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 Second Quarter 2023 Earnings Call. Today's conference is being recorded. If you have any objections you may disconnect at this time. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Thank you, Mr. Eliason, you may begin your conference.

Thank you, and welcome to our second quarter conference call. We appreciate your continued interest in our company. 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 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. For further details concerning these risks and uncertainties, please refer to our second 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.

Thank you Nic, and thank you for joining our call today. I hope everyone's having a safe and joyful summer. At DaVita, we've been focused on innovation and continuous improvement to provide the highest quality care for our patients. Hand-in-hand with these efforts, we've been driving operational improvements across our organization. Our second quarter performance reflects strong traction across those initiatives, putting us on a path to deliver strong clinical outcomes and financial results for the year. Today, I will cover the second quarter results, offer some perspective on the industry landscape and drivers of long-term performance, and update our full year guidance. Before we get into the second quarter details, I would like to take a moment to celebrate a clinical and technological milestone. On our February call, we mentioned the rollout of our next generation clinical IT system, which we refer to as Center Without Walls or CWOW. I'm happy to report that after five years of development, CWOW is now live in each of our approximately 2,700 clinics across the United States. This patient-centric cloud-based system combines and replaces four legacy systems and is designed to provide seamless flow of information across each of our centers in all modalities. This includes real-time clinical dashboards, data sharing with our physicians, integrated kidney care platforms, and notifications such as critical lab alerts. For ease of use, it features wristbands for quick teammate login, improved ability to track and reschedule mistreatment, enhanced real-time documentation, and consolidated reporting for streamlined analysis. While we're enthused about these immediate benefits, the most significant enhancement is the state-of-the-art data structure and platform upon which we can build further capabilities, including artificial intelligence to advance care delivery in the years ahead. With this groundbreaking platform, our clinicians can access the right information at the right time in the right place. Transitioning to our financial performance, in the second quarter, we delivered adjusted operating income of $432 million and adjusted earnings per share of $2.08. These results were driven by improvements across our financial trilogy of treatment volume, revenue treatment, and patient care costs. On volume, we saw our second consecutive quarter of improvements in census and treatments per day. This is encouraging, as it results from a better macro-environment and progress in our operating initiatives. We're turning near the top of our original volume range of down 3% to flat year-over-year, and if these trends continue, we anticipate delivering volume growth in 2024. Shifting to revenue and revenue per treatment, revenue per treatment was particularly strong in the quarter, primarily driven by typical seasonal factors from patients meeting their copays and deductibles, along with normal expected rate increases and improvement in mix, including Medicare Advantage. Adding to the revenue per treatment increase, we have seen progress from investments we've been making in our revenue cycle capabilities. These investments resulted in higher cash collections and a decline in our days sales outstanding. I'm excited about the investments we've been making in these areas, which represent a good example of how we are constantly improving operations. Finally, patient care costs improved as expected in the quarter. Although base wage increases remain well above historic pre-pandemic levels, other expenses, including contract labor and pharmaceuticals continue to decline. This benefit was partially offset by elevated training costs. While staffing levels in our clinics are in a much better position compared to last year, we continue to experience above-average turnover among facility teammates. As a result, we no longer expect improvement in our training productivity during the back half of this year. Taking a step back for the most recent results, I would like to offer some reflections on the broader industry landscape and our effort to drive performance going forward. Beginning with the reimbursement rates, we are disappointed by CMS's proposal to update the ESRD prospective payment system for 2024. Specifically, the proposed rate increased falls short of expected cost inflation in 2024 and failed to adjust for the acknowledged inflation forecast miss relative to actual wage and inflation increases over the past two years. The kidney care community will continue to advocate for an adjustment mechanism to reconcile these forecasts similar to what exists today for skilled nursing facilities. In response to the persistent cost inflation, we are continuing our track record of innovation across all areas of our cost structure. Most recently, we consolidated portions of our facility footprint and reduced pharmaceutical costs through our conversion to Mircera for anemia management. These programs are proceeding in line with our expectations. Going forward, we will continue to drive cost efficiencies across the P&L. Through these efforts and continued improvement in our volume trend, we continue to target 3% to 7% long-term growth of our enterprise adjusted operating income. Looking forward to the remainder of the year, given our progress during the second quarter, we are advising our adjusted operating income range of $1.475 billion to $1.625 billion to a new range of $1.565 billion to $1.675 billion. We are also updating our adjusted earnings per share range from $6.20 to $7.30 to a new range of $7 to $7.80. Our performance relative to this guidance will continue to depend heavily on momentum and patient census trends, our ability to manage patient care costs within the broader labor environment, and sustain improvement in revenue cycle management. I will now turn the call to Joel to discuss financial performance and outlook in more detail.

Thanks, Javier. I will walk through a few factors driving our strong performance in the second quarter, starting with treatment volume. In the second quarter, U.S. dialysis treatments per day were up by approximately 0.3 percent sequentially. This is the result of continued census gains in the second quarter, driven by an increase in new dialysis admits. Mortality remains higher than pre-COVID levels, but came in lower than Q1 and in line with our expectations for the quarter. Our mistreatment rate continues to be elevated relative to historic levels. Revenue per treatment was up $10.59 versus Q1. Approximately half of this increase was the result of seasonality, primarily due to higher patient responsibility amounts in the first quarter. Approximately $2 came from normal expected rate increases and continued increases in patient mix. An additional roughly $2 was the result of strong cash collections in Q2. As Javier said, we have been investing in improvements in our revenue cycle management systems and processes and are beginning to see the benefits of these efforts in both revenue per treatment and days sales outstanding. We were anticipating these improvements, but they came earlier than forecasted. We expect these benefits to persist in the back half of the year and going forward. As a result, we now anticipate year-over-year revenue per treatment growth to be 2.5% to 3%. On a non-GAAP basis, patient care costs per treatment decreased 1.5% sequentially. While base wage increases remain high, we have successfully reduced most of the temporary compensation measures we relied on during 2022. At the end of Q2, contract labor has returned back to pre-pandemic levels. Operating income from our integrated kidney care business was approximately flat with Q1. The quarter benefited from positive prior period developments in our special needs plans and the timing of expenses that were delayed until later this year. For the full year, we now expect integrated kidney care adjusted operating income to be approximately flat to the 2022 operating income loss of $125 million. Regarding our clinic footprint, in Q2, we closed or consolidated 16 centers in the U.S., bringing our year-to-date U.S. closures to 36. We continue to assess further facility consolidation and closures during the back half of the year. Regarding capital structure, we ended the quarter with a leverage ratio of approximately 3.7 times EBITDA and did not repurchase any shares during the second quarter. Our capital allocation strategy remains focused on capital-efficient growth, a target leverage ratio of 3 to 3.5 times EBITDA, and the return of excess cash flow to investors through share buybacks. Given our increased guidance for the balance of the year, we have increased visibility towards bringing our leverage level back within our target range. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

Thank you. Our first caller is Kevin Fischbeck with Bank of America. You may go ahead, sir.

Good afternoon. Actually, this is Joanna Gajuk filling in for Kevin. Thanks for taking the Q&A question here. So, thanks for the color around the revenue per treatment and breakdown in terms of the drivers. There are included very strong performance and I appreciate your commentary aspect. I guess a fast group for the year. Just looking into the pieces because you said a better payer mix is one of the drivers. Can you talk about the specific commercial pricing and what kind of rate increases are you getting this year and also any indications for how things are tracking into next year? Because I guess that's where maybe one area, because you also mentioned a Medicare rate out there being lower than cost inflation. So, is the commercial pricing tracking better?

Yes. Thank you for the question, Joanna. I'll start off and Joel, you can supplement if I miss anything of importance. Private pay mix is holding up. It picked up 20 basis points and we continue to see that our private pay patients really value their insurance. As it relates to rate increases, just a reminder, most of our contracts are multi-year. So, in any given year, we don't negotiate that many contracts. There's nothing really to call out on that. Our rate per treatment increases are in line with expectations. So, is there another part of your question that I didn't answer, Joanna?

Is there still bipartisan support for a fix regarding the Marietta case? Can you provide any updates on that? Additionally, concerning commercial pricing, are you observing that employers are using this court decision to limit networks or are they leveraging it during price negotiations?

Sure. Let me take a minute, and let me lend up a little to some people who are not tracking all of the Marietta, so it's probably best for me to divide it into what we know and what we don't know. So, let me start with what we do know. As we look at our claims year to date, we have not seen much change compared to prior years, so there's not a lot of volume. But we have learned more about how employers change benefits and mislead members on how it's done. And so we don't want to accommodate this poor behavior. What we have done is we've implemented a verification process at admissions, and if an employer eliminates the network dialysis benefit for its members, then we have the right to prevent that plan from having access to our centers. In addition, we continue to have very high bipartisan interest in making sure that policy makers protect our patients. So those are the things that we do know. What we don't know is how many employer groups are considering carving out dialysis from network in the future. And we also don't know if or when members of Congress will introduce the bill and how the Congressional Budget Office will score it. The last part of your question was, are payers using this in one way or another? It has not come up in one negotiation, because this is really more of a dynamic between the employer trying to decide what to do with the plan, not what the payer does with the provider. The provider and the payer both value network. Does that help you, Joanna?

Yes, that makes sense. No, no, that totally makes sense and I appreciate it. So in terms of what's going on in Congress and the score, is there any indication what we might hear about this or that's not really something that we can predict from the outside?

Yes. There's nothing we can predict from the outside. That's left to policymakers, champions, and the dynamics of Washington, D.C.

Great. Thank you. And if I maybe just on the guidance phase, but it sounds like some improvement in the pricing rate and then I guess contract labor, sounds like that's better. Is that the way to frame the guidance phase of $70 million of the operating income, just the operating income guidance?

Yes, Joanna, if I were to kind of give you the pieces of what drove $70 million of increased guidance, that's middle of the range to middle of the range on operating income. I'd say about half is the revenue per treatment, as you called out. The other half is volume. We saw stronger admissions this quarter, and the nature of volume is cumulative. It'll never really kick in any one quarter in that big a way, but as it accumulates, stronger in Q1, stronger in Q2, and we see it better in the back half of the year. For the full year, we think that'll contribute about half of the $70 million. Contract labor continues to improve, but it's now pretty much in line with what we were expecting. As we said in the prepared remarks, it's really back down to pre-COVID levels, and hopefully it won't be much of a topic going forward.

Thank you, appreciate it. Thanks for the call.

Thank you. Our next caller is Andrew Mok with UBS. Sir, you may go ahead.

Hi, good afternoon. Appreciate all the color on the sequential revenue per treatment improvement, but a couple of follow-ups there. First, is the seasonality component in line with historical seasonality, or is there something about the patient benefit design that's creating more acute seasonality this year? And can you go into a bit more detail on what's driving the better cash collections? Thanks.

Yes. Andrew, thanks. So on the seasonality, no, it was a little bit more than $5 per treatment, which is right in line with what we've seen historically. In terms of collections, look, we have invested in our processes and in our technology to get better information and to give better information to the health plans on everything from prior authorizations to other data required to claim submissions. And that's both the quality of the data and the timeliness of the data. What we're seeing is we're getting paid quicker, and that's why you saw days sales outstanding come down last quarter. Again, this quarter we're also seeing we're collecting more, and that's what's driving the revenue per treatment increase. I think the most important thing from our standpoint is not a one-time thing. These are fundamental changes that we've made that we think will persist.

Great, appreciate the call. And then as a follow-up, the guidance, the operating income guidance is up about 5%. I think your free cash flow is up about 10%. Can you help bridge the difference there? Or help us understand why the free cash conversion is better on the new guide? And I think I missed your comments on share repurchase, but we'd love to get your latest thoughts around there and the potential resumption of share repurchase? Thanks.

Sure. The big difference between operating income and free cash flow is the days sales outstanding. As we see those days sales outstanding come down, that'll add to the free cash flow for the year. In terms of share repurchases, we're on track with what we set out to do. Our leverage levels were above our target range. I think we were quite clear with everyone. We wanted to get back down to 3.5 or below. We're making good progress on that. We're at 3.7 for the quarter, and we didn't buy back any shares. We don't expect to buy back any shares in Q3, but we feel like we've got better visibility now to get back to the 3.5 or below.

Great. Thank you. I'll hop back in the queue.

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

Hey, can you guys hear me now?

Yes, Pito.

All right, sorry about that. I'm not sure what happened there. Back to treatment growth here. In pre-COVID, like you're getting about 4,000 new patients a year, about two-thirds of those in the first half of the year from nephrologists dropping on and obviously, the rest coming from hospitalizations and start talking to you guys. I guess, how is that tracking this year at this point relative to sort of that 4,000 times two-thirds? Is that what you guys are seeing for new patients at this point?

Yes. So Pito, the short answer is if you're looking at admits, we are tracking pretty much to pre-COVID levels. The challenge is excess mortality, and that remains elevated. That's the reason that we're not yet ready to say we're going to return to pre-COVID growth levels. That said, mortality has been coming down year-over-year since COVID started. It's down in Q2 versus Q1. If mortality continues to decline and return to pre-COVID levels, then the math you laid out of 4,000 new patients a year, we'd be back there again.

Which is a perfect segue for the next question about mortality. You talked about that sort of coming down. I guess is there any way you can give us, or what is the rate of that decline? And if it follows the path you've seen in the last three quarters, is this, so what glide path would that indicate?

Yes. That's a tough piece of analysis to do because it hasn't necessarily been smooth quarter-to-quarter or year-to-year. So, look, we're watching it carefully. We all know there's a minor surge going on, but I think minor is the operative word from what we've seen so far. So, we're keeping a careful eye on it, but I don't think we can draw a trend line based on the history to say when we think mortality gets back to zero. Where excess mortality gets back to zero.

Okay. Is there something they can quantify for what excess mortality was this quarter and what it was for the last quarter?

Yes. Last quarter, it was roughly 900 lives. This quarter, it was between 500 and 600. Remember, we will sometimes update those over time. We get better views of excess mortality as time goes on. But somewhere between 500 and 600 is our best estimate for Q2.

Okay. And I definitely understand sort of the complexity of coming up with those for a variety of different reasons. For Medicare Advantage, what percent of your MA patients are currently taking risk for one way or another?

I need to calculate that quickly. Pito, I don't want to provide an inaccurate figure, so let's discuss that later.

Okay. The next one here is on managed care rate increase question that was asked earlier. I guess, are you seeing managed care do anything different in terms, not just in rate increases, but potentially trying to your patients? Like, if you've seen any behavior changes for managed care in the last 90 days or so, just, obviously you're seeing increase relation elsewhere, just curious that they're trying to control costs within other parts of the business?

No, we haven't seen any changes at all.

Okay. Got it. And then, so last one here. On the pace of consolidation for facilities, obviously, you guys do the lowest-hanging fruit first. But as you see the success of capturing those patients serving within other centers, do you get more aggressive about consolidation than maybe you had originally planned for about a year from now? And when patients are consolidated, do you see an increase of local treatments at that point?

Yes. I think we want to be really careful about being 'aggressive'. But we want to be really thoughtful and balanced in all the trade-offs that go into closing a center. We have to remember, our patients are incredibly vulnerable. One of the most important things is to be close to their home. About 90 percent of our patients are within 10 miles of their home. That's one of the best things we can offer: convenience. We talk a lot about health equity issues and not being in the communities. We are in the communities. We take that pretty seriously. But as the economics constraints happen, and if we are able to accommodate our patients, we are being very thoughtful on that. We have other obligations like leases and other things, so there's a natural time to review a clinic to see if it's appropriate for closure.

Okay.

And then the second part to your question, I think, Pito.

Yes. So, I'll ask some questions in different ways. I guess, if the patient is consolidated, do you see an increase in the utilization of home treatments? And then, the second part of the question is, to what percent of treatments today are being done in the home?

No, is the answer. We are not seeing any changes in whether a patient goes home or not. We continue to be a very strong advocate of home. There are a lot of dynamics and education that go into that. We want the right modality for the right patient. But we are huge champions of home. The mix on home is roughly around 15%, a little above that, like 15.2% or so, but it's been hanging around that 15%. COVID had a big impact on home; many patients felt more comfortable during that time of insecurity to go and be taken care of by professionals. But we're starting to see a slight pick up in patient choice to go home.

Okay. And then, I think a last question for me here. Can we get an update on the Medtronic joint venture? I guess, how much sort of on to the drag is that on operating income? And just as you look at it today, what's the pathway to that becoming operating income neutral, and can you just refresh us on sort of why that's a good opportunity for you guys? Thanks so much.

Sure. Just as a reminder, it doesn't hit our operating income. It’s below the operating income line. So it hits EPS. It’s worth about $15 million pre-tax per quarter. This quarter we actually had some positive gain as a result of the transaction. We think that number will decline over the next couple of years. We anticipate getting to breakeven in two to three years. In terms of why we like this, as Javier mentioned, we're really interested in figuring out ways to help our patients get home, and new technology can be part of that answer. We're looking for other ways to innovate beyond just the service and information capabilities that we can do. We recognize Medtronic as a world-class leader in innovation on the medical device side. We just thought their history here combined with our knowledge would make for a great partnership, which is why we invested in Mozarc.

Perfect. And the last quickie for me. I may have missed it. Did you guys quantify what the turnover was, nurses and technicians for this quarter and how that compares versus 2019? Thanks.

Thank you for that last question. We did not go into that level of detail. I think what we can say on labor, because we've gone into so much detail on labor. In the overall category, it is playing out as expected. Some of the underlying components have shifted a bit. To give a little more detail on that: base wages are above our normal averages. Our contract labor is back in line to normal, and we continue to have elevated training costs. That’s how the leverage is moving. Overall, the category is as expected.

Great. I'll stop there. Thank you guys very much.

Thank you.

At this time, I am showing no further questions. We do have one more question. Andrew Mok from UBS. You may go ahead, sir.

Hi. Just a couple follow-ups on the clinic closures. You closed down 16 clinics, but opened 10 new dialysis clinics. I'm just trying to better understand what's driving the new clinics at this point, given, I thought a lot of the clinic closures were a result of excess mortality. So, what are you seeing in the market that's causing you to open new clinics? Are there any characteristics that you would call out about them, whether they're home dialysis programs or anything like that? Thanks.

In general, you can imagine health care is local. There are areas where there are literally full clinics. Sometimes there are relocations. Sometimes, as you called out, there might be just a home center that was needed. There’s a little bit of all that, but as you can see, the number is materially smaller as we are very focused on ensuring that capacity utilization is where it needs to be and that we're capital efficient.

Got it. And on the mortality, I think you gave us the absolute number in the quarter. Can you give us a sense of how the mortality rate in general is tracking and how far off are you against pre-pandemic levels? Thanks.

The mortality level looks roughly 1% or so higher than pre-pandemic. As Joel mentioned, it's a bit cyclical and depending on the surge. There is one or sort of the front end tends to have higher mortality in the front end of the year or the back end versus the middle of the year, but I think a good number is roughly 1% or give or take 2,000 patients.

Great. Thanks for all the color.

Thank you.

At this time, I'm showing no further questions. Javier?

Okay. Well, thank you, Michelle, and thank you all for your questions. As you heard through our comments today, we've continued to drive operational efficiencies and make investments to fuel our performance now and into the future years as well. Some of those seeds that we planted are beginning to sprout, and some will take additional time and continued effort. We look forward to keeping you updated on our continued progress in the back half of the year. Thank you for joining the call and be well.

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