquely homogenous and transparent, which has a lot of pros for us in our mind, more consumers are demonstrating our superior outcomes and business acumen and forces the government to take more accountability because they can’t hide behind the myth of saying they don’t really know what’s going on and/or what impact their policies have.
Therefore, it’s important in that context where the government is going to get differentially involved for the community to be differentially effective, and we are, obviously, in a highly imperfect and uncertain world we will talk a little bit more about that and the transparency I’ve referred to.
Let’s step through each in turn. This slide hasn’t changed much for ten years for the small number of you have been around. And that in itself is not a reflection of the fact that we are intellectually stale or just lazy. It’s because this reality hasn’t changed significantly in ten years, which is kind of the whole point. It is still the case that there is no clinical controversy of when your kidney has failed.
There’s no clinical controversy around extra kidneys for transplants sitting around not being used. So there’s no controversy around need unlike so many other (inaudible) where there is a controversy or uncertainty about whether or not it will be continued.
For most patients, it’s three times a week for the rest of your life unless you are one of the fortunate few that gets transplanted and if anything, there’s modest amount of upward pressure on this as there is more science that suggests that maybe getting a fourth treatment is a good idea. It’s not cyclical, it’s not seasonal. You need this multiple times per week or you get very sick and die.
There’s very strong center loyalty in every direction, us to the doc, us to the patients, the patient to the center, the patient to the doc, the doc to the center, doc to the patient, patient to the doc, whatever, very strong loyalty for a whole bunch of structural reasons and then just the human reasons of being so tightly engaged with one another in a life saving therapy. If you doubt this, visit some of our centers, in particular, and you will feel the kind of bond that exists.
We, in particular, are proud of the bonds between our center team mates and the physicians and have had situations as each of you know who’ve been around where the physicians have left a practice elsewhere and 90% of the patients stay with us. Choosing to stay with the people who are with them every time they visit, three times a week. There are very little therapeutic alternatives on the horizon although certainly if one looks out a number of years one hopes to a change to that bullet point, but there’s nothing dramatic going on there right now.
And then basic demography turns. Kidney failure is wildly disproportionately significant in the Hispanic, African-American elderly communities. These are all growing communities in America. This is again incredibly boring demand growth slide, where you wonder if we smoothed it out but it’s pretty much as if you plotted the individual points because that’s how regular the growth has been. It does tweak a little bit each year. Sometimes, inexplicably where you wonder if the government’s got the data wrong. That’s not reflective in what we see. But this is pretty much the trend line.