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    DaVita Inc (DVA)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$113.60Last close (Feb 13, 2024)
    Post-Earnings Price$123.00Open (Feb 14, 2024)
    Price Change
    $9.40(+8.27%)

    What went well

    • DaVita expects treatment volume growth of 1% to 2% in 2024, driven by consistent new patient admissions and reduced mortality, signaling a return to pre-pandemic growth levels.
    • Revenue per treatment is anticipated to grow by 2.5% to 3% in 2024, primarily due to rate increases and improvements in revenue cycle management, benefiting profitability.
    • Integrated Kidney Care (IKC) is achieving significant progress, with 30% year-over-year growth in total medical expense of patients in IKC programs and an expectation to reach breakeven by 2026, indicating a promising new revenue stream.

    What went wrong

    • DaVita's capacity utilization remained low at about 58% at the end of 2023, significantly below the pre-COVID level of approximately 65%, with only a marginal increase expected in 2024.
    • Interest expenses are projected to rise in the second half of 2024 to between $130 million and $140 million per quarter, up from $100 million to $110 million per quarter in the first half, due to the expiration of 2% interest rate caps.
    • Despite growth efforts, DaVita expects an adjusted operating income loss of approximately $50 million in its Integrated Kidney Care (IKC) business for 2024, delaying profitability in this segment until around 2026.

    Q&A Summary

    1. 2024 IKC Loss Guidance
      Q: Why is IKC still losing $50M in 2024?
      A: Despite projecting 25% revenue growth and a 15% reduction in PMPM costs for Integrated Kidney Care (IKC), DaVita expects a $50 million loss in 2024 due to non-recurring positive developments in 2023 and changes in revenue recognition timing from shifting to accrual accounting.

    2. GLP-1 Impact on Business
      Q: Will GLP-1 drugs affect dialysis volume projections?
      A: Management believes it's highly improbable that outcomes from the FLOW study on GLP-1 drugs will significantly alter their dialysis volume projections, expecting a net neutral impact over the next decade.

    3. Volume Growth Outlook
      Q: How will you achieve 1–2% volume growth in 2024?
      A: DaVita anticipates volume growth through a return to pre-COVID levels of new dialysis admissions and a decline in mortality rates. This is expected to offset prior census declines, leading to 1% to 2% volume growth in 2024.

    4. Revenue per Treatment and Commercial Rates
      Q: What is the outlook for revenue per treatment and commercial rates?
      A: Approximately two-thirds of the revenue per treatment increase will come from rate hikes reflecting inflationary pressures. The commercial mix is expected to remain flattish at 10.9%, while the Medicare Advantage mix is projected to rise to 54–55% by the end of 2024.

    5. Labor Cost Assumptions
      Q: What are your labor cost expectations for 2024?
      A: DaVita projects 5% wage growth, including the California minimum wage impact of $25–30 million. Overall patient care costs are expected to grow 2.5% to 3% per treatment, mitigated by cost savings from initiatives like the Mircera shift and fixed cost leverage.

    6. Center Closures Impact
      Q: What's the financial impact of closing centers?
      A: DaVita plans to close or merge approximately 50 centers and open about 20 new centers in 2024. Savings will come from eliminating fixed expenses like rent and consolidating management, improving overall efficiency.

    7. Medicare Advantage Trends
      Q: How do higher MA trends affect your accruals?
      A: It's too early to determine the impact of higher Medicare Advantage trends on accruals. However, DaVita's ESRD population differs significantly from the broader MA population, and any potential impacts are included in the guidance range.

    8. Marietta Ruling Impact
      Q: Has the Marietta ruling affected commercial mix and pricing?
      A: The Marietta ruling has not led to significant changes, with the commercial mix remaining stable. DaVita continues to monitor the situation and advocate for patient choice in insurance coverage.

    9. AB 290 Update
      Q: What is the financial impact of AB 290?
      A: The potential financial impact of AB 290 is now estimated to be $0–25 million, lower than previously guided due to fewer patients on the AKF. A final ruling is pending, and appeals are likely.

    10. Free Cash Flow Conversion
      Q: Will free cash flow conversion remain strong in 2024?
      A: Free cash flow conversion is expected to remain well above net income in 2024, driven by structurally lower CapEx compared to depreciation and continued share-based compensation, despite not repeating the significant DSO improvements of 2023.

    11. Capacity Utilization
      Q: What is your center capacity utilization now and in 2024?
      A: DaVita exited 2023 with 58% capacity utilization and expects to increase this by about 1 percentage point during 2024. Historically, pre-COVID levels were around 65%.

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