Nic Eliason; Investor Relations; DaVita Inc
Javier Rodriguez; Chief Executive Officer, Director; DaVita Inc
Joel Ackerman; Chief Financial Officer, Treasurer; DaVita Inc
Andrew Mok; Analyst; Barclays
Christian Porter; Analyst; BofA Global Research
Dean Rosales; Analyst; Wolfe Research, LLC
Pito Chickering; Analyst; Deutsche Bank
AJ Rice; Analyst; UBS Equities
Ryan Langston; Analyst; TD Cowen
Operator
Good 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 first-quarter 2025 earnings call. (Operator Instructions)
Mr. Eliason, you may begin your conference, sir.
Nic Eliason
Thank you, and welcome to our first-quarter conference call. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO.
Please note that during this call, we will 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.
For further details concerning these risks and uncertainties, please refer to our first-quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, 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.
Javier Rodriguez
Thank you, Nic, and thank you for joining the call today. For the conclusion of the first quarter and reflecting on the events of this past few weeks, it is clear once again, the strength and dedication of our caregivers shine through each new challenge.
We're in the midst of remediating a cybersecurity incident that disrupted portions of our operations. Despite these challenges, we remain steadfast. We continued delivering life-sustaining care, creating meaningful career path for our teammates, and returning value to our shareholders.
Today, I'll share information on the cyber incident, highlight our first-quarter results, discuss key policy developments, and close with our outlook for the balance of the year. But first, as always, we will begin with the clinical highlights, the true foundation of everything we do.
Last year, we launched a community-based collaboration with the YMCA to support chronic kidney disease education and prevention. Through the collaborative community kidney health program, YMCA locations nationwide are helping to bring vital education, free chronic disease screenings, and critical kidney health resources directly to the communities that needed the most.
Our early results are eye-opening. In our initial pilot, 30% of participants screened were found to have previously undiagnosed CKD, creating powerful opportunities for early intervention and life-changing care. Early detection and education are the cornerstones of kidney disease prevention. And through this collaboration, we're setting ambitious goal to reach thousands of people, empowering communities with the knowledge they need to close the gap in kidney health awareness.
Partnership with the YMCA is more than just a program. It's a reflection of our unwavering commitment to building a healthier, stronger tomorrow.
Before getting into the first-quarter performance, I want to address the cybersecurity incident we disclosed last month. On April 12, we identified and swiftly began addressing a cybersecurity incident that encrypted parts of our system and affected our operations. While it's deeply troubling that bad actors continue to target the healthcare community, the incident highlighted our team's unwavering commitment to patient care.
I'm grateful to report that we provided uninterrupted dialysis care for our patients on the day we detected the incident and every day since at all of our centers worldwide. Thanks to the incredible responsiveness of our teams and our investment in IT infrastructure, we've been able to restore most functions as of today. All of our major systems used for the patients, physicians, and teammates, including the lab and billing, are up and running.
Work on the remaining applications will continue over the next few weeks. While the restoration of our systems is nearly complete, there will be some regulatory and legal follow-ups to address as we work to identify the extent and nature of the data that was taken and make the required notices. We expect that the majority of the costs related to this incident will be one-time items recognized in the second quarter and our current expectations regarding the financial impacts are included in our guidance today.
Transitioning to the first-quarter performance, adjusted operating income and adjusted earnings per share came in slightly ahead of our expectations. At a high level, this was driven by outperformance within patient care costs, phosphate binders, and our international business. This favorability was partially offset by a modest underperformance in treatment volume, partially due to an abnormally high flu season.
Let me offer some additional color on phosphate binders, which contribute to positive results for the quarter. As a reminder, phosphate binders are oral drugs prescribed to help dialysis patients avoid mineral bone disease. Beginning this year, CMS transitions phosphate binders for Medicare Part D into the dialysis benefit. DaVita's dispensing drugs per physician orders and receiving reimbursement from CMS and Medicare Advantage plans on a per-script basis during the initial PDUFA period.
As we predicted last quarter, the largest source of variability would be in drug mix where we have seen higher-than-expected prescription of iron-based binders. This is a win for our patients for receiving the most effective medication for their individual clinical need . We're still in the early days of this transition and expect further variability over the course of the year. That said, with initial data on drug mix, we now expect the full-year operating income contribution from phosphate binders to be at the upper end of our previous guidance range of $0 to positive $50 million.
I'll offer one final note for the first quarter regarding capital allocation. Our priority remains to invest available capital in innovation in high return growth opportunities such as our recent Latin America acquisition. Beyond those opportunities, we remain committed to returning capital to our shareholders through share repurchases.
Since our last earnings call, we repurchased approximately $680 million of stock, representing an accelerated pace over this timeframe. 2025, we expect share repurchases will be more front-loaded than typical and should slow down over the remaining of the year. To be clear, our capital allocation strategy remains unchanged.
Now I'd like to shift gears and share some thoughts on the new administration and potential policy changes. By the fast-moving environment, our top priority remains the same, advocating for our patients at the state and federal levels.
Today, I'll focus on three policy topics impacting the broader healthcare landscape: tariffs, Medicaid, and enhanced premium tax credits. For the first two, although the policies fluid on each and there's a lot to learn, we don't currently believe either tariffs or Medicaid reform represent any material financial impact.
As it relates to qualified health plans and enhanced premium tax credits, we previously shared a cumulative operating income impact of $75 million to $120 million. This impact is cumulative over three years and assumes a full exploration of the enhanced premium tax credits. We continue to believe this reflects the most likely range of outcomes. And as we've shared, we're likely trending toward the higher end of that range due to a strong 2025 open enrollment for exchange plans. While we're grateful to be largely insulated from recent policy developments, we remain vigilant and committed to strong patient advocacy.
In addition to outlook, we're maintaining our 2025 guidance range for adjusted operating income and adjusted earnings per share as disclosed last quarter. Although we've experienced headwinds from the cyber incident, our strong first-quarter operating performance has put us in a good position to achieve our financial guidance for the full year.
I will now turn the call over to Joel to discuss our financial performance and outlook in more detail.
Joel Ackerman
Thank you, Javier. First-quarter adjusted operating income was $439 million. Adjusted EPS was $2, and free cash flow was negative $45 million. Adjusted operating income was above the guidance we gave last quarter, largely as a result of strong expense management, profitability from orals in the bundle at the high end of our range, and strong performance in international, partially offset by lower-than-expected treatments.
I'll focus first on the details behind our Q1 operating income performance followed by an update for 2025 guidance. US treatments per day declined 40 basis points versus the first quarter of 2024 and was approximately 50 basis points below our forecast. Weakness was largely the result of higher missed treatment rate, which was caused by a severe flu season and a higher-than-expected impact from storms in January and February.
Adding to this shortfall was the negative impact on census from higher-than-anticipated flu mortality in the quarter. Mission growth was strong during the quarter, which supports our hypothesis that the negative admissions growth we saw in the fourth quarter was the result of normal variability and not a trend.
Looking forward to the remainder of the year, the flu-related census impact in the first quarter will contribute to lower treatment volume for the remainder of the year than we had previously expected. Additionally, we believe the cyber incident that Javier described resulted in lower-than-normal admissions for about two weeks in April. Taking these two factors together, combined with the treatment shortfall in Q1, we are now expecting an approximately 50-basis-point decline in treatments for the year.
As a reminder, 2025 volume is also negatively impacted by the PD supply shortage we faced in Q4 2024. Despite these temporary challenges, we still expect to return to 2% volume growth, although the timing is hard to predict.
Consistent with what we have forecasted in the past, these forecasts are for a number of treatments, not treatments per day or non-acquired growth. Revenue per treatment increased $4 in the quarter. Approximately $10 of the increase is attributable to new reimbursement for phosphate binders, partially offset by $5 of decline due to typical seasonality of patient responsibility for co-pays and deductibles in the first quarter.
Patient care cost per treatment increased by $7, sequentially. This was driven by approximately $8 per treatment of new costs associated with phosphate binders and partially offset by a decline from the seasonally high fourth quarter.
First quarter G&A costs declined by $33 million, sequentially, again as a result of a decline from typical seasonally elevated spend towards the end of the year. Adjusted international OI increased by $29 million versus the fourth quarter. As a reminder, the fourth quarter was impacted by a $19 million reserve recorded against aged accounts receivable in Brazil.
Integrated Kidney Care, our value-based care business, had operating losses of $29 million in the quarter, in line with expectations. As a reminder, IKC has seasonally stronger operating performance in the second half of the year. This quarter, we realigned the operations of an IT product from our IKC segment into our US other ancillary segment, which moved approximately $4 million of operating loss from IKC into US other ancillary results for the quarter. We anticipate the full-year impact of this change to be approximately $17 million.
Below the OI line, we incurred $18 million of other loss, mostly related to Mozarc, our joint investment with Medtronic. We expect this to be a consistent quarterly run rate for the remainder of the year. In the first quarter, we repurchased 3.7 million shares and we repurchased an additional 1.7 million shares since the end of the quarter.
Our repurchases continue to be informed by our typical assessment of leverage ratio, liquidity, and market price relative to our view of intrinsic value. This accelerated purchase pace brought our leverage level at the end of the quarter to 3.27 times, near the middle of our target leverage range.
Q1 debt expense was $135 million. Beginning in the second quarter, we anticipate debt expense will increase to approximately $145 million per quarter for the remainder of the year.
Let me now turn to our expectations for full-year 2025. We are reiterating our full-year adjusted operating income and earnings per share guidance. Despite challenges associated with a difficult flu season in Q1 and expectations for some headwinds related to the recent cyber incident, the underlying strength of our business performance in the first quarter and the increase in our forecast for profitability of orals in the bundle give us confidence in our full-year guidance.
That concludes my prepared remarks for today. Operator, please open the call for Q&A.
Operator
(Operator Instructions) Andrew Mok, Barclays.
Andrew Mok
Appreciate all the color on the cyber attack and treatment growth. If we look at the 50-basis-point revision for the full year, can you help us understand how much of that was attributable to flu in the first quarter and how much of that is attributable to the cyber attack? And then similarly, what was the impact of flu in the quarter? Can you help spike that up? Thanks.
Joel Ackerman
Sure, Andrew. So starting on the full year, the biggest impact on the full year was flu, but not because of the first quarter. It's really a census decline in the first quarter that impacts the full year. So that's a little bit more than half of the 50 basis points.
The other two components are: one, mistreatment rate in Q1; and the third would be the admit -- roughly, call it, 500 admissions we think we lost in a couple of weeks as a result of the cyber, and those two are roughly equal in size. So that's the 50 basis points for the year.
If you're thinking about Q1, the miss was largely mistreatment rate. The census impact in quarter did not have a big impact, and the mistreatment rate was a combination both of storms in January and February as well as flu.
Andrew Mok
Got it. Okay. And I think I heard you say that the majority of the costs related to the cyber attack will be one-time items recognized in the second quarter. Can you just help us understand that? Are you going to adjust that out of earnings? Or will you be incurring those costs and absorbing that into guidance?
Joel Ackerman
So I think there'll be two different buckets. There will be some that are direct costs that we will non-GAAP and are likely covered by insurance. So those are not included in our adjusted OI forecast. There will also be some that are more indirect, and those will flow through the P&L, and we've included those in our guidance.
Andrew Mok
Got it. That's helpful. And then on the oral phosphate, can you provide a bit more color on what you saw in the quarter with respect to uptake and drug mix? If you have any incremental details on that. Thanks.
Javier Rodriguez
Yeah. Thanks, Andrew. What we saw was that the mix came in a little leaning toward the iron-based. And so that's what we said in the opening remarks that in essence, change the guidance to the upper end. We had said $0 to $50 million, and now we will look to be on the higher end of that.
Andrew Mok
Do you expect the mix to change or evolve for the balance of the year? Or do you think you have a pretty good understanding of what that mix looks like based on results so far?
Javier Rodriguez
It's our first quarter with this experience. But when we talk to physicians, it appears that they're happy with the current mix.
Andrew Mok
Got it. Okay. And maybe one last one for me. Can you help us understand where commercial mix came in in the quarter and how the exchange growth shook out for Q1? Thanks.
Javier Rodriguez
Sure. The mix was unchanged, flat in the low 11%, and the open enrollment was healthy. And so we continue the trajectory of growth similar to the rest of the market.
Operator
Joanna Gajuk, Bank of America.
Christian Porter
This is Christian Porter on for Joanna. Just a few questions from us. I was curious if you could dive into the specifics of how much the cyberattack impacted you guys in terms of revenue and EBITDA, and then also the impact of phosphate binders inclusion in the Medicare bundle. Thank you, guys.
Joel Ackerman
Yeah. So on the cyber, just to be clear, this happened in April. So there was no impact in Q1, and it remains to be seen what the net impact on adjusted OI will be in Q2. But I'll remind you, it's built into our guidance.
In terms of -- remind me the second question? Oh, about binders. So I think if the question is how does this build up individually into our lines. Our RPT was up about $10 quarter over quarter as a result of binders, and our cost per treatment was up roughly $8 for the quarter from binders.
Operator
Justin Lake, Wolfe Research.
Dean Rosales
This is Dean Rosales on for Justin. Thank you for the updated color on non-acquired treatment growth in the year. Can you speak to your expectations for RPT in the year? Are they still in the 4.5% to 5.5% range? Thank you.
Joel Ackerman
Yeah. No change to our guide on RPT for the year. We think we'll get a little bit more from orals in the bundle, as Javier mentioned, but still within the range of the guide from last quarter.
Operator
Pito Chickering, Deutsche Bank.
Pito Chickering
I guess going back to the treatment growth question, can you sort of quantify just the new patients that started this quarter and how they start tracking in 2Q and sort of how that looks sort of year over year? And are you seeing any changes in mortality right now that we're exiting the flu season?
Javier Rodriguez
Yeah. So starting on the admit side, Q1 was a strong admit quarter for us. And we know there was a lot of interest last quarter. We called out a weak admit quarter in Q4. And I think a lot of curiosity on was that a normal variability, which is what we suspected or is it somehow the beginning of a trend.
And the strength we saw in Q1 certainly supports the hypothesis we have that it was just normal variability. So admits was certainly -- it was in line with what we expected, but it was strong in Q1.
In terms of mortality in it was absolutely elevated. We think that was 100% as a result of the flu. So not much more to say about that. It's a little early to see what's happening to mortality post flu. As you know, there's a little bit of a lag between when a month ends and when we have good clarity on mortality. So I can't give you much on what happened post flu.
Pito Chickering
Okay. Fair enough. And then looking at the revenue per treatment, there's sort of a bunch of pieces in there, and you said that the mix was flat. You actually -- you get positive tailwind obviously coming from the phosphate. Can you quantify what the phosphate was to RPT?
And then any other comments here in the first quarter RPT as it relates to managed care increases for this year? How should we think about co-pays and deductibles sort of comping out in the next couple of quarters?
Javier Rodriguez
Yeah. I think you asked a lot of questions, but let me just sort of summarize it. We gave a range of roughly 4.5 to 5.5 RPT. I think just speaking in big sort of categories, half of that will be increases in the core business and half of it will be orals. And so I think that kind of bundles all your questions. Does that get to it?
Pito Chickering
Yes, that works. And the last one here is on IKC, a decent reduction in the patients from March versus December. Just wanted to follow up. I think last quarter, you talked about some competitors that they're being more aggressive on pricing. Just what are your views around the IKC patients under treatment sort of at this point and any changes profitability of that versus your expectations? Thanks.
Javier Rodriguez
Thank you. I think a couple of things. Number one, from a clinical perspective, it's unambiguously good for patients. Our doctors are also having to change the way they practice and making sure that they start to get involved in transition of care, hospitalization, and other things. So that takes a while, as we've told you for quite some time.
The financials are playing out as expected, which is -- this is a business have a bit more volatility. So we've told you to look at on an annual basis. Unfortunately, there's been several unproven entrants that have gone in there and have made some amature risk moves and have really contracted quite poorly and aggressively. And what I mean by that is, economically speaking, so we have been quite disciplined in understanding the impact that we can do to patient care, and we've been very disciplined in our financial modeling.
So while we want to, of course, earn and win more business, we want to be able to be in a sustainable way. And so in addition, we've also severed some of these arrangements with some doctors that are not willing to change the way they practice because you have to really change the way you practice to be successful at this.
Pito Chickering
Okay, great. I don't think it --
Joel Ackerman
Let me add one more thing to that, Pito. Some of the decline in lives that you'll see from Q4 to Q1 is also the result of our ability to better predict how many lives will be retroactively removed from attribution based on certain rules that CMS uses in the CKCC program, particularly with CKD live. So it's not an economic change. It's more of how we count the lives and doing a better job of predicting that upfront.
Pito Chickering
Okay. And then last quick one here on international that looked pretty strong. I guess any sort of good guys or bad guys, you should highlight to us on international as you model that for the rest of the year. Thank you, guys.
Joel Ackerman
Yeah. International had a strong quarter, a lot of good guys across a number of markets. We feel good about how the new acquisition is playing out. So we called out last quarter a $50 million jump year over year and we probably picked up another $10 million on top of that $50 million in Q1.
Operator
AJ Rice, UBS.
AJ Rice
Maybe just a couple of things. Just to follow up on that question about the Latin America. Any update on Brazil and maybe more broadly on the M&A pipeline, what you're seeing? Anything to comment on what you might see in the back half of the year?
Javier Rodriguez
Yeah, thanks, AJ. On the Brazil, we're pretty close, although they've given us some restrictions that we got to abide by, so we got to play that out and divest a couple of centers. It's always not a good idea to guess, but we're getting to the finish line here. So hopefully, that will be here shortly.
As it relates to M&A, I think internationally continues to be an interesting place. And domestically, we're still pursuing onesie and twosies and then any practice that's willing to convert. So it's a dynamic place out there, but that's really how it summarizes.
AJ Rice
Okay. Just a follow-up on the IKC question. The $29 million loss, if I'm hear -- making sure I heard right, that's after moving some business that would have been a $4 million a quarter drag over into the core.
I guess two questions on that. It's interesting that you make that move. What's sort of behind that? And second, you still feel like -- I know we've got volatility quarter to quarter, but you're on track for a breakeven by 27% in that business.
Joel Ackerman
Yeah. So just to clarify one thing. We didn't move it to the core. We moved it to other strategic initiatives. But I think the most important thing is it has no bottom-line impact on the enterprise. It's just moving from one business to another.
This was an IT product that when first implemented was expected to largely be used by the IKC business. But over time, it became clear that it had other utility within DaVita, including in the dialysis business. So ultimately, we decided to allocate that a little bit differently, but it has no major impact on the path to profitability. Obviously, it helps a little bit because you're just taking cost out. But within the broader context of IKC and it's scale and variability, we still feel good about the path we were on.
AJ Rice
Okay. Does that then -- if I could just follow up on that then. Is the $4 million run rate of a loss? It's currently had as you move it into the this new area. Does that diminish over time then?
Joel Ackerman
No, I wouldn't expect it to go down over time.
AJ Rice
Okay. And then just maybe last point of clarification on your G&A. You're up about 3% cost per treatment. I know you called in the release some professional fee reductions as well as I think it pointed to a gain of some sort. Can you just elaborate a little bit more on were those meaningful in the quarter and what was going on there?
Joel Ackerman
No, I don't think there was a lot there. I think a big change in the G&A per treatment was the result of volume coming down. So there's a big treatment drop between Q4 and Q1, mostly driven by a reduction in the number of days. That was probably I think the single biggest thing that drove the change in G&A per treatment.
Operator
Ryan Langston, TD Cowen.
Ryan Langston
So you're keeping the full-year guidance the same, lowering just a little bit on the treatment volumes. I guess is a lot of that sort of the outperformance in the phosphate binder area or some of it from the stronger new set of admits that you called out?
Joel Ackerman
Yeah. So if I had to break down how we're thinking about guidance, I would say there were two negatives for the quarter -- or for the year. One is the decline in volume, the 50 bps. We brought that down. And the second will be the cyber costs.
So those are headwinds on the year, offset by two tailwinds. One is strength in Q1 and the second is the increase in the binders. The net impact of those two headwinds and two tailwinds would be no change.
Ryan Langston
Okay. And I might have missed the first part of AJ's question. But in the release, it's said there was a decrease in professional fees. And then there was a gain, I think, in G&A. Can you help us size the gain, again, I'm sorry, if AJ asked it and also maybe what drove the decrease in pro fees?
Joel Ackerman
Yeah. These are minimal items, single-digit millions. I wouldn't get too concerned about them.
Operator
Thank you. At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments.
Javier Rodriguez
Okay. Thank you, Michelle, and thank you all for your questions. Have you been following it, us, we have experienced three temporary externalities, including supply shortages due to a hurricane, a high flu season, and now a cyber incident. Regardless, we continue to achieve our clinical and financial objectives.
We look forward to building momentum over the remaining of the year. We'll talk to you soon. Be well.
Operator
Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
