DaVita Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2022

There are 9 speakers on the call.

Operator

Evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Second Quarter 2022 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.

Operator

Thank you. Mr. Ackerman, you may now begin your conference.

Speaker 1

Thank you, and welcome everyone to our Q2 conference call. We appreciate your continued interest in our company. I am Joel Ackerman, CFO and Treasurer, and joining me today is Javier Rodriguez, our CEO. Please note that 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 the actual results to differ materially from those described in the forward looking statements.

Speaker 1

For further details concerning these risks and uncertainties, Please refer to our Q2 earnings press release and our SEC filings, including our most recent annual report on Form 10 ks and all subsequent quarterly reports on Form 10 Q and other subsequent filings that we make with the SEC. 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 except as may be required by law. Additionally, we'd like to remind you that during this call, We will discuss some non GAAP financial measures. A reconciliation of these non GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.

Speaker 2

Thank you, Joel, and thank you for joining the call. Today, I will cover 5 topics: Health Equity, the Supreme Court case, 2nd quarter performance, an update on our Integrated Kidney Care or IKC business, and I will conclude my remarks with our current thinking for 2023. Before we discuss business matters, let me start with a clinical topic that is critical for society, Health Equity. Given the disproportionate impact kidney disease has on patients of color, health equity is of utmost importance. Across the key dimensions of access to care, access to information and clinical outcomes, DaVita and the kidney care community have achieved unparalleled equity relative to the vast majority of other disease states.

Speaker 2

We have used the focus of our scale to provide consistent equitable access to care Our leading clinical outcomes and protocols have reduced variability across all patient populations Regardless of race or socioeconomic status, our Black and Hispanic patients are at parity when it comes to dialysis adequacy, phosphorus and calcium lab values as well as hospitalizations and mortality. As another example of our efforts to drive health equity, Our Kidney Smart program is now available in 10 languages and we're participating in a pilot to develop culturally tailored education to underrepresented and underserved patient communities. As it relates to access, dialysis services are available To most patients within 10 miles of their home, we are proud of these results and now have set our ambition to improve access to transplant and home dialysis. Now moving on to SCOTUS. The ruling in the Marietta Memorial Hospital matter opened a loophole for We continue to believe that this narrow interpretation is not only contrary to Congress's intent when enacting these provisions, That could also result in harm to this vulnerable patient population and set health equity efforts back.

Speaker 2

We are working with the community on several initiatives to not only close this loophole, but apply other antidiscrimination provisions to protect these patients' right to be able to choose insurance The first step in the process is supporting legislative efforts of members of Congress We're passionate about protecting not only dialysis patients' rights, but also the Medicare Trust Fund. We're excited that last Friday, bi bipartisan legislation was introduced to allow Congress to do just that, amend the text of the MSPA to close the loophole opened by the Marriott decision. The proposed legislation clarifies that benefit plans seeking to limit or impair benefits based on the need for renal dialysis services Like the Marietta Plan, would be considered a violation of the MSPA. While getting any legislation passed will be difficult in an election year, We believe the restoration of the MSPA is non controversial and we will work with the Congressional Budget Office to ensure

Speaker 3

And

Speaker 2

the first question is from the line of David. Please go ahead. Thank you, David. Thank you, David. Thank you, David.

Speaker 2

That HHS is serious about protecting against insurance benefit designs that discriminate based on a variety of things, including disability. Should we start to see efforts by employer groups to modify benefit plans to take advantage For the workarounds of the MSPA created by the Emeritus decision, there could be legal actions based on these antidiscrimination provisions. Now moving on to financial results. For Q2, we delivered operating income of $433,000,000 and earnings per share of $2.30 Operating income was up sequentially by $95,000,000 as seasonal impacts of Q1 abated and treatments After the Omicron surge in Q1 through May, but increased in June and again in July, Mid treatment rates were also down significantly from the highs in Q1, but above the seasonal norms in Q2. The impact of COVID on mortality, mistreatment and treatment volumes remains difficult to forecast and is the biggest swing factor for our performance in the second half of twenty twenty two and into 2023.

Speaker 2

Labor costs remain a challenge in Q2 with higher contracted labor utilization and base wage increases similar to what we experienced in Q1. We're managing other patient care costs and G and A to help offset the impact of wage and other inflationary increases. With all these challenges, we continue to believe it's more likely that our performance will fall within the bottom half of our guidance range of $1,525,000,000 to $1,675,000,000 for 2022. Turning to an update on our IKC business. Operating losses in our ITC business were better than expected in Q2.

Speaker 2

This was a result of timing within 2022 With our recognition of some shared savings revenue earlier in the year than anticipated, we also benefited from positive prior period development in our special needs plan. For the full year, we are anticipating overall performance in IKC to be better than initially expected. Looking forward, we're gaining confidence in our model of care given the early results of our 2021 share saving true up. For 2023, we're also expecting significantly higher growth in our membership and dollars under management in both MA Live and

Speaker 3

from CKCC

Speaker 2

Program. As a result of the better performance in 2022 and the 1st year costs associated with significant growth, We are now expecting improvement in IKC operating income in 2023 to be lower than previously expected. Last, I want to provide an update on our thinking about 2023 overall. To help our investors and analysts with these updates, I refer you to a table in the outlook section in our press release that lays out our views on the primary drivers of operating income growth from 2022 to 2023. We continue to believe that we will deliver a significant rebound next year, Although the challenges and uncertainties around treatment volume growth in the healthcare labor market have led us to lower the improvement range $200,000,000 to $300,000,000 Let me walk you through the updated thinking.

Speaker 2

First, back in November 2021, We expected the volume headwinds from COVID to be over in 2023 and we're anticipating benefits from a pull forward of mortality from COVID. These factors would have resulted in a higher than normal volume growth in the middle of our range and a tailwind from volume in 2023 compared to our historical results. Based on what we have learned from Omicron surge in the winter and the continued evolution of the pandemic, We now expect COVID to remain a headwind to growth in 2023. Uncertainty around treatment volume incentive growth continues to be the single largest source of variability in our year over year profit forecast. 2nd, our confidence In the likelihood and the magnitude of the cost saving initiatives we've been working on has increased.

Speaker 2

We have plans in a way to reduce our procurement costs, Our fixed cost structure and shrink our G and A. This will result in some non recurring expenses in 2022 in 2023, but is expected to lower our cost structure for the long term. 3rd, Relative to what we knew at Capital Markets Day, we're now anticipating higher revenue per treatment growth next year. This is a result of higher rate increases and lower patient bad debt. To summarize, for 2023, we still expect to deliver a meaningful OI increase of $200,000,000 to $300,000,000 but based on volume and wage pressure, we are lowering that range.

Speaker 2

I will now turn it over to Joel to discuss our financial performance and outlook in greater detail.

Speaker 1

Thanks, Javier. First, let me start with some additional details on our 2nd quarter results. U. S. Dialysis treatments were up 2.3% compared to the Q1.

Speaker 1

This was the result of one additional treatment day and an increase of approximately 1% in treatments per day. Excess mortality was down significantly from Q1 As the impact of the first omicron surge receded, I will note this benefit appears to have reversed in June July As a new wave is having negative impact on volumes, mistreatment rates declined in the quarter as a result of typical seasonal patterns, but remained higher than usual in Q2 because of the new omicron subvariants. Revenue per treatment grew quarter over quarter by $4.19 primarily due to normal seasonal improvements driven by patients meeting their coinsurance and deductibles, as well as the continued shift to MA plans, partially offset by a seasonal decrease in acute treatment volume and the partial loss of Medicare sequestration relief in Q2. Patient care cost per treatment was lower by $5.47 per treatment quarter over quarter, primarily due to seasonality of health benefits and payroll taxes and lower costs across multiple other categories. G and A was up approximately $24,000,000 versus Q1.

Speaker 1

In Q2, There was approximately $23,000,000 of contribution to the industry's campaign against the Ballast Initiative in California. This is a pull forward of expenses originally planned for Q3. Our estimates for the full year impact of the Spend on the ballot initiative have not changed, although this does impact the timing between Q2 and Q3. Additionally, it was a one time gain on the sale of some self developed properties of $22,000,000 which approximately offset the pull forward of the Ballad initiative spend. The increase in G and A relative to Q1 was largely the result of higher compensation expense and increased T and E.

Speaker 1

Putting this all together, To help you understand how we think about the results in Q2 as a starting point for understanding the rest of the year, I would point out a couple of things. First, the Ballad initiative expense in the quarter was offset by the gain on the sale of self developed properties. Both of these items flow through the G and A line and combined had no significant impact on the quarter. 2nd, results in IKC for the quarter were significantly higher than anticipated for two reasons. 1st, We recognized shared savings revenue of approximately $15,000,000 that was expected in the back half of twenty twenty two.

Speaker 1

2nd, we had positive prior period development of approximately $10,000,000 Together, these resulted in Approximately $25,000,000 of benefit in the quarter that we do not anticipate recurring in the back half of twenty twenty two. In addition to these components, there were other items as there are every quarter, but these largely offset one another. The result of all this is that earnings for the quarter benefited from a net of approximately $25,000,000 compared to what we would use as a baseline for modeling earnings for the back half of the year. For Q3 and Q4, The spending on the California budget initiative is the only significant seasonal or unusual item that we currently anticipate. In Q2, we repurchased approximately 3,900,000 shares of our stock and we have repurchased an additional 9 The bridge to 2023 operating income.

Speaker 1

As he said, we are bringing the range of adjusted OI increase in 2023 down to $200,000,000 to $300,000,000 The initiatives we are undertaking to deliver on this range Operator, please open the call for Q and A.

Operator

Thank you. Kevin Fischbeck from Bank of America. You may go ahead, sir.

Speaker 4

Okay, great. Thanks. A couple of questions here. So it sounds like you're saying you took up your pricing outlook for next year. I guess, is there any way to think about what has changed Along those lines, like how much of it is because of a better view on the Medicare rate update versus NA rates versus commercial?

Speaker 1

Yes, Kevin, it's there are really 3 components to it. One is the Medicare rate as you referenced. The second is some operational and systems changes that we are going to make internally that we think can 5 higher yield or higher cash collections, which ultimately results in a higher RPT. And the third are some Benefit changes that will impact the patient component And improve our bad debt because the lower the patient component comes back related to out of pocket The lower that goes, the higher we will ultimately collect. None of this is about our expectation of higher rates on commercial or MA.

Speaker 4

Okay. And is there any negative view? I guess, obviously, with Mario there, I know you Guys talked about the initiatives that the industry is pursuing to fix that. But I guess is there an expectation or any Early indication around how commercial contracts are being renegotiated?

Speaker 3

Kevin, this is Javier. The short answer is it's too early to tell. And so we continue to watch it and we will let you know if we see anything. As we said last time, there is a segment that's more likely than not, which is that small employer, But these things take time and so we don't have anything new to report on it.

Speaker 4

Okay. And then I guess, you mentioned that you've changed versus your original outlook of Bridge for 2023. You have a different view about volumes. How much of that is because of math versus what's already happened in the math of that going forward versus kind of your changed view or more conservative view about what how things might develop going forward?

Speaker 1

I think it's more about what will happen going forward And what we've seen so far, volume is a little bit below where we were expecting, But this is more about our expectations for excess mortality going forward rather than what we've seen so far.

Speaker 3

Remember, Kevin, we talked a little about a pull forward, I. We called it sort of COVID unwind at one point, which is we thought that once that excess mortality unwound that we would have a little Richer growth in 1 year and now we just don't have visibility. Mathematically, of course, It will happen, but we don't have visibility as to when it will happen. And so that's the math that Joe just talked about.

Speaker 4

Okay. So the total OI number has not changed. It's just the timing is too difficult to predict, so you're just taking some

Speaker 5

of that out Next year.

Speaker 1

Well, the total OI for 2023 has changed.

Speaker 4

In the

Speaker 1

middle of the range by 75. So it was 250 to 400. We've moved it to 200 to 300. So 75% at the middle of the range. I think it's fair to say that 75% is fully accounted for By our change in volume expectations, there are some other puts and takes as well.

Speaker 4

I guess, I You guys talked about like 150 to 200 OI from the COVID normalization on the volumes over time. Is that still the right way to think about it? That number hasn't changed?

Speaker 1

I don't think our views on normalization from COVID have changed in terms of volumes. I think we've stopped kind of thinking about what's the negative impact on away from COVID and more recognizing where we are today is the new baseline and how are we going to move forward from here. But The comments we've made about the pull forward and ultimately excess mortality at some point needing To go away and become lower than normal, we still believe in that.

Speaker 4

Excellent. Thank you.

Operator

Thank you. Thank you, Kevin. And our next caller is Justin Lake with Wolfe Research. You may go ahead, sir.

Speaker 6

Thanks. A couple of follow ups from Kevin's question there. First, you talked about some benefit changes that are going to help reduce Patient out of pockets. You mind giving us a little more color?

Speaker 1

Yes. This relates to Changes in the way Medicare is calculating the maximum out of pocket for And for duals in particular, that's where we see the impact. We have a very heavy dual population In our MA book and as the change in Medicare out of in maximum out of pocket Changes and these dual eligibles reach their maximum out of pocket quicker Then ultimately the patient component of which as you know we collect very little, they'll hit that earlier in the year And the result is the call it the patient bad debt number goes down.

Speaker 6

How big an impact should that have for the revenue per treatment if we're thinking about next year?

Speaker 1

I would say Somewhere in the

Speaker 6

$1.5 range. Got it. And is that just effectively Profitability in terms of that falls right to the bottom line in terms of price?

Speaker 2

Yes.

Speaker 6

And then thinking about the mix for next year, I know it's Impossible to say what employers are going to do with this Marietta stuff at this point, but have you built in to that range that you've updated Any assumption around deteriorating payer mix? Or are you assuming that that stays constant?

Speaker 1

We're not expecting any material impact in 2023 from Marietta, so no change to the mix.

Speaker 6

Got it. And then just a question on salaries and benefits. I think the number you had put in for this year in terms of I think your framework is typically 2% to 3% increases. I think you added something like $75,000,000 for this year. Can you give us an update versus that target, that extra $75,000,000 this year?

Speaker 6

And then what are you assuming in that number next year? By our calculation, it looks like it might be more mid single digits assumed again next year. How much above that 2% to 3% normal are you assuming for wage pressure next year?

Speaker 1

Yes. So Justin, as a reminder, we called out a number more like 125 for this year. So call it a salary wage and benefit Increase year over year in 2022 of about 6%. And that's what we saw in the Q1, it's what we saw in the Q2. We're expecting that for the full year.

Speaker 1

As you look forward to next year, we're expecting the number to Come down, but remain well above that 2% to 3%. So somewhere roughly halfway between The 3% and the 6% number.

Operator

Okay.

Speaker 6

That's helpful. I appreciate the comments.

Speaker 3

Thanks, Justin.

Operator

Thank you. Our next caller is Pito Chickering with Deutsche Bank. You may go ahead, sir.

Speaker 7

Hey, good afternoon guys. Thanks for taking my questions. Going back to the IKC part, you broke out the $15,000,000 of shared savings, $10,000,000 of prior period. Can you just

Speaker 2

sort of step back a

Speaker 7

little bit and say what's changed sort of in 2Q versus what you're expecting at the Analyst Day and expectations? Can you remind us what's the process for getting true ups from managed care plans at this point? And then any more details as you get True ups about how these costs savings progress throughout 2021?

Speaker 3

Well, I'll let Joe answer some of the technical questions you asked. But one of the things that I really want to make sure that we jot down on this one is that this business is has a lot more ups and downs. And to look at it quarter over quarter is probably not a great way to look at it, but rather to look at it on an annual basis because of these True ups and the lumpiness and the seasonality of the flu and all the things that happen in this type of business. But that said, Joe, I want to answer the technical part.

Speaker 1

Sure. So the prior period development is on the snip And it's no different than the kind of prior period development you'd see in a managed care plan. And that's because our accounting there, We take the full revenue and the full expense through the P and L. The $15,000,000 of shared savings, the process there, obviously, The year has to end, the claims have to run out to some extent, data is exchanged and reconciled. And when we become confident That, the shared savings numbers are clarified, that's when we will recognize the revenue.

Speaker 1

So For some of the 2021 plan years, we got that level of confidence earlier than we expected and that's what led to the 15,000,000 of revenue in Q2 versus the back half of the year when we had originally expected it. If you Step back in terms of where we are versus Capital Markets Day, and I'll use specific numbers just to make it clear. So we were anticipating a loss for the year from IKC of roughly $175,000,000 We now expect that number to come in a bit better, maybe I'd say probably a $10,000,000 to $30,000,000 improvement Sure. As we're scaling the business, we're seeing some advantages relative to what we thought. But overall, I would It is still early in the development of this business.

Speaker 1

We are expecting ups and downs, but it was a good quarter for IKC.

Speaker 3

So just

Speaker 7

sort of digging there one more question and then I'll go to something else. But as you look at your the patients that you got sort of in the Q1 of 2021, any sort of color on Sure. Where those margins are today? Are these profitable after 18 months? Kind of just any Is it building sort of how you transition from losing money to making money on those patients?

Speaker 1

Yes. So first, let's be clear, we're not making money. We just had positive prior period development and positive savings. There's still a huge expense base against those. So It's to some extent playing out as we expected with 2021, just the timing is a bit different in the year.

Speaker 7

Okay. I guess, let me ask that in a different way. With what you're tracking today, how fast before you convert from losing money on these patients into making money?

Speaker 1

Look, at Capital Markets Day, we laid out a plan where the business should become breakeven in 2020 5 plus or minus, that's the year where we think we'll cross over. I don't think anything on our views around the path to IKC profitability has changed yet.

Speaker 7

Okay. Moving to the cost side of the equation, just to follow-up on Dustin's questions. How easy is it to hire people today? Where is turnover today versus the net hires,

Speaker 4

so

Speaker 7

how is it progressing throughout the year? And do you think there's any pressure on treatment growth in the back half of the year due to lack of stuff?

Speaker 3

I'll grab that. It's hard to talk about the entire country as a Unison because there is submarkets And labor markets are very different market by market. I would say that it feels That we have crossed the most difficult period that this quarter feels a lot easier than last quarter, but that was on the hardest quarter in So contextually speaking, it's still a difficult labor market. As it relates to the second part of your question, Are there markets where we're not accepting patients? The vast majority of our clinics are accepting patients, Vast majority.

Speaker 3

There are a couple of pockets, 5 or so markets that are the vast majority of the ones Where we have pressure and so the way to look at it is that if you're a patient, the first thing you want to do is of course get out of the hospital. There's lots of stress around acclimating to your new life on dialysis. But that said, the most important thing is you want safety. And once you get to the right staffing, then you say time away from home in the right location. Right now, we have more Centers than usual where a person has to travel longer than they wish, but they are getting placed.

Speaker 3

And so we're working through those dynamics and hope to revert to normal over the course of the year.

Speaker 7

Great. And 3 quick number questions. Where is your home penetration today? How should we think about both interest Just costs in the back half of the year as well as tax rate. Thanks so much.

Speaker 3

Thanks. On the home penetration, we had flattish growth Due to all of the COVID dynamics, so that mix is still in the 15% range. And as it relates to the interest Thanks, John. Yes. Interest expense, we expect it to

Speaker 1

go up in Q3 and Q4. There are really three dynamics there. 1 is just The outstanding amount on our revolver is higher than normal. 2nd, LIBOR continues to increase. And while we are capped on most of our floating rate debt, we're not capped on all of it.

Speaker 1

And third, Because our leverage level is above 3.5%, we go into a different tier on our floating rate Debt and we're now paying $1.75 above LIBOR rather than the spread of $1.50 above LIBOR. You put that all together, I think $100,000,000 a quarter of interest expense for Q3 and Q4 is a reasonable estimate.

Speaker 7

And then tax rate, I guess, how should we think about tax rate put back out of the year?

Speaker 1

Tax rate, I'd say we're not changing our guidance For the year, so staying at 25% to 27%.

Speaker 7

Great. Thanks so much.

Speaker 3

Thank you, Peter.

Operator

Thank you. Our next caller is Sarah James with Barclays. You may go ahead. Thank you. I was wondering if

Speaker 8

breaking up things like pricing versus volume, help us understand some of the dynamics going on there.

Speaker 3

Sorry, Sarah. And did you

Speaker 2

say IKC? Is that where you started? Or did you say something at

Speaker 3

the beginning? I didn't catch it.

Speaker 8

Yes. No, I was wondering if you're thinking about expanding key performance indicators or the metrics you disclose around commercial mix to break out pricing, so we can understand the dynamics going on a little bit better.

Speaker 1

I think, Sarah, we're relying on giving the commentary during the call, making sure the analysts And the investors understand what's moving up and moving down. In terms of putting this in a table on the press release, that's not something We've been thinking about recently.

Speaker 8

Okay. Are there aspects of partnerships to help bring down costs or transportation, just anything that would help offset the headwinds in the next few years?

Speaker 3

Yes, Sarah. We've been looking at them for quite some time. Hopefully, our track record, if you look compounded year after year, our Cost structure has gone up less than 1% over time. And so that takes Maniacal focus and discipline and execution of some of the type of things that you said. If you look at ESA, which has been historically our most expensive pharmaceutical.

Speaker 3

We have personalized dosing and AI algorithms of the type that you described.

Operator

Any sense on what

Speaker 3

Well, it's embedded in the $200,000,000 to 300 $1,000,000 that we cite for next year, and so it's in that range right there. If you look at that slide, We have in there the cost savings that's embedded in the pharmaceutical line there.

Operator

Okay. Thank you.

Speaker 3

Thank you.

Operator

Our next caller is Gary Taylor with Cowen. You may go ahead, sir.

Speaker 5

Hi, good afternoon guys. A couple of numbers questions first. Going back to last call, and I missed the first couple of minutes here, so I apologize. But I thought on the Q1, You had said towards the bottom half of the OI range this year, you reiterated that range in the release. But is there any Commentary around bottom half for this year, does that still hold?

Speaker 1

Yes, Gary. I think we're sticking with That, no change to where in the range we think will come in.

Speaker 5

Okay. And then I hadn't realized before, certainly we've seen the proceeds on the self developed to the cash flow statement, but I hadn't realized any accounting gains were running through, G and A. So I appreciate you calling that out This quarter, has it ever been as large as this? Like when I look back on proceeds last year, dollars $76,000,000 $93,000,000 I was just curious if there were any other material gains that ran through G and A?

Speaker 1

Yes. So the reason it was so big this quarter is it related to one of our central business offices, so a much Bigger building, historically, they generally related to clinics. So the numbers for individual clinics were much Smaller, but, there when we were building more clinics historically, there were more of them. So yes, you would have seen numbers like this. They were, I'd say, reasonably consistent historically.

Speaker 1

So the reason we called this out is because it was so big and it was anomalous relative to what you've seen recently.

Speaker 5

Got it. Cash flow a little softer than we thought, DSO is still hanging up there around $65,000,000 and I thought Some of that was related to what you thought at one point were sort of timing related issues. Any updated thoughts on DSO Yes. And when that can head lower?

Speaker 1

Yes. So cash flows were hurt by cash taxes this quarter. So that was the big hit there. In terms of DSOs, we do think there's an opportunity to bring it down. That said, I would call out that the shift to MA From Medicare fee for service that we've seen over the last couple of years, we'll structurally increase our DSOs by a couple of days.

Speaker 1

Medicare is a very quick payer. The MA DSOs are more typical to the DSOs you'd see in a commercial book. And as we have less Medicare fee for service And more MA, it does structurally increase the DSOs. That said, I think there is an opportunity to bring it down a little bit.

Speaker 5

Got it. And last one for me. Can you just and I know you guys, for obvious reasons, don't talk a lot about this publicly, but just Your Amgen contract, are we back on year to year on that now or is that multi year? How do we think about If and when there's opportunity around rate on ESA?

Speaker 3

Yes, Gary, good memory. Our contract does expire at the end of this year. We have renewed a contract On the SA front and the savings are embedded in $200,000,000 to $300,000,000 increase year over

Speaker 5

year. Okay. Thank you.

Speaker 3

Thank you.

Operator

Our next caller is Justin Lake with Wolfe Research. You may go ahead, sir.

Speaker 6

Thanks. Just a few quick follow ups here. First on leverage, you were in the press release, you were at 3.8 times. You give us an update on where you see kind of your leverage targets and where you see this kind of going by year end?

Speaker 1

Yes. So our leverage target hasn't changed of 3 to 3.5 times. And I think we've always been consistent that this is A range we want to be in most of the time, but not necessarily all of the time. And if you go back a few years, you would have seen us Well above it and well below it. Where we wind up in year end and in 2023, I think Will depend on a few things, share buybacks being one of them, obviously, earnings being another, free cash flow being 3rd.

Speaker 1

So, we're not going to give out a number because it will depend on all those factors. But I'd say over time, we continue to believe 3 to 3.5 times is the right range for us and we plan to get back there.

Speaker 6

Got it. And in terms of share repo, the company has been extremely consistent in deploying cash Back to shareholders via repo. Any thoughts on that you talked about leverage potentially being even higher. Is it possible that you buy back more shares over the next 6 to 18 months versus just free cash flow? Would you keep debt at a higher level and use some of that debt to buy back more stock?

Speaker 3

Justin, we're always staying at it. As you know, it's a complicated topic, but the one thing you can count on is that we're going to stay consistently focused On returning to shareholders and then on the margin, the question is do you get a little more aggressive and you lever up a bit Because you think it's a good opportunity and then of course you also have to look at the world, there's a little more uncertainty right now And so you have to take all those trade offs, but everything is on the table.

Speaker 6

Okay. And then just lastly, in terms of leverage, I have gotten a couple of questions just because your debt is trading at a decent discount to par at the moment. Any thoughts on buying back that debt at a discount to lower leverage versus share repurchase?

Speaker 1

Yes. I mean, we look at the relative trade offs of we think of those both as to some extent opportunities to Return capital to our shareholders. So we'll look at both of them depending on where they're trading, although I think The history is clear. We tend to lean towards share buybacks over buying back our debt.

Speaker 6

Got it. And last question, just the industry was facing a dialysate shortage Earlier in the year, haven't heard much about it recently. Just I know you did expect it to kind of get back to normal in the June, July timeframe, so just wanted to get an update there.

Speaker 3

Yes. Thanks, Justin. The inventory levels are a little Below what they normally are, but we've passed the period of high anxiety and having share, etcetera. So I think the worst is behind this and we can move forward.

Speaker 6

All right. Thanks again.

Speaker 2

Thank you.

Operator

Thank you. Pito Chickering from Deutsche Bank. You may go ahead, sir.

Speaker 7

Hey, guys. Just one last follow-up here. Just on that, the Medtronic deal you guys announced in May, just could you go into a little more of a Detail on these the goals of the transaction and sort of why you felt that was best use of shareholder cash? Thanks.

Speaker 3

Well, there's not much to report, Vito. We're excited to partner and develop Medical Innovation and Technologies with Medtronic, I think the only thing that we have to report Is that the FTC has passed the period of the Hart Scott and Rodino. And so It's a pro competitive deal, so we anticipated it to be low scrutiny and that's how it went. Of course, the FTC can always Come back and ask, but that was a positive thing and directionally exciting for us. And it's early, of course, The transaction will probably close in Q1 of next year and so not a lot more to report.

Speaker 7

Fair enough. Thanks so

Operator

much. Thank you. And at this time, I am showing no further questions.

Speaker 3

All right. Thank you, Michelle. I've just got two closing thoughts. First, we've been talking for over a decade about the potential contributions of Integrated Kidney Care Building systems, the capabilities needed to deliver on this potential. 2nd, the operating environment and macro Landscape, as we discussed, are very tough.

Speaker 3

I am very proud of the teammates' resilience and agility to offset some of these Headwinds by creating cost savers. We appreciate your interest in our company and we'll be talking soon. Be well.

Operator

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

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Earnings Conference Call
DaVita Q2 2022
00:00 / 00:00