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 Third 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 third 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 third 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 all for joining the call today. I'm grateful for the incredible effort of our frontline caregivers as we deliver outstanding care for our patients while also navigating recent hurricanes and related supply disruptions. Alongside these challenges, we continue to execute on operating efficiencies and innovate across the continuum of care. Today, I will cover our third quarter performance, which was in line with our expectations, provide an update on our supply chain, discuss our expectations for the upcoming CMS 2025 final rule and wrap up with some comments about next year. But first, we will start the call as we always do with a clinical highlight. This quarter, we'll use this opportunity to highlight the remarkable resilience our patients and teammates have demonstrated in the face of recent storms. Over the past month, millions of lives were impacted by the devastation caused by Hurricanes Helene and Milton. Despite hundreds of centers being in the path of these storms, most were open within days of the storm relenting and all but one is fully operational today, providing care in these communities. Many inspirational stories emerged from the dialysis community which came together to support those in need. In the immediate aftermath of these storms, our care teams from across the country rallied to support the regions affected. DaVita deployed generators, water tankers, over 20,000 gallons of fuel and high-water crews to conduct wellness checks and search for missing patients and teammates. Local leadership worked tirelessly to account for all patients and teammates and to coordinate transportation for urgent access to the dialysis care many patients needed to survive. Our Asheville Kidney Center opened on the Sunday immediately after Hurricane Helene, under generator power to provide care for patients from six nearby facilities. We and others in the kidney care community opened our doors to anyone needing treatment, including those who normally treat with other providers. I was proud to see the dialysis community come together in common support of patient care. Combined with the dedication of our local care teams, our successful emergency response has again underscored the importance of scaled resources and operating discipline. Although the storms have since passed, our efforts are ongoing to coordinate humanitarian needs, including food, housing and other assistance. We continue to work with the impacted communities to rebuild. Thank you all to the teammates who have gone above and beyond to care for one another and our patients. Beyond the community impact, key supply lines were disrupted by Hurricane Helene due to the closing of Baxter's North Cove facility. Baxter supplies us with the majority of our peritoneal dialysis or PD solution used for home PD therapy and the majority of our saline used during each in-center hemodialysis treatment. Baxter and other manufacturers have been able to provide sufficient supply for all our current PD patients to continue the treatment relatively uninterrupted. While we have had to temporarily suspend new patient starts on PD, thanks to the great efforts of our regulators, government officials and Baxter. We expect to resume new PD starts next month and we expect supply dynamics to normalize in the first quarter. Shifting to saline, Baxter is now able to supply us with approximately 60% of their pre-storm levels as they continue their work to bring the North Cove facility back online. Fortunately, we've been successful in securing alternative supply to ensure continuity of care and safety for our patients. Because these challenges occurred near the end of the quarter, the impact on Q3 financial results was minimal. For the fourth quarter, we estimate an impact of approximately $10 million to $20 million due to the high supply costs, lower PD patient starts and lower productivity from our home caregivers. This is now included within our 2024 adjusted operating income guidance range and we expect a portion of this quarterly impact will continue into 2025, depending on the duration of the supply challenges. I'll transition now to our expectations for the ESRD final rule from CMS, which we anticipate will be published shortly. While there are many aspects of the rule, we'll be primarily focused on two areas. First, the market basket update, including how CMS handles the new proposed wage index and the base rate. As a reminder, the proposed rule led to an approximate 2.1% increase. The second is the transition of oral-only drugs into the bundle beginning January 1. As a reminder, this is a statutory mandate by which oral-only drugs, which are mostly phosphate binders will transition from the Medicare drug benefit over to Medicare Part B. While CMS made clear it intends for these drugs to enter the bundle, we are waiting on information such as initial reimbursement and the treatment of unbillable items. We continue to believe this transition to the bundle will provide more patients with access to these important therapies. We recognize that some pharmaceutical manufacturers continue to advocate for the legislation to delay the implementation of this long-standing rule, but urge legislators to put patient access first. We're prepared to implement this transition in support of our patients. Transitioning to our third quarter performance, adjusted operating income was $535 million and adjusted earnings per share was $2.59. We view our third quarter results as fairly straightforward, consistent with how we have delivered value throughout this entire year. Although treatment volume growth remains a challenge, our business continues to demonstrate resilience as we mitigate the volume headwinds with margin expansion, including the momentum of our IKC and International results, all while continuing to invest in our future. Cash flow remains strong and we continue to deliver on our disciplined capital allocation strategy, returning capital to shareholders through share repurchases. Turning to the full year. We remain on track to deliver results consistent with our 2024 guidance range. We're reconfirming our 2024 adjusted operating income guidance of $1.91 billion to $2.01 billion. This forecast now includes the impact of Baxter supply shortage. It is a bit early to give specific guidance for 2025, although I know that many of you are already looking ahead to next year. Over the next few months, we'll learn more key factors including open enrollment, oral drugs in the bundle, integrated kidney care, and others. So we will provide formal 2025 guidance on the fourth quarter call consistent with our normal cadence. That said, some multiyear context may be helpful. After challenging years in 2021 and 2022 during the pandemic, we're now on track to deliver our second consecutive year of double-digit adjusted OI growth despite continuing volume and labor pressures. Looking forward, we expect to return to adjusted OI growth more consistent with our historic pre-pandemic multi-year guidance. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Thank you, Javier. For the quarter, adjusted operating income was $535 million, adjusted EPS was $2.59 and free cash flow was $555 million. Let me start with some details behind the Q3 results. Quarter-over-quarter treatment volume per day was flat. This was in line with our expectations and is the result of continued strong admissions offset by elevated mortality and slightly higher mistreatment rates resulting from inclement weather, namely Hurricane Beryl in July and Hurricane Helene in September. We remain confident that our full-year treatment volume growth will fall in the range of 0.5% to 1%. Revenue per treatment was up more than $4 versus the second quarter, in line with our expectations. Our revenue cycle performance is sustaining the strong RPT results we've seen throughout the year. We still expect full-year RPT growth to be within the range of 3.5% to 4%. Patient care cost per treatment increased $2 sequentially. This was primarily the result of continued labor cost pressure plus higher medical benefits expense in the quarter. G&A costs increased by $19 million quarter-over-quarter due to typical quarterly variability in expense timing. Depreciation and amortization increased by $11 million in Q3 versus Q2 as a result of higher center closure costs. International OI increased slightly in the quarter as a result of strong operational performance offset by $4 million of unfavorable foreign exchange impact. Adjusted operating results within Integrated Kidney Care, our value-based care segment increased $32 million sequentially due to lower costs in our special needs plans and timing of revenue recognition related to CKCC, the government value-based care demonstration program. As always, we recommend evaluating IKC performance on an annual basis given the propensity for quarterly variability. We still believe IKC will have a full-year operating loss of approximately $50 million. Below the OI line, third quarter debt expense was $37 million higher than in Q2. This was due to two main factors. First, our 2% interest rate caps expired at the end of June and our current caps have a weighted average rate of approximately 4.3% for the rest of 2024. This impact is in line with our expectations and consistent with our guidance from the beginning of the year. The second factor contributing to the increase this quarter was the additional debt raised in August. Following our second-quarter earnings call, we successfully completed two debt transactions totaling $2.1 billion. The proceeds from these deals were used in part to repay our Term Loan B maturing in 2026, now making our nearest debt maturity 2028. Leverage at the end of Q3 was 3.17 times EBITDA, a slight increase from Q2, while remaining below the midpoint of our target range of 3 times to 3.5 times EBITDA. In the third quarter, we repurchased 2.7 million shares and we have repurchased approximately 600,000 shares to date in October. Let me close out with some comments on what remains of 2024 and our thoughts as we look towards 2025. As Javier said, we are reaffirming our adjusted OI guidance range of $1.91 billion to $2.01 billion. Despite the anticipated hurricane-related OI impact in the fourth quarter, we expect continuing operating momentum to offset the headwind. We are also maintaining our adjusted EPS range of $9.25 to $10.05 and our free cash flow range of $950 million to $1.2 billion. Looking forward to 2025, as Javier mentioned, it is too early to give formal guidance. Regarding some of the components of earnings, I would like to call out a few unique potential headwinds and tailwinds outside of our normal dynamics. For the headwinds, first, we expect mortality will remain elevated in 2025. Second, we expect the impact of the Baxter facility closure will continue in 2025. Third, the full-year impact of the expiration of our 2% interest rate caps will negatively impact EPS. For the tailwinds, first is the declining center closure costs in 2025 that we called out last quarter. Second is the positive OI impact from our international business driven by our Latin America acquisitions. And finally, we expect that the inclusion of orals in the bundle would be a tailwind if the pharma companies are unable to get legislation passed to delay the inclusion. Lastly, regarding RPT and PCC growth, we expect both to be elevated relative to pre-COVID levels. We will give an update on all these factors along with more quantitative guidance on the Q4 earnings call. That concludes my prepared remarks for today.

Thank you, sir. Our first caller is Andrew Mok with Barclays. You may go ahead, sir.

Hi, good afternoon. It sounded like there was a fair amount of operational changes to help navigate the hurricanes, but most of that would be felt in Q4. So wanted to better understand, one, how much of an impact hurricanes had on 3Q treatment volumes, if any? And then Joel, I think I heard you reiterate full-year treatment growth between 50 basis points to 100 basis points of growth, which would imply a fairly significant acceleration in Q4 against the presumably greater impact from hurricanes. So I just wanted to understand how we should think through that and square those comments. Thanks.

Yes, thanks, Andrew. So for Q3, I'd call out the impact from hurricanes as about 10 basis points and that shows up in the mistreatment rate. In Q4, I don't think this does much to change how we were thinking about Q4 before hurricanes.

So, are the hurricanes not expected to affect Q4 volumes?

It would be significantly less than the 10 basis points from what we've observed so far. The quarter is not over, so there could be additional challenges, but so far, it would be less than the 10 basis points.

Got it. Okay. And then appreciate the early comments on 2025 headwinds and tailwinds. Can you help us understand the order of magnitude of some of those? And hoping specifically you could comment on the potential financial impact of the inclusion of phosphate binders that could have on next year's results. Thanks.

Well, let me start with the end on that on the phosphate binders because we really tried quite a lot to give you a useful range. And unfortunately, we can't and it's just because there's not enough information to give you a useful number. So let me just give you an explanation of the underlying dynamics, so everybody can be on the same page. So first of all, there is a class of drugs, phosphate binders that will be the biggest part of the orals in the bundle. The first thing is we do not know because the rule hasn't come out, although we expect to hear shortly what the reimbursement will be by the government. Secondly, there are four products within the phosphate binders and we don't know the mix of those products. And the pricing is quite different between those four products between branded and generic. And within that, the branded have had restrictions and authorizations and other things that once those go away, we don't know what's going to happen with the mix. And then the last thing is the volume. There's about 10% to 15% of our patients that don't have Medicare Part D and weren't participating in these orals in the bundle and that's why we think that this is so good for access for those patients. And so, we don't know what will happen with that volume. So, if you start to play with the variables, they start to get quite wide because, in essence, the volume could tighten up, but then the reimbursement has a wide range. And then the one that really throws a lot of dynamics into it is the pricing and the mix within that pricing. So unfortunately, we're going to have to wait till next quarter to give you a better number, better sense of that.

Yes. And Andrew, to follow up on the first part of your question. So I called out five factors, three tailwinds, two headwinds that would impact operating income. There was one additional, the interest expense, but that only hits EPS. Like the orals in the bundle, it is hard, there's a lot of swing factors that could apply to each of these. So I'm not going to quantify them individually. That said, I think a reasonable starting point for modeling would be that the headwinds and the tailwinds will offset each other at the OI line.

Got it. So when we think about the referenced target growth, which I think is 3% to 7% pre-COVID, that's inclusive of all those headwinds and tailwinds. That's how we should think about it?

I believe that's accurate.

Thanks. Hi, everybody. I believe I know the answer to this clarification, but I want to ensure it's on the record. The $10 million to $20 million from hurricane impact is related to EBITDA, not revenue. Regarding treatment patterns, last quarter you mentioned that new to therapy returned to pre-pandemic levels. It appears to have remained positive this quarter. Is it showing any strength or is it about the same? Also, are the elevated mistreatments solely due to the hurricane impact or are there other factors at play? Lastly, concerning mortality, it seems like you're now projecting that into 2025. Is this the first time you’re addressing '25 or is there something new prompting you to mention '25 in relation to heightened mortality rates?

Yes. Let me get these in order. First, regarding the Baxter impact in Q4, it will mainly affect EBITDA. There is a possibility of a slight impact on revenue if we lose some patients to another provider offering peritoneal dialysis, but I would say the majority will not be from revenue changes. Concerning the three factors influencing volume, there is no new information on admissions; they are consistent with what we have discussed before. The mistreatment rate is not solely due to storms; historically, it averages around 6% throughout the year, though it tends to be higher in Q1 and Q4, with Q2 and Q3 lower. The increase we observed from the storms was modest and not indicative of the overall mistreatment rate. Regarding mortality, there is no new information that alters our perspective on 2025. The persistent elevated mortality rates have yet to return to pre-COVID levels, and this ongoing trend slightly influences our outlook. However, nothing this quarter has significantly changed our views for next year.

Okay, thanks a lot.

Hey, good afternoon. So back on that non-acquired treatment growth number here. There's obviously a lot of focus here. Can you quantify the number of new patients you added in the first quarter, second quarter and third quarter? Any color on how many you lost to transplants sort of this year? Any color on those patients moving to other centers or geographies? I'm just looking for any other reasons besides mortality as I'm trying to tie out the treatment growth they get, they're looking at showing with a delayed USRDS quarterly data on incidence and prevalence. Thank you.

Thank you, Pito. Let me just grab it at the high level because there is sort of, let's call it, a restless energy of trying to figure out what's happening with volume. But the reality is that it's just as straightforward as elevated mortality. That when you look at the admit growth, it is healthy. When you look at the mix, it is healthy. When you look at transplants, they are constant. It moves a little, but it doesn't really move the needle at all. It goes up and down a bit. Our share of transplants has continued to be constant. So at the end of the day, we could have mistreatments move a little here and there because of storms or other things that are seasonal, but the bulk of it is elevated mortality.

Yes, and let me just…

Sorry, go ahead.

Let me just pop on to the first question which was about the NAG in the quarter and let me just give you a little bit on that. Quarterly NAG has some volatility in it. If you're trying to do what I think you're trying to do, which is trying to piece out the volume trends which we're all trying to figure out. I don't think looking at quarter-over-quarter NAG is a great number for that. Within that number is factors including this treatment rate a lot about timing of census during the quarter. So it's down 60 bps quarter over quarter. I don't think that says anything material about where the volume overall is trending.

Okay, fair enough. I have a follow-up regarding IKC. Typically, you reconcile with your payers in the third quarter. This quarter, payers have experienced some volatility. I’m curious how that reconciliation went with the payers for 2023 during the third quarter.

Yes. So we are on track for the year. I would say, I would encourage you and everyone as we always have, let's look at IKC on an annual basis rather than a quarterly basis. We're reaffirming our negative $50 million for the year which has been our number all year long. And I would say the volatility that we read about in the payer market largely has not impacted us.

Okay. But don't you do your big annual adjustments from the previous year during the third quarter? Is that the case?

We do them in the third quarter and the fourth quarter and they're going as planned.

Okay. Okay, fair enough. Okay. And then last question here. Just looking at commercial and MA price increases for '25 or needs tracking in line with historical levels. Thank you.

Yes, there's nothing interesting to call out. Going as expected.

Hi. Just on volume growth, given the continued decline, how should we think about volume growth for the year? I think previously you were at 0.5% to 1%. And any thoughts into 2025. And also, in IKC, can you give us any indication in terms of how your reimbursement is split between capitated shared savings? That would be helpful. Thanks.

Yes, starting on the volume, for 2024, we're still thinking 50 bps to 100 bps of growth. So no change there. On the IKC thing, I think we'll have to get back to you on that one. Did I miss a question, Lisa?

Hi, thank you so much for taking the question here. So I guess I just follow up on the last question here around volumes, right? So you expect to still grow slightly for the year? And then how should we think about, I guess, next year and your kind of ultimate target of growing 2% on volumes same-store?

Yes. For next year, as Javier mentioned, the main focus is on mortality and its projections. To elaborate, if we use the middle of our range for this year, which is 75 basis points of growth, you should consider that there is a slight headwind on treatment days for next year, roughly 25 basis points. Additionally, there's one headwind and one tailwind to consider. The headwind relates to clinic closures, which we identified last quarter as impacting volume for the year. As these closures fade into our history, we anticipate some tailwind from that. We might also face a headwind next year due to the PD and Baxter situation. Some patients looking to initiate PD might choose other providers instead, as we cannot accommodate all new PD patients this quarter. I see these two elements, the clinic closures and the Baxter PD issue, as offsetting. Therefore, we'll start next year with a base of this year's 75 basis points, subtracting 25 basis points from the day mix, leading us to a starting point of 50 basis points. Returning to Javier's earlier point, it's up to the team to assess what they expect for mortality next year compared to this year, and mistreatment rates could also add variability year-over-year. This is the framework I suggest for considering next year's outlook.

Okay, that's very helpful. Thanks for explaining the day's impact. I have another question. First, could you follow up on the PD patients? What is your home dialysis mix? And within that, what percentage is PD versus HD home?

So our mix in PD hasn't changed because it happened by the end of the quarter and that's in the mid 15 is the range. HHD is like a 2% or so mix. And I would take this moment just to thank Baxter and the government. They've been amazing, working literally around the clock to make sure that all of our patients get their supply. And so, as we look at what they've told us, we will obviously see a little deterioration in that through the fourth quarter, but we will normalize by the first quarter and try to get all our patients back on track.

Yes. And the one thing I'd add, Joanna, is of those PD patients, remember, we expect to keep the vast majority of them. The new patients, many of them, about half of them are already dialyzing in our clinics and we think it won't be too much of an inconvenience for them to wait a little bit before they move to PD. Those new to dialysis patients who are going to go on PD have options, including postponing dialysis, assuming they have residual renal function, they could go in center and then transition to PD. And then there could be some who decide that they don't want to wait and will go to another provider. So what we would expect you to see is a decline, a potentially significant decline in our home mix over the next quarter, but the number of patients that actually leave DaVita or don't join DaVita, we don't think will be that high.

That's very helpful. I have another question regarding next year's outlook. Following your comment about expecting RPT growth to remain elevated next year, does that imply that the 3% to 3.5% to 4% guidance you're providing for this year is what we should expect next year, or should we anticipate something slightly lower or higher? How should we approach this? Thank you.

It's too early to guide quantitatively, but I would think lower than that.

Hi, thank you. In the release, I think it said that 3Q advocacy costs had increased. But I think in the second quarter, those were down year-over-year. Can you just kind of give us a sense on what those are related to?

We've got several things going on through the advocacy costs, but a couple of the main drivers are California and the elections there. And then, of course, what we're doing with the restoration of the patients in Washington, D.C. And then the last one would be the orals in the bundle because as you might have heard, there's some campaigns from pharmaceutical companies that are trying to delay orals in the bundle. And so, we're having to mobilize our resources in Washington, D.C. to make sure people are educated as to the good that orals in the bundle can do.

Got it. And then just last for me. I think on mistreatment second quarter in a row just elevated from weather, assuming we don't have any more, I guess, hurricanes, other weather events, et cetera, would we expect those to revert back to sort of normalized historical levels? Thanks.

The mistreatment rate remains elevated compared to pre-COVID levels. We anticipate it will gradually decrease over time, assuming no additional storms occur. However, it's important to note that there is a seasonal increase in Q4, so even without further storms, we would still expect the mistreatment rate to rise in that quarter.

Thanks. Good evening. First question, just going back to your headwinds and tailwinds. I didn't hear you mention RPT annualizing the strength of 2024 annualizing next year. Just my numbers, I have you going from 2.5% to 3% to 3.5% before, right? So you guided up by 1%. A lot of that ramps in the second half of the year. So I would have thought the annualization of that strong second-half '24 growth would be a pretty good tailwind to 2025. Any comment on that? Am I missing something?

Yes, Justin, your math is all right and we stand by our comments. We had a lot of debates, as you can imagine about what to call out as unique headwinds and tailwinds versus non-unique headwinds and tailwinds. So I think we stand by that and that's why we called out RPT is going to be higher than normal next year. We just chose not to put it in the bucket of headwinds and tailwinds we called out.

Hi, thanks. Thanks for letting me back in. I just wanted to follow up on G&A. It looks like that was up 7% sequentially and 10% year over year. What were the drivers of that in the quarter?

Yes, in G&A, we have a lot going on because we're trying to really go through the entire continuum of care and unite it, all the transitions of care. But the big bulk of it is going into IT is going in. And the second part is, of course, you've got wages in there. And the third part would be the reimbursement operations investment that rendered the increase in revenue per treatment. So those are the explain the vast majority of the increase.

Got it. Okay. And then maybe on the follow-up to the commercial mix. How much is the ACA exchange mix within the commercial mix within that, 11%? And how much growth are you seeing on the ACA exchanges this year? Thanks.

So just to make sure I've got the right language, I think on the QHPs. So, on the QHPs, the country's running around 7% to 8% mix and our population is running around 3% mix. And so we're underrepresented because in QHPs, if one of our patients picks Medicare, they are out of the QHP. So that's why we're underrepresented.

Got it. And can you give us a sense of how much growth you've seen in that payer class? Thanks.

We're growing exactly as the market grows. So that has been literally the lines are on top of each other.

Hey, guys. It's a quick follow-up here for 2025. Will depreciation be another tailwind for next year?

I'm sorry, I didn't hear that. Pito, can you say that again?

Yes, you bet. Will depreciation be another tailwind for next year EPS?

It'll be flat to down. Well, the answer is yes. Part of it comes from the center closure number coming down, but excluding that, it'll be flat to down.

Okay. Doing some quick calculations, the absence of a PD impacts mortality negatively. However, Baxter is quickly ramping up their facilities, which should be resolved in the first part of the first quarter. Regarding Justin's questions about interest rate caps, that's straightforward math. In terms of center closures internationally, it also comes down to numbers. Depending on how the bundle performs, and considering both the headwinds and tailwinds, could it be possible that this might be more of a tailwind than a headwind? We just want to see how everything shakes out with the bundle. Is that a reasonable way to think about it?

I think there's probably a little bit more variability in a bunch of these lines than you're giving credit to. So, orals could be better, it could be worse. But all of these probably have a decent amount of play in them. So I think it could go either way, a net headwind or a net tailwind.

Thank you. At this time, I am showing no further questions. I'll turn the call back over to you for closing comments.

Okay, thank you, Michelle. And thank you all for your interest in DaVita. We'll end the call where we started with appreciation for the hard work of our DaVita Care teams on behalf of our patients. Although we will incur some additional expenses related to recent storms, we expect to absorb these costs within the continued strong performance of our underlying business. We've covered a lot on volume and as we said, while mortality remains elevated, our investments in people and infrastructure and capabilities has returned our operating income to the pre-pandemic trajectory. Thank you for your continued interest and be well.

Thank you. This concludes today's conference call. You may go ahead…