Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to DaVita's Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. 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 may 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 all for joining our call today. On behalf of all the teammates who provide lifesaving care to our patients, I am grateful for the opportunity to report another positive quarter for DaVita. We continue to enhance our clinical capabilities while optimizing our revenue, operations, and cost structure. Today, I will cover the details of our second quarter performance, comment on the CMS 2025 proposal, and wrap up with our outlook for the remainder of the year. But before I dive in, let me begin, as we always do, with a clinical highlight. As you know, every day, tens of thousands of DaVita caregivers work to give life to our patients. Nurses play a central role within our interdisciplinary care teams, serving as our patient's caregiver, sounding board, and familiar face they see over 100 times per year. Unfortunately, thousands of nurses left the profession during the pandemic. As a result, the healthcare system is facing a critical nursing shortage. I am proud of the programs and initiatives we've implemented to support the next generation of dialysis nurses. I'll highlight three examples. First, we're collaborating with leading nursing universities on tailored nephrology-specific nursing curriculum. We're also providing financial assistance to remove barriers to entry for prospective nursing students. Second, we've created a clinical internship program immersing students with hands-on experience in DaVita Dialysis Centers. We have 700 clinical interns this year, with more than 2000 individuals participating since the inception of the program. Third, we've built a nurse residency program to support new nurses from student to practicing registered nurse. Our goal is to help hundreds of nurses in the program feel more confident during their first year of practice, which, among other things, can lead to better patient safety. We're excited to do our part to alleviate some of the pressures of the nursing workforce and help ensure access to care is not a barrier. Transitioning to the second quarter performance, adjusted operating income was $506 million and adjusted earnings per share was $2.59. This outcome was ahead of our expectations for the quarter, primarily driven by favorability in patient care costs and continued strength in revenue per treatment or RPT. Offsetting this favorability was volume growth that was lower than expected. This was primarily due to elevated mistreatments related to spring storms, along with lower than expected census gain. Our second quarter adjusted results also included approximately $15 million of center closure costs. In prior periods, we excluded these types of costs from adjusted operating income as non-GAAP adjustments. We'll expand on this point throughout the call today. Let me give some additional detail on RPT growth, since it continues to contribute to our strong performance and supports our 2024 guidance increase. There are many variables in RPT, but I'll highlight two primary drivers. The first and largest component is continuous improvement in our collection capabilities. This is a multiyear effort, so let me elaborate a bit more on this one. The complexity of revenue operations has increased over the last few years. Billing and collecting from health plans now more frequently involves new data and process requirements. These challenges include navigating prior authorization, payer-specific billing requirements, numerous online payer portals, and separately billable items. These layers are exacerbated by a growing list of participating health plans due to the growth of Medicare Advantage and exchanges, as well as our patients more frequently updating their coverage choices. In response, we made a series of targeted investments in technology and teammates to modernize and retain top-class capabilities. These investments focus on greater automation of routine tasks, increasing the rate of electronic claim submission, and more frequent benefit insurance verification, among other enhancements. This has improved our overall collection rate and enabled us to collect on claims more quickly, reducing days sales outstanding. With more comfort and experience with these capabilities over the past year, we believe these improvements are sustainable and will continue into 2025 and beyond. Second, our health plan negotiations have resulted in modestly higher rate increases as a result of the higher inflationary environment over the past few years. Despite these rate increases, we are still not recouping the full impact of high inflation. We continue our track record of innovation and discipline within our cost structure to bridge this gap. The combination of these two factors, along with continued improvement in payer mix, increases our expectations for RPT growth for the year. In the first quarter, we communicated our expectation to land on the top end of our range of 2.5% to 3% RPT growth in 2024. With continued progress, we now expect 2024 RPT growth within a range of 3.5% to 4%. Staying on the topic of revenue, CMS recently released its ESRD Proposed Rule to update the prospective payment system for 2025. The CMS expected rate increase of approximately 2.1% was broadly in line with our internal expectations. The methodology has become more complex with the introduction of a new wage index, and while we appreciate CMS's effort to innovate, the proposal falls short of reflecting the industry's true cost inflation. We will provide feedback to CMS in hope of improving this methodology in the final rule and in the years ahead. Absent further edits, the proposed rule would continue to put pressure on the system. Additionally, with the proposed rule, CMS reconfirmed its intention to include oral-only drugs within the bundle as scheduled beginning next year and identified positive policy changes to aid with this transition. DaVita supports CMS's position and, given our experience with calcimimetics, we strongly believe this will provide more patients with access to these drugs since many of our patients do not have Part D coverage. We understand that there are entities arguing for Congress to delay the implementation with stated concern around patient access and the operational ability for providers to comply. DaVita is well prepared and investing the necessary resources to implement this transition in support of our patients. Turning to full-year guidance, we are raising our 2024 adjusted operating income guidance while incorporating a change in the treatment of our center closure expenses. We are raising 2024 adjusted operating income guidance from the prior range of $1.875 billion to $1.975 billion to a new range of $1.91 billion to $2.01 billion. This represents a $35 million increase at the midpoint of the range. This is the result of a $95 million increase in expected operating performance offset by now including approximately $60 million of full-year center closure costs that we previously would have excluded from adjusted operating income as a non-GAAP adjustment. Joel will provide more detail about this change in our non-GAAP reporting presentation. This guidance reflects sustained momentum in our key operating metrics, including the revenue per treatment progress we highlighted today and our expectations for a strong performance in the back half of the year. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Thanks, Javier. Our second quarter adjusted operating income was $506 million, adjusted EPS was $2.59, and free cash flow was $654 million. Before I dive into the specifics on our performance for the quarter, let me add some detail to the change in reporting presentation of our non-GAAP results that Javier mentioned. As a result of a recent common letter from the SEC to DaVita, we will no longer treat center closure costs as an adjustment in our non-GAAP presentations. These center closure costs impact our patient care cost, G&A, and depreciation and amortization expense lines. Our adjusted OI and adjusted EPS for Q2 now include center closure costs, and our updated full-year 2024 guidance shared today follows the same methodology. To help with comparisons to prior periods, we are also now showing prior period results under the new methodology. In aggregate, these costs represent approximately $15 million per quarter in 2024 for a total of roughly $60 million expected this year. For comparison, center closure costs in 2023 were approximately $100 million. For 2025, we are forecasting $20 million to $30 million of center closure costs. These presentation changes have no impact on how we manage our business nor our overall profitability, cash flow, or long-term expectations. With that, let me break down each of the components of our Q2 performance starting with U.S. dialysis and specifically treatment volume. Sequentially, treatments per day were up 1.1% in Q2 versus Q1. This increase was primarily due to census gains in the quarter and a seasonal improvement in mistreatment rate. Compared to the same period last year, second quarter treatments per day were up 50 basis points.

Second, U.S. net census gains were weaker than expected. Although new to dialysis admits grew for the sixth consecutive quarter, mortality was above our forecast. We expect both of these factors to negatively impact the second half of the year. For the full year, we now expect treatment volume growth will likely be between 0.5% and 1%. Revenue per treatment was up approximately $6 sequentially. This increase is primarily due to typical seasonality from higher patient coinsurance and deductibles in Q1. As Javier outlined, we now anticipate full-year revenue per treatment growth of 3.5% to 4% for 2024. Patient care costs per treatment were approximately flat quarter-over-quarter. Typical seasonal declines from items like higher payroll taxes in Q1 offset higher health benefit costs and other inflationary increases in the second quarter. Depreciation and amortization declined $12 million in Q2 versus Q1, partially as a result of a decline in center closure costs. Center closure costs in D&A were approximately $50 million in 2023, compared to $10 million in 2024. Since these costs are now included in our adjusted D&A numbers, we now expect a year-over-year adjusted D&A decline of approximately $40 million to $50 million. For Integrated Kidney Care or IKC, our value-based care business, operating income declined $8 million sequentially. As we have seen in the past, we expect results in the second half of the year to be significantly stronger than the first half as a result of the timing of revenue recognition. International operating income was flat quarter-over-quarter. We have closed our acquisitions in Ecuador and Chile and expect our acquisitions in Colombia to close in Q3 and in Brazil by year-end. Moving now to capital structure, in the second quarter, we repurchased 2.7 million shares, and to date in Q3, we have repurchased an additional 1.1 million shares. Leverage at the end of Q2 was 3.1 times EBITDA. This was down from three months ago due to growth in trailing 12-month EBITDA and a reduction of net debt by over $200 million. As of the end of Q2, we held approximately $400 million of funding from Change Healthcare's parent UnitedHealth Group, related to the cyber event earlier this year. As of today, that balance currently sits at approximately $300 million, and we expect additional repayment to align with successful collections on impacted claims. We continue to collect on Change Healthcare impacted claims, and U.S. dialysis days sales outstanding have declined by 14 days quarter-over-quarter. As always, we are assessing opportunities to optimize our capital structure, which includes looking to address the remaining balance of our term loan B maturing in 2026. We continue to target leverage within our range of 3 to 3.5 times. To this end, we are also assessing opportunities to increase our debt to ensure sufficient capacity to maintain leverage within this range. To conclude, let me share some additional detail about our updated adjusted operating income and adjusted EPS guidance for 2024. As Javier said, our new adjusted OI guidance range is $1.91 billion to $2.01 billion. There are several moving pieces within this number, so let me give you the key puts and takes. First, we are including expenses related to center closure costs in this adjusted OI range. This is an approximate $60 million of additional operating expenses that were previously not in our adjusted OI guidance. To reiterate my earlier comments, this is a change in the presentation of our adjusted results and does not impact our GAAP financials or cash flows. Second, additional RPT growth of approximately 50 to 100 basis points relative to our previous expectations represents an increase of approximately $85 million at the midpoint. Third, the range reflects improved expectations for patient care costs, mostly related to labor and productivity improvements, which is mostly offset by our revised volume expectations for the full year. Altogether, these changes represent an approximate $35 million increase in our adjusted operating income guidance at the midpoint of the range. We are also updating our 2024 adjusted earnings per share guidance to a range of $9.25 to $10.05 primarily due to the increase in adjusted OI. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

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

Hey. Good afternoon, guys. Nice quarter, and thanks for taking the questions. On the NAG, can you give us some color on what you saw through the quarter and what you saw in July? Just looking at the high end of your revised guidance, you get to grow like 1.5%, which is a big step up versus what you saw in the first half of the year. So just want to kind of see what you guys are seeing to give you confidence in the high end of that.

Sure. Thanks, Pito. So through the quarter, what we really saw was mistreatments were elevated relative to what we expected, and our census growth was below expectations. The pattern there has continued, as new dialysis admits remain strong, and the growth there is consistent with what we had seen pre-COVID, and mortality remains elevated. In terms of the back half of the year, I'd point out one thing that gives us confidence, which is we've got an extra treatment day in the second half of the year relative to the second half of the year last year. So that in and of itself is about 30 basis points of additional growth. Other than that, we really haven't modeled in a whole lot of changes for the back half of the year. We haven't built in much census growth, and we're expecting the mistreatment rate to continue to be challenging. So if you really think about the back half of the year, year-over-year growth, it's really about treatment days rather than any change in any of the underlying assumptions.

Okay, fair enough. And you gave some of the moving parts, but if we exclude the $60 million of closure costs, you raised guidance by $95 million. Can you just bridge us the components of sort of how you raised guidance by $95 million versus the previous guidance? I just want to understand that as I think about sort of 2025. Thanks.

Sure. So I'd start with revenue per treatment, where we moved the guide from what essentially last quarter was 3% now to 3.5% to 4%. So at the midpoint, 75 basis points is worth roughly $85 million. So that's number one. And that's coming from a combination of continued success on the revenue operations, strength in contracting that we've seen through the year so far, and then a little bit of mix improvement, so that's the dominant factor and worth $85 million. Contributing to that as well is some improvement we're seeing in labor costs. I'd highlight two things there. First, some of the premium pay, whether it's overtime or spot bonuses, have come down. And second, we are seeing a little bit better productivity in the year than expected. Those two things combined are worth about $30 million. And offsetting that is about $20 million of OI headwind from the lower volume that we've called out. So plus $85 million from RPT, plus $30 million from labor, minus $20 million from volume, that will get you to a $95 million increase before taking into account the $60 million change in center closure cost.

Great. Thanks so much.

Thanks. Let me just follow up on Pito's question there. You said $20 million from lower volume?

That's right, Justin.

And you took down volume by what, 75 basis points at the midpoint?

Yes. I would say that when we were considering this, we probably did not anticipate reaching the midpoint last quarter. Therefore, we would need to start with a slightly lower volume number to connect to that $20 million.

So maybe it's 50 basis points. I'm just trying to think about the relativity here volume to OI?

Yes, you're in the right ballpark, yes.

So in your mind, 50 basis points of volume is about $20 million of OI on an annual basis?

Yes. If you had asked me, just stand alone, what's 50 basis points of volume worth? I probably would have told you $50 million to $60 million. So maybe use a slightly lower number.

It's not the same thing.

Oh, I'm sorry, I'm sorry. Correcting me, 1% is worth 50 to 60. So you're in the right ballpark there.

Okay. And then on center closures, did you say $20 million or $30 million for next year?

Yes for 2025, we think the number will be in that range.

Okay.

And just to be clear about that, when you're modeling center closure costs, it's important to realize that not all the costs come right when we close a clinic. Some of them, like lease acceleration costs for example, can have a delay from when we close the clinic. So I think by next year, our clinic closure rate should actually be back to what it was at pre-COVID levels, call it 20 clinics a year, somewhere in that range. But the costs we're calling out will be a holdover from what we've seen. Some of them will be a holdover from the clinic closures in 2024.

Got it. That's what I was trying to get to. So you think you'll be back to, like, 2020 center closures next year?

Yes, something like that. This year, I think last quarter we had called out 50 for the year. We're probably running light. And I would guess at the end of the year, we'll probably have closed only about 40 for the year and getting back to a more normal pace for next year.

Okay. And then just a question before I jump off on revenue for treatment. One, I think you said in the release you had some offsets to pricing from mix pressure. What's mix in the second quarter versus Q1?

Mix was down a drop in Q2, but it's hanging right around 11%. It's right where it was at the beginning of the year. Our commercial mix at the end of Q1, which I don't think we disclosed, was a little bit harder to estimate because of some of the changes, some of the challenges with Change Healthcare as some of the claims were delayed. But I don't think there has been a lot of movement on commercial mix between Q1 and Q2 that would have any real financial impact.

And then lastly on the exchanges, so I assume that you were at 10.9 to end the year, if I remember the fourth quarter report. But let's say you're at 11. How much of that's coming from exchanges today and how much of that came from exchanges let's say pre-COVID?

Yes, the number is up about 200 basis points.

Hi. Good evening, thank you. Just a couple from me. On the lower census growth, maybe I missed it, but is that isolated to any particular geographies, or maybe are there just certain geographies that are maybe performing below kind of the average and maybe pulling that down a little bit?

No, Ryan, we're pretty much seeing that across the board.

Got it. And then just to clarify, maybe on the RPT improvement, sounds like obviously you're still working through that, and some of that will annualize into 2025. Is it fair to assume that may end up just from a year-on-year, maybe closer to 3.5% to 4%? You're guiding this year as opposed to maybe the 2.5% to 3%?

Yes. It's early for guidance, but I would not go to 3.5% to 4% for next year. I think that would be a real stretch to perform at this level for another year.

Great, thanks. Maybe just to follow up on that point, do you just have, like, the percent of revenue that comes from the exchanges year-to-date so far?

Yes, I'm not sure we're going to, I don't think we're going to give that number, Kevin.

And then you made a comment in the prepared remarks about leverage, and I think you said that you were looking to add debt to ensure capacity would be in this range. Are you saying that you would look to potentially lever up to deploy more capital, I guess, on share repurchase, or were you just talking about something else?

Yes, so I wouldn't use the phrase lever up, because what we're really targeting here is maintaining the leverage range of three to 3.5 times. And if our goal was to get our leverage range or our leverage multiple above that, that's what I would characterize as levering up. I think the reality is, as our EBITDA grows, in order to maintain that leverage range of three to 3.5 times, recognizing we're at the low end of that range right now, we need more debt capacity, and it's just using the middle of the number. As EBITDA goes up, you multiply it by 3.25, and that's the capacity you need. So we're thinking about how much debt capacity, do we need to make sure we can stay in that range as EBITDA grows.

Okay. And in theory, that capacity would be used on share repurchase. Is that, or is there anything else?

I mean, it would be used under our capital allocation philosophy. So the first thing we would love to do would be to invest it in growth, recognizing it needs to be capital efficient growth, and hit our return thresholds. Barring that, share repurchases would certainly be at the top of the list of how we would use excess capacity to maintain our leverage level.

Hi. Good evening, thank you. Just a couple from me. On the lower census growth, maybe I missed it, but is that isolated to any particular geographies?

No, Ryan, we're pretty much seeing that across the board.

Okay, so lever up just to clarify, you can't use that phrase, but in theory, you need to find the ability to raise more debt to maintain your targeted leverage?

Well, we're really trying to maintain our target leverage. So you're at a point where if you want to maintain that range, you may need to add some debt to do that.

Correct.

Got it. And is that how you think about acquisitions at this point?

Yes, I think we would prefer to utilize our balance sheet that we would have to keep in mind our overall leverage targets and those types of things.

Thanks for that clarification.

Thank you.

Okay. And just before we take the next question, I just wanted to clarify, that's 200 basis points of revenue, not 200 basis points of mix increase that came from the exchanges. So just wanted to make sure that was clear.

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