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 Fourth 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 fourth 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 fourth 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 would 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 all for joining the call today. As we reflect on the past year, our 2023 financial performance highlighted the resilience of our business and revealed some of the early benefits of our multi-year investment in strengthening our platform. External challenges of the past few years ultimately made us stronger, and with continued investment in our teammates, systems and capabilities, we believe that we're well-positioned for the years ahead. We began 2024 with great momentum and a reduction in the risks and uncertainties that characterize the recent years. Today, I will cover our 2023 results and our 2024 guidance, provide an annual update on integrated kidney care and briefly continue our discussion on GLP-1 drugs. First, however, I'll begin the call as we always do with the clinical highlights. More than 20 years, we have strived to be a community-first and a company second. This means that we're committed not only to providing outstanding care but also to give back. In 2023, our teammates logged over 42,000 hours of service to their communities, which marks our highest year ever in a step toward achieving our cumulative goal of 125,000 hours by 2025. Some of our special teammates donated their personal time to advance our goal of raising awareness for kidney disease. We recently wrapped our 2023 Health Tour, a mobile health screening and kidney care education program supporting local communities across the country. Today, 15% of our US population has kidney disease, which often goes undiagnosed and untreated until symptoms become severe. Our mobile health tour was designed to help identify risk factors that may lead to chronic kidney disease, including screening for obesity, diabetes, high blood pressure and family history of kidney disease. For two months on the road, our bus traveled 17,000 miles to offer free screenings in 48 communities across eight states. To power this tour, more than 300 of our teammates volunteered 1,200 hours in service to their local communities. This effort is an excellent example of combining our dedication to service with our ongoing commitment to raising awareness for early detection and prevention of kidney disease. Transitioning to our performance. Full year 2023 adjusted operating income, adjusted EPS and free cash flow all came in well above our guidance from the beginning of the year. As context, I think it's helpful to reflect back on our progress over the year. We began 2023 in an uncertain environment and shared the assumptions in our guidance that volume and labor challenges would continue throughout 2023. We're simultaneously developing and executing on a number of initiatives focused on offsetting some of those financial headwinds we were facing. As the year progressed, we saw encouraging data points early in the year which ultimately turned into consistent positive trends. These improved trends, combined with the strong operating performance and the positive impact on the initiatives we implemented, resulted in a 20% year-over-year growth in adjusted operating income, 28% growth in adjusted EPS and a return of our leverage ratio back to the target range. I'll share three points for additional color. First, on volume. We entered 2023 with a 2% growth headwind due to the annualization of excess mortality from the prior year. Since then, successive COVID surges have been weaker in magnitude with lower mortality. At the same time, we were able to produce four consecutive quarters with year-over-year growth in new patient admits. Adding these factors together, 2023 saw increased patient census for the first time since COVID started and volume that was approximately flat year-over-year, landing at the top of our guidance range. Second, our labor performance in 2023 was better than 2022. We cut our reliance on contract labor more quickly than anticipated and improved staffing in our centers. On the other side of the ledger, teammate turnover has remained elevated in line with the strong healthcare labor markets. Looking forward, improved retention and training costs represent an opportunity for improvement in the years ahead. Third, independent of these trends, we drove strong operating performance through our differentiated platform and capabilities. Most notably, we invested in our revenue operations to achieve sustainable improvements in our collections. This resulted in an additional $3.50 in revenue per treatment for the full year while reducing more than 12 days from our US day sales outstanding. Adding to this, we executed against our cost-saving initiatives related to pharmaceutical spend and further consolidated our facility footprint. Finally, we exceeded our annual profitability targets for integrated kidney care, which I will cover more in detail in a moment. To summarize, we entered 2024 with more visibility and confidence than we have had since the start of COVID in 2020. Our ability to invest in our people, process and systems, despite the operational and financial challenges of the last few years, has positioned us well for the years ahead. On that note, let me transition to our value-based care business, which we will call integrated kidney care, or IKC. We have consistently urged our investors to assess this business on an annual basis rather than focusing on our quarterly results. Now is a good time to pause and reflect on our performance and outlook of IKC. At a high level, we assess IKC performance based on three primary metrics: one, total medical expense and patients in our IKC programs, which represents growth; two, our clinical performance or effectiveness of reducing total medical costs; and three, per member per month spend on our model of care and G&A, which indicates cost management. I'll walk through each in a bit more detail. First, total medical expense of patients in our IKC programs grew to $4.6 billion, reflecting approximately 30% growth year-over-year. This represents care for 58,000 patients as of year-end, a 38% increase from 2022. Within our traditional value-based care programs, we continue to be disciplined, prioritizing profitable growth. For 2024, we expect growth in excess of 25% for total medical expense and covered lives. Second, our model of care has proven effective in helping our patients lead healthier lives and reducing medical costs, reflecting in a net savings rate that is slightly ahead of our expectations. The largest driver is year-over-year reduction in hospitalizations, especially readmission rates. This relies on our collaboration efforts between our care teams and physician partners to prevent rising acuity and address the needs of our most complex and vulnerable patients. And finally, our per member per month cost continues to trend down as a result of growth in the program and improved fixed cost leverage. In 2023, our per member per month cost declined by 7%. We expect per member per month cost to further decline by approximately 15% in 2024. The result of these efforts is that we outperformed our 2023 adjusted operating loss forecast, and we believe we remain on track to deliver breakeven or better performance by 2026. Beyond the core metrics, we can further break down our performance based on three primary components of our IKC business: special need plans, our value-based care portfolio focused primarily on Medicare Advantage patients, and the CKCC demonstration project for our Medicare fee-for-service patients. Within that portfolio, after many years of investment and consistent year-over-year improvements in cost savings, our MA contracts and special needs plans have now reached profitability. Keep in mind that the third component, CKCC, represents approximately 50% of our value-based care census. As we adjust to the changes from CMS and further optimize our model of care, we expect this program to become profitable in 2026 timeframe. Before we get into 2024, I'll offer a quick comment on GLP-1. To be clear, none of our thinking has changed since our last earnings call. Shortly after our call, results for the select clinical trial were released. As expected, the trial confirms certain cardiovascular benefits in people with obesity and cardiovascular disease, including a 20% reduction in all-cause mortality. Next on the near-term horizon will be the FLOW study, which we anticipate will demonstrate efficacy on multiple endpoints, including slowing the progression of chronic kidney disease. As a reminder, such efficacy that may be demonstrated in the FLOW study is already incorporated into our GLP-1 base case, reflecting a net neutral impact on dialysis volume growth as adoption ramps up over the next decade. Shifting to 2024, we're setting guidance for adjusted operating income growth of 10% and adjusted EPS growth of 9%, reflecting the midpoint of our respective guidance range for each metric. This incorporates our expectations of a more predictable operating environment, continued returns from our revenue cycle investment and further progress in IKC. This guidance demonstrates the resilience of our business and our ability, despite external challenges, to provide high-quality care while delivering strong financial results. Let me touch on a few drivers of our forecast. First, 2024 adjusted operating income will benefit from the full year impact of positive developments in 2023, including the annualization of revenue cycle improvements, our transition to Mircera and savings related to our center consolidation. Second, as noted, we're demonstrating progress in our IKC business and continue to expect breakeven by 2026. And finally, adjusted earnings per share will benefit from our share repurchase program, offset by other factors below the OI line, including other losses, higher interest expense and higher effective tax rate. As we turn the page to 2024, we have a great opportunity to drive operating advancements that further differentiate DaVita within kidney care. I'll now turn it over to Joel to discuss our financial performance and outlook in more detail.

Thanks, Javier. In Q4, we delivered $415 million of adjusted operating income and $1.87 of adjusted earnings per share. Our strong performance for the quarter puts us just above the top end of our updated full-year guidance range from the Q3 call. Our outperformance in the quarter relative to our expectations was primarily related to prior period development in our special needs programs in our IKC business, plus revenue per treatment growth from continued improvements in our revenue cycle management. In the US dialysis segment, fourth quarter treatments per day were flat versus the third quarter. As a reminder, mistreatment rates are seasonally higher in the winter months, which was offset by an improvement in our day of week mix relative to the third quarter. Revenue per treatment was up approximately $6 quarter-over-quarter. About half of this was due to normal quarterly fluctuations. The remaining increase was driven equally by continued improvements in our revenue cycle management and typical fourth quarter seasonality related to higher acute mix and reimbursement for flu vaccines. Adjusted patient care cost per treatment was up $13 sequentially, driven primarily by seasonality, including higher benefits expense and continued investment in our teammates. This sequential increase was higher than typical for Q4, but in line with our expectations described on our Q3 earnings call. In our IKC business, adjusted operating results were down $39 million sequentially, due primarily to the timing of shared services revenue recognized in Q3 primarily from arrangements from 2022. Additionally, in Q4, we recognized incremental shared savings revenue of $55 million associated with Medicare Advantage value-based care arrangements for plan year 2023. This is earlier than we had previously anticipated recognizing revenue for 2023 arrangements and is the result of the clearing of several revenue recognition hurdles earlier than otherwise anticipated. This revenue would have otherwise been recorded in 2024. As a result, we now anticipate that our recognition of shared savings revenue for our Medicare Advantage contracts in 2024 and beyond will generally align with the plan year in which they are earned, although there will likely continue to be updates in our estimates during each planned year and beyond until final reconciliation. This $55 million shared savings revenue recognized in 2023 has been excluded from our adjusted operating income as it represents earnings incremental to what would have been expected in 2023 absent the change. International adjusted operating income was down $18 million quarter-over-quarter. The largest component of this sequential change was driven by an increase in bad debt reserves. Transitioning to capital structure, during the fourth quarter, we repurchased 2.9 million shares, and since the start of 2024, we repurchased an additional 1.5 million shares. We ended 2023 with a zero balance on our revolving credit facility and our leverage ratio declined slightly to 3.15 times consolidated EBITDA, below the midpoint of our target leverage range. The strong free cash flow was partly the result of continued reduction of our US dialysis DSOs, which ended the quarter at 54 days, down three days from last quarter and 12 days below the level at the end of 2022. Turning now to detail on 2024 guidance. Our adjusted operating income guidance for the year is $1.825 billion to $1.975 billion, representing 9.6% year-over-year growth at the midpoint. This is above our long-term expectation of 3% to 7% growth in adjusted operating income, driven by higher revenue per treatment growth, typically as a result of our investments in our revenue cycle management and cost savings in our non-labor patient care costs due to annualization of Mircera and footprint-related cost savings. To give you more detail, let me first cover the three main drivers of US dialysis growth versus 2023. First, we expect treatment volume growth of 1% to 2%. This is the result of continued new patient admissions growth on par with pre-pandemic averages, partially offset by mortality that is expected to remain slightly higher than pre-COVID levels. Second, we anticipate revenue per treatment growth of 2.5% to 3%. Approximately two-thirds of this growth is due to rate increases. The remaining third of the expected increase is primarily from the annualization of the revenue cycle management improvements we saw in 2023. Third, we expect adjusted patient care cost per treatment to increase by 2.5% to 3%. We continue to expect wages to increase at rates above pre-COVID levels. Savings to offset this include leverage of fixed costs as treatment volume grows and annualization of cost savings initiatives in 2023, including our conversion to Mircera for anemia management and our center consolidation efforts. Let me mention a couple of other items to help your thinking about US dialysis. We expect adjusted depreciation and amortization to decline by approximately $10 million to $15 million, a marked change from historical increases of approximately $20 million annually. This is the delayed result of our consistent effort over many years to increase our capital efficiency. As it relates to policy matters, we do not expect to spend the $50 million to $60 million related to ballot measures that would have been typical of past election years. For IKC, our guidance assumes an adjusted operating income loss of approximately $50 million. This reflects our expectation of continued growth in total medical spend and covered lives within our IKC programs, improved shared savings performance, and further fixed cost leverage, as outlined in Javier's earlier comments. In our international business, we incorporated in our guidance continued growth in adjusted operating income of approximately $20 million year-over-year. Below the OI line, we expect losses of approximately $60 million, largely as a result of our share of the losses in Mozarc, our co-investment with Medtronic in kidney products. We expect interest expense of $100 million to $110 million per quarter in the first half of the year and $130 million to $140 million per quarter in the second half of the year. This increase is due to expiration of our 2% interest rate caps at midyear. We expect an adjusted effective income tax rate of 24% to 26%. For free cash flow, we expect $900 million to $1.15 billion, approximately 125% of adjusted net income. Consistent with our long-term capital strategy, we expect to deploy the vast majority of our free cash flow towards either capital-efficient growth when such opportunities exist or otherwise return capital to shareholders through share repurchases. We anticipate ending the year within our long-term target leverage ratio range of 3 times to 3.5 times. That concludes my prepared remarks for today.

Thank you. Justin Lake with Wolfe Research, you may go ahead.

Hi. This is Dean Rosales on for Justin. My question is on your Medicare risk businesses. Wondering what you're seeing there in terms of trend through 2023. And then specifically on special needs products, how many members do you have there exactly? And how much revenue is in those products? And could you speak to what you've seen in terms of costs year-to-date and then specifically Q4? Thank you very much.

Thanks, Dean. So, what I'd highlight on the risk side of Medicare Advantage is, I think it's important to realize that the ESRD population is different than the broader MA population. And some of the trends you might be seeing with other payers, which we certainly watch very carefully, don't necessarily apply to our population. I'd highlight three things. First, the needs of these patients and the medical costs that they bear are very different than a population given the high acuity of these patients. So that's one. Second, I would also note the reimbursement for this population runs differently, and it's a separate reimbursement rate that comes out in both the preliminary and the final rule. And third, that the coding changes that apply to the broader MA population do not apply to the ESRD population. So, with that, I think it's early for us to really have a full view on what 2023 is. That said, we're feeling pretty good about where our net savings came in, both on the SNP side and on the Medicare Advantage population within our value-based care. In terms of just some of the cleanup, we have about 3,000 members in our SNP products. And in terms of revenue, it's somewhere north of $300 million.

Thank you.

Hey, good afternoon, guys. Looking at 2024 guidance, you're assuming a loss of $50 million in IKC. Can you refresh us what that was in 2023? And then in the script, I think you talked about 25% growth in revenues of IKC and a 15% reduction of PMPM. I would have assumed that would have shifted from a loss to gain in 2024 those metrics. So, if you can sort of help bridge that? And then, I think you're shifting from a cash accounting to an accrual accounting. That seems like a pretty big shift for you guys. I guess, what's giving us comfort that, that accrual makes sense at this point?

Certainly. There’s a lot to unpack here. First, regarding revenue accounting, in the past, we only recorded revenue when we felt confident we could reasonably estimate our share of the shared savings. This applied to both our Medicare Advantage population and our Medicare fee-for-service population within the CKCC program. For the SNP product, we have always used an accrual method. The change we are discussing pertains to when we feel confident enough in these estimates. The reasons for this change are threefold. First, we have modified some contractual language that now provides us with earlier clarity on attributed lives. Second, we are receiving data sooner, allowing us to perform calculations earlier. Third, our experience has led to improved actuarial models. With these enhancements combined, we are now confident in our ability to reasonably predict our share of the shared savings revenue, which ultimately translates to revenue in the plan year. Regarding 2023, we are estimating a loss of $50 million for 2024. Our non-GAAP figure for 2023 indicates a loss of $94 million. It’s important to note that this $94 million loss includes revenue from our value-based care products for plan year 2023, which results from the estimation change, as well as revenue from that product line for 2022. To align 2023 more closely with 2024, it may be helpful to exclude approximately $25 million to $30 million to make the comparison clearer. You also had a question about PMPM metrics.

You are reporting a loss of $94 million after excluding between $25 million and $30 million. You indicated a growth of 25% for IKC and a 15% decline in PMPM for 2024. Given this growth and the cost reductions, it seems that these factors should have led to a higher operating income instead of a loss. How can we reconcile these growth and cost reduction metrics with the $50 million loss?

Yeah. So, a few things. First, just to clarify that estimate change I referred to only is true of the Medicare Advantage business. The CKCC business is still new enough that we're not comfortable estimating the savings in the plan year. So that part hasn't changed. In terms of your question, so the cost savings we're referring to is only related to our model of care in our G&A. It's not what you'd call the MLR in a health plan business. It's not that equivalent for us. Second, there was a significant amount of positive period development in 2023, particularly in the SNP business that we're not forecasting to recur. So, that would be another adjustment, which I think would help bridge the question of why aren't we getting to profitability next year or this year in '24.

Okay. And then, on treatment growth, you're looking at the normalized growth in 4Q of 70 bps, you grew 50 bps in the third quarter. Is a key driver in fourth quarter new patients? Is it lower mortality? And also, when you close a center, those patients join another center, is that organic growth at the new center as old as the one as your discontinued ops, even though the patients don't actually change the numbers?

Yeah. So, no on the last one. If a patient moves from one clinic to another, it doesn't show up as any sort of growth anywhere. It's still our patient. In terms of the volume growth. I would point to Q4 over Q3 as effectively being flat. Treatments per day were flat. And that's really a combination of a small census decline, which is not uncommon in Q4, offset by a better treatment mix day. So, Q4 was really, I would call, a flat volume quarter-over-quarter.

Great. I'll jump back in the queue.

Hi. Good evening. Actually, this is Joanna Gajuk filling in for Kevin today. Actually, first question is just a follow-up on the volume discussion and it sounds like flattish sequentially, but I guess year-over-year, up less than 1%. And your guidance for '24 assumes 1% to 2% volume growth. So, kind of how do you build to that growth, especially to the higher end of 2%? What gives you confidence that, I guess, you could get to that volume growth for the year?

Yes. Thanks, Joanna. So, I'd start with the fact that the single biggest impact on volume year-over-year is census. And remember that census builds over the course of the year. So, if you look at the '23 growth, which was effectively flat, that was burdened by the fact that the census declined over the course of 2022 and only started building in '23. So, a lot of the zero in 2023 is the annualization of the negative impacts of 2022. As we think about '24, I'd really break it down into two components. First is new to dialysis admissions and we've watched that build over the course of 2023. And we feel comfortable that that growth rate is back to pre-COVID levels. The reason we don't get back to what you'd call a 2% number pre-COVID or that would be the high end of the range is mortality continues to run higher than it did pre-COVID. It is way down off its COVID peak, but it's still running a bit higher than a typical pre-COVID year, remembering that mortality moved around in pre-COVID years, primarily as a result of the severity of the flu season. So, if you take a more normal new to dialysis admit outlook and then a slightly negative mortality outlook, that's how we get to the 1% to 2%.

Thank you for that. And another follow-up on the guidance, I guess. You talked about your outlook for revenue per treatment. So specifically, can you talk about the build, I guess, for that? How much, I guess, is the commercial rate increases? And I guess last quarter, you mentioned there's some larger contracts up for renewal. So, any color in terms of these rate increases you're seeing there? And also inside that, your mix, commercial versus government, and then, specifically MA, where you stand on the MA mix?

Great. Let me address that, Joanna. First, I want to clarify that we are currently in a normal period regarding payer dynamics. We are working to ensure that our rates account for the inflationary pressures we are experiencing. Specifically, regarding your question about the composition of the rate increase, approximately two-thirds of it can be attributed to rate adjustments, while one-third comes from other factors. A significant portion of this one-third is related to the annualization of the improvements in our reimbursement operations we noted in 2023, and the rest is due to the mix. As you may have observed, our Medicare Advantage mix is slightly above market trends. By the end of the quarter, our MA mix was about 52%, and we anticipate that it will increase by a few points to around 54% to 55% by the end of 2024, depending on open enrollment outcomes.

And I guess on this commercial plan that you mentioned some larger plans up for renewal, any update there in terms of the rate increases you're seeing?

Commercial, on the negotiations, we're not going to go into specifics. We continue to see that our commercial patients value their private insurance, and commercial mix is flattish. So, nothing to report on that. And of course, that's embedded in the guidance of the RPT that we gave you.

Great. Thank you so much for taking the questions.

Thank you, Joanna.

Thanks. Hi, everyone. I can't let you get through the call without asking a question about GLP-1. In your prepared remarks, you mentioned that for the FLOW study, you expect efficacy on multiple endpoints, including the slowing of CKD progression. That seems to be where the market currently stands. Given your analysis, which has gained traction in the financial community, is there anything from the FLOW study that might lead you to reassess your position? It seems like you've addressed most of your expectations in your analysis, but I'm curious if there's anything that could make you more or less optimistic about its impact on your business.

Thanks for the question, A.J. And as you know, last quarter, we had sort of a dissertation on GLP-1 that's gotten a lot of conversation. At the end of the day, we, of course, wanted to make sure that our shareholders and others were really well versed on it. I think that while there could be an unusual surprise because you never want to say that the chances are zero, it is highly improbable that we didn't capture in our range what is likely to play out. And so that at the end of the day, we expect a net neutral impact on dialysis volume over the next decade. We did a lot of probabilistic adjustments and weighted as to how many people would participate and all the normal math that we discussed, and we don't want to change our position a bit.

Okay. Great. Maybe if I could pivot and ask you about your assumptions around labor going into '24. I know there's the underlying what you're banking on for wages and benefits for your permanent workers. I believe you still should have a tailwind from contract labor, at least annualizing where you're ending the year. And then, there's the whole issue of the California minimum wage for low wage healthcare workers. I know you said you wouldn't be spending for election spending, but I wonder what you're factoring in for that when you anticipate it to start to have an impact.

Thank you, A.J. Regarding labor for the year, we expect patient care cost growth per treatment to be between 2.5% and 3%. This can be roughly divided into half labor and half other expenses. For labor specifically, we anticipate a growth around 5% for the year, which includes impacts from California. A few months ago, we estimated a net impact of about $30 million to $40 million once everything is fully implemented, with projections of $20 million to $25 million for 2024. We have been able to roll this out more quickly than we initially thought, so I now expect the number to fall between $25 million and $30 million, which is included in our projections. We believe we can maintain patient care cost growth at only 2.5% to 3%, even with 5% growth in labor costs, thanks to savings from the annualization of the shift to Mircera and actions we've taken regarding clinic footprint. We also benefit from fixed cost leverage as we increase volume without adding new centers. Many of our other costs are fixed and do not vary with increased volume, and they are typically secured under long-term contracts. Thus, despite the pressure from a 5% increase in wages, we believe we can achieve that 2.5% to 3% growth.

Okay, that's great. Thanks a lot.

Hi. This is Ryan Langston on for Gary this evening. I think Dean touched on it earlier, but maybe just to go back, how is the higher sort of Medicare Advantage trend we saw in the back half of the year impacting the accruals, I guess, not only for '23, but sort of your guidance for '24? And Joel, can you remind us when you anticipate to have the final reconciliation with your plan partners? Thanks.

The final reconciliation will vary depending on the plan and can often take three or four quarters. This will ultimately be included in the prior period development of the IKC business. Regarding the impact of some costs on the broader Medicare Advantage population in the fourth quarter, I believe it's too early for us to determine if it will have an effect. However, I want to emphasize that our population is quite different from the broader population. Looking ahead to 2024, we are closely monitoring the situation to see how it unfolds, and this is factored into our projections.

Hi. Just two questions for me. Number one, we're 18 months since the Marietta ruling, your commercial mix and pricing seems pretty stable. So just wanted to know if you have any thoughts on what that ruling has meant over the last few years and whether you're expecting any changes? And then also just a clarification in terms of the fact that you don't need to spend on ballot initiative and obviously, your wages are going up in California. So, it seems like a reasonable truce with the SEIU. Is this something that we should expect to continue, or is it really just this election cycle? Or it would be obviously nice for you guys to be out of this two-year cycle of fighting ballot initiatives? Thanks.

Thank you, Lisa. Let's begin with Marietta. As we have mentioned before, we haven't seen many employer groups change benefits, which is excellent. It would be unfortunate for employers to deny employees with end-stage renal disease the option to choose. We remain very aware of this situation and continue to collaborate with the kidney community and disability groups, as it's a serious risk that we want to avoid. I often liken it to having a broken lock on the door of your house; even if nobody has broken in yet, it’s still important to fix it. The Supreme Court indicated this needed clarification, and the Champions, Congress, and others share that belief. We need to navigate this process. Additionally, our verification process for admissions has been beneficial, as illustrated by an employer group that initially implemented changes but ultimately reverted back when they discovered their employees lacked a network. This suggests that sometimes ideas are pursued without fully grasping the consequences, but in this instance, it resulted positively. We will keep focusing on this. Regarding your second question about the ballot, we appreciate that we are investing in ensuring our patients and teammates remain unaffected by a potentially harmful ballot process, and it requires significant funds to educate the wider state about this issue. We are pleased that our teammates will ultimately benefit from the money we are not spending on that. Concerning whether this is just for this election cycle, we have discussed two election cycles, which should provide a good opportunity to reassess our relationship with labor.

Great. Thanks for the clarification.

Thank you, Lisa.

Hi. This is Dean on again for Justin. My question is on center closings. And I'm sorry if you've touched on it already, but how much more is there to do here? And could you speak or can you parse out the impact to the P&L from the center closing, right, so revenue versus cost savings from lower fixed costs and efficiencies? Thank you.

Yeah. So, I appreciate the question. We are thinking that the year will have roughly 50 centers either closed or merged into other centers. And thinking about roughly in the ZIP code of 20 new centers, so net 30. As it relates to the P&L, I'm not sure I understood your question. Could you try it again?

More just the moving parts impact to the P&L, just could you speak to how you guys are impacted by center closing?

I think a good healthy way to think about it is you will have a little volume loss on patient choice. But when you strip all of that, these centers tend to be inefficient. And so, what you do is you consolidate the management and the leadership. Then, you have some savings on fixed expenses in particular, rent and medical director fees. And so, at the end of the day, that's where the savings come from, inefficient center with some fixed expenses that get eliminated.

Got it. Thank you so much.

Hi, guys. A few follow-ups here. To Joanna's question, what was the commercial mix in the quarter? And what are you seeing for 2024?

Commercial mix for the quarter was 10.9%, and we expect it to stay flattish.

And then free cash flow conversion was very strong in '23, the guidance is about 54% in '24. Is there anything changing within cash flow conversion? Or is this simply the DSOs that you got, what, 12 days in '23 which won't repeat in '24?

Yeah. You've got it right. '23 was a really impressive decline in DSOs. '24, the free cash flow conversion remains well above net income, and that's really driven by two things. One is just structurally our CapEx is lower than our depreciation and amortization. And second is share-based comp, stock-based comp. And those two things should persist, and that's why, call it, 125% of net income that we're driving in free cash flow for this year, we would expect to persist for some time.

Okay. Like any updates on AB 290?

There is a little update. There is some activity on it. But at the end of the day, maybe the best way to summarize it is that the judge hasn't had a final ruling, but gave some color. In that color, basically both parties won some points and both parties lost some points. And so therefore, the odds of an appeal are quite high when there is a final ruling. The next question is probably if you were to say what will be the financial impact we had guided to in the past, something in the $25 million to $40 million range. As less people are on the AKF, I think that number is likely to be lower, more like a $0 million to $25 million would be a good range.

Okay. Great. And then last question, I'm going to ask the center closure question differently. What was center capacity utilization at the end of, I guess, in the fourth quarter of '23? And what do you assume that goes in the fourth quarter of '24?

I'm sorry, Pito, did you say capacity utilization?

Yes. I mean just thinking about a combination of centers closing and patients coming back and overall center capacity utilization, where do you exit the year in '23? And where do you think that can get to by the end of '24?

Yeah. So, we're exiting the year at about 58%. And I would expect picking up 1 point, maybe a little bit more over the course of the year.

And just as a point of reference, like if you want to go back pre-COVID, I'm going to go back several years in the 2016 or so range, we would be in the 65% range. Just so you see the impact of all of this California conversation that we've had. California, because how difficult the operating environment is, is roughly in the 70% range because people aren't opening centers. So all these very expensive propositions and poor conduct have had an impact and the people do not want to open centers there.

And then just out of curiosity, if over a multi-year period to get back to 65% kind of, is this worth like 300 bps of G&A leverage here? And kind of if you can size up that for me, that would be wonderful.

Yeah. So, the leverage you'd see would be in our patient care costs, it's not in the G&A because there's a fixed cost associated with the clinic that's in the patient care cost. So, you'd see it there. I think the best I can do to help you with that math would be to think about our patient care cost per treatment number, right? So, running at $255 for 2023, that is roughly two-thirds variable, one-third fixed. So, if you imagine us growing that volume without building as many centers, and just to be clear, we would have to build some centers because even though capacity utilization is low, the capacity may not be exactly where in the country you need it to be. So, depending on what assumption you make there, recognizing that a third of that PCC per treatment is fixed, I think that will give you everything you need to do to do the math on what it could be worth.

Great. Thanks so much, guys.

Thank you, Pito.

Thank you. At this time, I'm showing no further questions.

Okay. Thank you, Michelle, and thank you all for your interest in DaVita. Just in summary, we had a strong close to the year and that, combined with our guidance for 2024, we are now back on a path to recuperate our pre-pandemic financial trajectory. We will continue to work hard to deliver strong results, innovate, and most importantly, provide great clinical care for our patients. Thank you all for joining the call. Be well.

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