DaVita healthCare Partners Inc. (DVA)

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DaVita (DVA)

Q1 2011 Earnings Call

May 03, 2011 8:30 am ET


LeAnne Zumwalt - VP of IR

Unknown Executive -

LeAnne Zumwalt -

Luis Borgen - Chief Financial Officer

Jim Gustafson - Vice President of Investor Relations

Kent Thiry - Chairman and Chief Executive Officer


Kevin Ellich - RBC Capital Market

Brian Zimmerman

Unknown Analyst -


Jim Gustafson

Hello, ladies and gentlemen, I'm Jim Gustafson, DaVita's Vice President of Investor Relations. And I'd like to welcome you to our Q1 2011 earnings call and our 2011 Capital Markets Day. For those of you in the room and for those listening online, thank you very much for joining us.

First, I'd like to go through our forward-looking statements. We will make some forward-looking statements today. I'm putting up slide here that is also available on the WebEx and will be available as PDF afterwards. And I suggest that people take the time to read this. Also, we'll be making some non-GAAP statements and the reconciliation to those non-GAAP statements will be available online as well.

So today our agenda will be first to go through the overview of our Q1 results and then to discuss an overview of the company, some investment highlights, business fundamentals, go through the financial review and then finally, summarize it all. So with that, to go over our Q1 results, I'd like to introduce, Luis Borgen, our Chief Financial Officer.

Luis Borgen

Thanks, Jim. Good morning. Welcome to our capital markets day. Okay. Treatment growth was 7.2% compared to Q1 of the prior year. Our non-acquired growth was 4% when normalized for the calendar it was 4.2% this is to the greater proportion of treatments that occurs on Mondays, Wednesdays, Fridays. The non-acquired growth in Q1 was consistent with the most recent quarters.

Our Q1 revenue per treatment declined by $44.72 sequentially, the primary drivers were reduced Medicare reimbursement rates due to bundling, declining utilization of physician-prescribed pharmaceuticals and the commercial mix, which continue to decline. The rate of decline did moderate in the quarter. Remember, this mix decline is a combination of decreased mix of new private patients due to the economy and improved mortality. This is partially offset by improved commercial rates.

Our patient care cost treatment decreased $1.59 sequentially. This sequential decline was primarily due to the reduced unit cost and utilization of physician-prescribed pharmaceuticals. Our Q1 patient care cost represents a good baseline for 2011 at this time.

Moving on to our bottom line results. Operating income was $236 million. It was down 3% due to implementation of lower Medicare reimbursement, prior to the transition adjustment fix. EPS for the quarter was $0.96, down about 8% year-over-year. Along with a lower operating income, EPS was also impacted by higher debt costs as a result of refinancing last fall.

Q1 was a very strong cash flow quarter, operating cash flow was $330 million. This was favorably impacted by a couple of items. Number one, we had certain favorable working capital items going our way. And number two, the timing of our semiannual interest payments on a bond, which typically occurred in Q1 and Q3 are now in Q2 and Q4.

Moving on to operating income guidance. Now that we have one quarter under our belt and have some clarity on our transition adjuster fix for 2011, we are providing OI guidance for 2011 of $1.40 billion to $1.1 billion. This incorporates the recent transistor adjuster fix and DSI, which we expect to be approximately zero OI contribution in 2011, net of transaction and integration costs.

Our initial 2012 guidance is from $1.1 billion to $1.2 billion. This includes the net expected OI contributions from DSI.

Some of you may be surprised by the low end of our guidance. We've not usually give guidance this far out, but the recent changes that we've seen in reimbursement and our cost structure we thought it was appropriate to give you a sense of how we intend to grow off this new baseline. There are four variables that could negatively impact operating income and put it at the lower end of guidance. Number one, commercial mix has and continues to decline and may continue to do so in the future. Additionally, we face rate pressures from the VA [Veterans Affairs] and state Medicaid programs. And finally, we may accelerate our investments in our International business should we identify the right opportunities. We may update guidance as we have more clarity over the next six months.

Moving on to our 2011 cash flow outlook. I want to take a few minutes to walk you through our thinking with respect to our cash flows for this year. First, we expect maintenance CapEx to be approximately $240 million. Our distributions to joint venture partner should be approximately $100 million.

Let me step back a minute. Our operating cash flow guidance for 2011 is $840 million to $940 million. Once you take into account the maintenance CapEx and the NCI distribution, this would imply a free cash flow guidance of $500 million to $600 million.

We anticipate spending at least $150 million on development CapEx. In addition, we will spend about $690 million to acquire DSI. And finally, we expect to have about $70 million in mandatory debt repayments related to our term loans. In this scenario, we would see approximately a $310 million to $410 million reduction in our cash balance this year.

So what does this all mean for available cash. We started the year with $860 million. I just walked through our changing cash. So we expect the reduction of $310 million to $410 million. And year-to-date, we have acquired about $80 million through acquisitions and about $100 million of share repurchases. So on a net basis, our remaining cash should be approximately $270 million to $370 million before any further acquisitions or share repurchases this year.

Thank you. With that I want to introduce our Chief Executive Officer, Kent Thiry.

Kent Thiry

Okay. Good morning, and welcome to those of you who are new to DaVita, and particularly welcome to those of you who've been with us for a while. The categories are pretty much normal ones. We'll try to move crisply as we always do so that we can spend much intense time as you would like on as many questions as you would like. It's important that we always start with a mission. We are first and foremost a caregiver company. In the end, if we're to choose between serving you, the shareholder or you the potential patient or your mother or father is the potential patient or your brothers or sister, we choose the latter as our first priority. And it's important for people who know that going in. This is what the house looks like. If anyone has been in for a while, I would have dropped by sooner, please do what we can help set that up. I would like you to know that in addition to kind of generate returns we're doing really good things for fellow human beings. This is a typical center except for the fact it's really clean.

We have about 1,650 of those right now. And here is a typical matured center, just so you get a feel for the operating reality across those 1,642 places. Here is the totals. Once we close DSI, we'll be a tad over 30% in national market share.

So now under the investment highlights. So what we've tried to do here is if we were you and had to come to this meeting or listen to this WebEx then go back to your partners and describe why would you invest or would not invest. We try to get to the right point so that we essentially afford you that summary. Hopefully with the right backup behind the assertions. From an industry point of view, so forgetting DaVita except for the fact that hopefully over the last 12 years, we play a significant role in shaping the industry. As we have said for a long time, as we are leader in the industry, job one is to protect the profit pool, and job two is to fight over it. And many industries when leaders forget job one, they end up fighting over a price that's not worth very much in the end. So we spent a lot of time over the last 12 years, trying to make sure there is sufficient capital attractiveness in the segments so we can continue innovate care and provide more access, simultaneously providing return to you. So the government gets the return, the patient gets the return as do you. So in that context, what are the industry highlights? This is a summary, and we'll briefly step through each of these assertions.

They're quite different in total for most healthcare service segment service in America or the world for that matter. On the demand side, there a few areas as regular and as predictable of demand. There's no clinical controversy, minus a little bit of discretion though, where exactly -- when you started out this patient. There's no real clinical ambiguity but we need it. There's nothing dramatic going on within the foreseeable timeframe around transplant, although we always hope that will change from a clinical point of view. It's not cyclical. It's not seasonal. Physicians have a lot of loyalty to its centers and to a company in many cases, not all patients have a lot of loyalty to the centers and physicians as there are very limited therapeutic alternatives. And then if you look at the demographic trends, the elderly and Hispanic and Afro-American populations are those, which are disproportionately prone with kidney failure and they, of course, are also the highest segment in America. So as we've said for years during the demographic jet stream of American medical care. So demand is stable within most of your investment time horizons. Looking backward instead of forward, you can see that those words that we're saying are true now have been true for sometime.

From a cash flow point of view in part because of that demand in part because we're a low-fixed cost business, I want to remind you that what it takes to build a center from scratch, several hundred thousand of dollars lethal improvement, several hundred thousand dollars in equipment, which can be pulled out and use elsewhere, several hundred thousand of working capital losses until you reach breakeven that can also be pulled out if you're working down your receivables if you ever put the center in. So you're only making capital is really the leasehold improvements and whatever lease you signed.

So relative to revenue flows and cash flows and great level of fixed cost base and most of our capital investment with periodic opportunistic exceptions like when we bought Gambro 5 years ago and DSI right now, most of our capital investments are quite small in incremental.

It is just incredibly important that most of this community is investor-owned because in our world of American health care it's an unfortunate reality that for 87% of our patients which are government-paid, we actually lose money, like 82% Medicare, 5% Medicaid. And so that remaining 13%, actually 11% to 13% depending exactly how you want to cut it, much subsidized the other 87%. None of us will design the healthcare system this way. It's not appropriate for the government to regulate our cost control in our segment because it's just a massive cost shift. But from an investor point of view, when you first look at that, it's of great concern because you say, "Oh, my gosh, the private payers won't continue to subsidize the government" why would they want to do that, it takes so much more. The short answer is they have to because all the providers are faced the same reality. And so no one can afford to get by if they don't pay charge private payer significantly more than Medicare. It's not a happy fact, but it's a well-known fact and particularly now that about three quarters of all centers in America are owned by investors, they're very sensitive to that reality. So no one's going to do something foolish assumingly, and put patient care at risk in the sort of Don Quixote-like quest for incremental volume.

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