Earnings Call Transcript - DVA Q3 2025

Operator, Operator

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2025 Earnings Call. Mr. Eliason, you may begin your conference, sir.

Nic Eliason, Group Vice President of Investor Relations

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.

Javier Rodriguez, CEO

Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. We are accustomed to operating in a dynamic healthcare environment, and today is no different. The government shutdown is on its 29th day, and key healthcare policy decisions remain in flux. And while these developments have real implications, we remain focused on what matters most, providing excellent care. This focus is not only in the best interest of our patients, but continues to generate consistent financial results. Our third quarter performance was in line with our expectations and keeps us on track to achieve our full year guidance. These results also enable continued investment to improve the lives of our patients and enhance the experience of our teammates and physicians. Today, I will share the highlights of our third quarter performance, update our guidance for the full year, and walk through a few swing factors for 2026. But first, as always, we will begin with our clinical highlights. Today, I will feature our research team, known as DaVita Clinical Research, or DCR. Powered by a dedicated team of medical directors and data scientists, in fact, by one of the largest patient data sources in the country, DCR has been instrumental in advancing kidney care research. A few metrics that put this team's contributions in perspective. DCR maintains more than 250 research sites in the United States and has conducted more than 500 clinical trials. This team of researchers has helped achieve FDA approval for dozens of ESKD drugs, and DCR research and data has fueled more than 700 clinical publications. With a drive toward innovation and patient safety, DCR has helped to develop new therapies, improve outcomes, and generate benefits to patients and physicians across the kidney care community. This long-standing commitment underscores our position as a leader in clinical research. Most recently, DCR is evaluating outcomes of middle molecule clearance using middle cut-off dialyzers, which will provide critical U.S. specific data and has the potential to represent a significant step in advancing patient outcomes. This is just the latest example of how DaVita is advancing the development of new therapies and actively shaping the future of kidney care. Transitioning now to our financial performance. We delivered the third quarter adjusted operating income of $517 million and adjusted earnings per share of $2.51. These results were consistent with our internal expectations. Joel will provide detail on the quarter, but at the highest level, we continue to manage patient care costs effectively while the U.S. treatment volume was down approximately 1.5% year-over-year. Before I cover full year guidance, let me provide a bit of detail on one of the ongoing strategic priorities: investing in technology infrastructure. As a reminder, last year, we completed the rollout of our next-generation clinical platform. We continue to enhance that system and are making other long-term investments to replace our scheduling system and further upgrade our revenue operations technology. Simultaneously, we're adopting AI solutions across our platform. This includes internally developed use cases, opportunities with commercially viable applications, and working with external providers. While these projects result in higher G&A growth, we believe that these investments are critical to advancing clinical care, improving the experience of our patients and teammates, and driving long-term cost efficiencies. Let me now transition to our full year outlook. We're reaffirming the midpoint of our guidance ranges for adjusted operating income and adjusted earnings per share, while narrowing each range. We now anticipate full year adjusted operating income between $2.035 billion and $2.135 billion and adjusted earnings per share of $10.35 to $11.15. I recognize that many of you are already looking ahead to 2026. While it's too early to provide formal guidance, let me walk through several key variables that will influence our perspective on next year. First is volume. We faced several headwinds in 2025 that we don't expect to recur, including Hurricane Helene, the severe flu season, and the cyber incident. Beyond those discrete events, and as I talked about last quarter, we will continue our efforts to drive clinical progress to improve mortality and support treatment growth. Second is payer mix, where there's active policy debate right now. We're among the many who are closely monitoring the impact of enhanced premium tax credits on commercial mix. We'll also be assessing the ongoing recalibration of Medicare Advantage landscape, as evolving market dynamics from government policy and payer behavior affect Medicare Advantage enrollment and insurance mix. Third is Integrated Kidney Care or IKC. We're awaiting the release of final 2024 performance year results from the government CKCC program. The timing of the release and the recognition of the associated operating income could shift between 2025 versus 2026. We feel good about our progress in 2025 and it's an important reminder that timing of operating income remains difficult to predict. In short, there remains a range of potential outcomes for 2026 and we expect to learn more about each of these factors over the coming months. And as customary, we'll provide formal guidance during our fourth quarter earnings call in February. To wrap up my comments, we remain on track to achieve our full year goals. Meanwhile, our long-term investment in IT and clinical innovation strengthens our ability to deliver superior patient care and create sustainable value. As we look to 2026, we're monitoring a number of variables that will shape the coming year, and we remain confident in our ability to navigate them effectively. I will now turn it over to Joel to discuss our financial performance in more detail.

Joel Ackerman, CFO

Thank you, Javier. Third quarter adjusted operating income was $517 million, adjusted earnings per share was $2.51, and free cash flow was $604 million. I'll provide detail on the individual components of our results, beginning with U.S. dialysis. First, on treatment volume. U.S. treatments per day declined 1.5% versus the third quarter of 2024, in line with our expectations. The decline is primarily the result of two factors: First, the mix of days as this quarter was slightly skewed towards Tuesdays, Thursdays, and Saturdays as compared to Q3 last year; second was the negative impact of the census trends from higher mortality from a severe flu season and lost admission opportunities as a result of Hurricane Helene and the cyber incident. Next, revenue per treatment increased approximately $6 versus the second quarter. This was primarily driven by rate increases, higher revenue from phosphate binders, and the negative impact of the cyber incident on Q2 RPT. These improvements were offset by a slight decline in payer mix and normal variability. We continue to expect full year RPT growth will be at the low end of our original 4.5% to 5.5% guidance. Achieving this will require some acceleration of RPT in Q4, which we expect from vaccines, normal rate increases and higher-than-typical impact from the resolution of aged claim balances. Now moving to patient care costs. PCCs per treatment increased by approximately $5 sequentially. The majority of the change was the result of typical increases in wages and higher pharmaceutical expense due to higher dispensing volumes of phosphate binders relative to the second quarter. Excluding the impact of phosphate binders, patient care costs continue to outperform our expectations from the beginning of the year. We continue to expect full year PCCs per treatment to increase between 5% and 6% versus 2024. International adjusted operating income was $27 million. This was down $9 million versus the second quarter, primarily due to the onetime benefit that we called out last quarter. In IKC, our value-based care business, our Q3 adjusted operating loss was $21 million. As I have mentioned in the past, the quarterly phasing of IKC is hard to forecast. That said, we feel good about achieving flat or better IKC adjusted operating results in 2025 as compared to last year consistent with our guidance from the beginning of the year. In aggregate, third quarter operating results were in line with our expectations. At the midpoint of our tightened adjusted operating income range, the implied guidance for the fourth quarter represents an approximately $60 million sequential increase. We expect this fourth quarter improvement to be primarily driven by higher treatment volume due to better treatment day mix, sequentially higher revenue per treatment, and timing of IKC revenue, offset by typical seasonal increases in patient care costs and G&A. Switching to capital allocation. During the third quarter, we repurchased 3.3 million shares, and we have repurchased an additional 400,000 shares since the end of the quarter. Year-to-date, through today's earnings call, we have repurchased approximately 10 million shares representing approximately $1.5 billion. As a reminder, the 400,000 shares we repurchased in October were pursuant to our publicly filed repurchase agreement with Berkshire Hathaway. According to that agreement, just prior to each DaVita earnings call, we buy from Berkshire the number of shares necessary to return its ownership to 45%. This transaction is contractual and formulaic. We finished the quarter with leverage at 3.37x consolidated EBITDA within our target leverage ratio of 3 to 3.5x. As we look to the remainder of 2025, as Javier mentioned, we are reaffirming our guidance for full year adjusted operating income with a midpoint of $2.85 billion and adjusted earnings per share with a midpoint of $10.75, while narrowing the band of each range. We look forward to sharing full year results and providing 2026 guidance when we speak again in February. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

Operator, Operator

Our first caller is Kevin Fischbeck from Bank of America.

Kevin Fischbeck, Analyst

Great. A couple of points emerged from your prepared remarks. First, you mentioned the volume number for next year. I understand the one-time items you highlighted this year. How do you think volumes would have looked this year without those three items you mentioned: the hurricane, cyber incident, and flu? What would that number have been this year?

Joel Ackerman, CFO

Yes, Kevin, I'll take that. I think the number is probably about a 75 to 100 basis point headwind on '25 volume from those three things combined, and that's a combination of census and missed treatment rate.

Kevin Fischbeck, Analyst

Okay. And the other thing that jumped out on our volumes was that you just mentioned working to improve mortality. Is there anything that you can provide color on there? I assume that's not something that necessarily shows up in a given quarter, but maybe there's optimism that, that can improve next year? Or is that a slow steady improvement over time?

Javier Rodriguez, CEO

Yes, Kevin, it's consistent over time. We are reviewing all our clinical protocols, including time on therapy, fluid management, GLP-1s, and other medications to determine the best approach to reduce our mortality rates. Ultimately, we will discuss the mid-molecule clearance, but that process will take time.

Kevin Fischbeck, Analyst

Yes. Okay. And then my last question is about MA enrollment. It seems like it's a more significant factor for 2026 than I initially thought. I understand it's subject to change. When you refer to it as a swing factor, are you implying that shifts in membership between payers could substantially affect your rates given the significance of your agreements with different payers? Or are you more concerned about a general decline in MA enrollment as people return to traditional Medicare or Medicare with supplemental coverage?

Javier Rodriguez, CEO

At the end of the day, you highlighted two variables, which is mix. And within that mix, there's a different revenue within each payer. We're agnostic on that because we don't know which way it's going to go. On the other hand, you do have different enrollment, and you're seeing a lot of payers talk about their volatility in their enrollment. So we're just highlighting that we don't have any particular insight but rather, it feels like the marketplace is more dynamic at this juncture.

Kevin Fischbeck, Analyst

Okay. But that is a potentially significant swing factor that you found it necessary to mention? I don't really consider it to be that major of a variable, but it is.

Javier Rodriguez, CEO

Well, significance, obviously, is in the eyes of the beholder. But at the end of the day, there's enough dynamics and enough membership in there that you could see a scenario where it could swing in one direction or another. So we wanted to call it out. I mean if you were going to talk about revenue per treatment next year, you have that dynamic. And then, of course, you have open enrollment, which has the dynamic of the tax premium credits that's being discussed right now with the federal government. And so those two are just a little more in the air as we speak than in normal years.

Joel Ackerman, CFO

That's said Kevin, I think I agree with Javier, we're trying to highlight where there might be variability. That said, I think it is safe to say that commercial mix is a more significant financial swing factor than MA mix.

Operator, Operator

Our next caller is Andrew Mok from Barclays.

Andrew Mok, Analyst

I appreciate all the color on 2026. Maybe just back on the volume side. You called out the 75 to 100 basis points of discrete items that are not going to recur next year. So I guess, is it fair to think of that as a reasonable starting point as we contemplate potential growth for next year? And Javier, I think you noted investments in technology, infrastructure, scheduling systems. Are any of those items expected to have a meaningful impact on treatment growth? Or is there anything else that you can do in your control to influence the volume environment?

Joel Ackerman, CFO

Yes, Andrew, I'll take the first one. So if you were to translate that 75 to 100 bps from '24 to '25, I think '26 over '25, again, if you're comparing year-over-year growth rates, you're probably looking at a 50 to 75 basis point structural improvement in '26 growth relative to '25 growth. And that comes largely from the flu and the cyber incident. The hurricane is kind of annualizing out and is offset; the kind of the benefits of that is offset by the fact that there's a small headwind in '26 over '25 from day mix. Just as a reminder, '25 over '24 had a 20 basis point day mix headwind. And then '26 over '25 has an additional 10 basis point headwind. '27 will be a tailwind.

Javier Rodriguez, CEO

When you analyze the numbers and summarize them, starting with 2025, we project a decline in volume of 75 to 100 basis points, and it seems more likely to be closer to 100 basis points due to the missed treatment rate. Therefore, using negative 100 basis points for 2025 growth, you would adjust that number while considering other factors. I’m not providing guidance here, but to help understand how to approach the starting point for 2026, you could improve that negative 100 basis points in 2025 by approximately 50 to 75. Thus, you would begin with an adjusted growth in 2025 of between negative 25 and negative 50 from which to build the number for 2026.

Andrew Mok, Analyst

Got it. And do you want to comment on...

Javier Rodriguez, CEO

Andrew, for your second question, we are investing in a lot of things. U.S. specifically, will impact volume. The short answer is we don't know specifically volume, but if you were to expand that question to the P&L, I would say that we are optimistic, and we're working hard. Some of the models that we're working on could impact volume. For example, we are working on something that would risk stratify hospitalization. And if we can make an intervention, it changes hospitalization that would, of course, impact volume. On the other side, we're doing models to affect the cost structure, things like administrative things in the call centers and revenue operations that can do authorizations in a much more rapid way and more reliable way that would likely get you a higher collection. So those are a couple of the examples of the things that I highlighted in the opening.

Andrew Mok, Analyst

Great. And on the premium tax credits, I think the last estimate of the headwind you gave was $120 million over 3 years. Is that still a good number to think about? And can you comment on your growth in the exchanges and how that's played out throughout the year?

Javier Rodriguez, CEO

I believe that estimate is still accurate. As you know, the future of the extended premium tax credits is uncertain. If they were to be eliminated, we would approximate a loss of around $120 million over three years, although this would not be distributed evenly. We expect about $40 million in the first year, $70 million in the second year, and $10 million in the third year. The uneven distribution is due to how our models segment the population. We anticipate that our current patients, who have a high need for insurance and recognize the importance of coverage, are more likely to maintain their plans. Additionally, for many of them, it remains the most economical choice. The situation is different for those patients who are not yet aware that they have chronic kidney disease. Some may let their insurance lapse, resulting in them becoming Medicare patients once their kidneys fail. There is a range within this group, as some CKD stage 4 patients may already be quite ill and could seek exchange plans. Given these dynamics, the projections for 2026, 2027, and 2028 are somewhat uncertain. We're also monitoring discussions in Congress about potential changes, which include modifications to the enhanced tax credits over time, adjustments to poverty level thresholds, or possibly no action at all. These factors will influence our assumptions moving forward.

Joel Ackerman, CFO

And Andrew, just on your question on private pay mix, mix is down about 15 basis points in the quarter, which I would call normal variability and year-over-year, it's flat.

Operator, Operator

Our next caller is A.J. Rice from UBS.

A.J. Rice, Analyst

Maybe there's an obvious answer to this, but the headline number looks like your operating income for the quarter was about $50 million below the consensus. I know you're saying it was in line with your expectation, and you've not changed the midpoint for the year as to where you think. Is it just a matter of people were mismodeling given the day counts you're referencing for the third and fourth quarter relative to what you were internally thinking? Or what is going on there if you have any view?

Joel Ackerman, CFO

We do not provide quarterly guidance, which may create some discrepancies with market expectations. To clarify our perspective, in order to reach the midpoint of our guidance for Q4 compared to Q3, we would require an increase of approximately $60 million in operating income. There are a few factors contributing to this. First, we typically face seasonal cost challenges, which we estimate at around $30 million in both patient care and general and administrative expenses. However, this is balanced by several factors. The first is volume, related to a mix of days; Q3 had a 60 basis point headwind in day mix year-over-year, while Q4 is expected to provide a 60 basis point tailwind, translating to about $15 million. The second factor is IKC, which we project will increase by around $25 million from Q3 to Q4 based on our initial guidance. Lastly, we anticipate a revenue per treatment increase of about $50 million, influenced by seasonal factors such as vaccines and regular rate adjustments. Additionally, there is typically more variability from the resolution of older claims with payers, which can occur every quarter and is difficult to predict in terms of scale and timing. Historically, these claims tend to be more favorable in Q4, and we expect this trend to continue for Q4 of '25.

A.J. Rice, Analyst

Okay, that's helpful to understand. Regarding the cyber-attack and the charge related to the Mozarc relationship, do these factors affect the adjusted earnings? Specifically, what was the estimated impact on earnings and volume from the cyber-attack in this quarter? As for the Mozarc charge, it appears that you anticipate it will be somewhat of a burden for the next year or two, and with the charge being taken now, does that resolve the burden? Is this significant in terms of operating earnings?

Joel Ackerman, CFO

Yes. So let me take these one at a time. So first on Mozarc, the answer is the charge will largely eliminate the Mozarc drag on the P&L next year. It doesn't hit the operating income line; it hits the other income line. So it's not in our adjusted operating income, but it is in our pretax. And that's been a significant drag, both last year and this year, and it will get pretty close to 0 for next year. In terms of cyber, the big impact was last quarter through both RPT and volume. As we play it forward in Q3 and Q4, the impact goes way down, and it's primarily volume. The cost side of it has been non-GAAP, both last quarter and this quarter.

Operator, Operator

Our next caller is Pito Chickering with Deutsche Bank.

Pito Chickering, Analyst

So one more question about treatment growth. I apologize for repeating myself, but could you discuss new patient starts in the third quarter and how that compares to the previous year? Additionally, how is mortality trending in the third quarter in comparison to the first half of the year? Lastly, has IOTA had any effect on new patient starts or treatment growth?

Joel Ackerman, CFO

Pito, could you repeat the last part of your question? I didn't catch that.

Pito Chickering, Analyst

It's IOTA, the new bundled system for kidney transplants.

Joel Ackerman, CFO

Okay. Yes. No impact from that. Going back to the original part of your question, I'd say volume for the quarter came in largely as expected with a little bit more pressure on missed treatments than we expected. Remember, we called missed treatment rate out as elevated in Q2 as a result of the cyber-attack. They came down off that peak, but still running higher than in Q3 of 2025. In terms of both admissions and mortality, there's really not a lot new to call out there. Admissions continue to run within the normal band that we've seen post COVID. And mortality, again, down versus Q1, but that's largely a flu phenomenon. There's really no pattern or trend to call out about mortality either quarter-over-quarter or year-over-year.

Pito Chickering, Analyst

Okay. And then can you talk about the timing of the IKC funds? I think typically, they closed at the end of the third quarter for the previous calendar year. Was there any changes to the timing of those contracts? And have you already settled some of those funds in October for calendar '24?

Joel Ackerman, CFO

Yes. So the big change on IKC timing for the year was moving some of the revenue from plan year '24 from what we would have thought would have been the back half of the year and some of which would have hit in Q3 into Q2. And that's why IKC was so strong in Q2, and we called it out as timing. So that's really the big thing I would call out. Look, I think timing on IKC will continue to be difficult to predict. A lot of it is a function of when we get information from payers as well as the federal government and our ability to recognize revenue is really subject to the timing of that, which we don't have control over.

Pito Chickering, Analyst

Okay. And then last one for me. The implied fourth quarter guidance range is pretty wide, I think it's like $0.80. What would have to happen in order for you to be at the low end versus the high end of the guidance? And if you think about the midpoint, I know you talked about treatment growth and the tailwind coming from the day mix. But what treatment growth should we be modeling to get to the midpoint of the guidance?

Joel Ackerman, CFO

In terms of what is influencing the range, I would highlight both RPT and IKC as having significant potential. For Q4, you can expect year-over-year treatment volume growth to be positive. It's not substantial, likely around 20 to 30 basis points, but it will be positive. This is due to the day mix being a challenge this quarter, while next quarter, it will act as a benefit, contributing to the positive growth.

Pito Chickering, Analyst

Okay. And then last one here, what do you think the market share has done in '25 if we exclude these cyber incidents?

Joel Ackerman, CFO

Yes, that's a really tough question. The best way to answer it is with USRDS data. The latest USRDS data is for the first quarter of 2025, which just became available for the fourth quarter of 2024 and the first quarter of 2025. We believe that the incidence data from the quarterly USRDS is more reliable, while the prevalence data is less reliable. Considering all of this, there is hardly any USRDS data available to accurately predict market share.

Javier Rodriguez, CEO

But if you grab that data as imperfect as it is, and you grab the intelligence that we have in the field and you make the adjustments for roughly the 1,600 patients that are both impacted by the PD in the cyber outage, we have no reason to see any meaningful shift in market share.

Operator, Operator

Our next caller is Justin Lake with Wolfe Research.

Justin Lake, Analyst

Joel, our growth sounds like it's got to be about $10 sequentially of improvement. Is that the right ballpark?

Joel Ackerman, CFO

I think it's more like $8.

Justin Lake, Analyst

Okay. And how much of that do you think is this collection that we would think of as maybe nonrecurring in the same magnitude?

Joel Ackerman, CFO

I noted a $50 million improvement in RPT, which translates to approximately $7 of RPT. That is the largest part of it. While I can't provide an exact amount, I believe it's reasonable to say that it is likely more than half.

Justin Lake, Analyst

Perfect. And then the fourth quarter volume assumption, I apologize if I missed it, but did you give a number there in terms of what you're assuming for volume?

Joel Ackerman, CFO

Look, you can back into it more or less. And on treatment volume, it would be growth of somewhere around 20 or 30 bps. And remember, that's treatment volume, it's not treatments per day, it's not NAG. It would be an absolute year-over-year growth of about 20 or 30 bps.

Ryan Langston, Analyst

You mentioned changes in payer mix driving RPT down a bit. Can you provide the commercial treatment mix from the quarter or at least the change from the second quarter? Also, does the fourth quarter guidance assume any positive movement in that payer mix?

Joel Ackerman, CFO

I don't think it will be a significant component of it. In terms of where mix is today, it's right around 11%. It was down 15 bps from Q2 to Q3. It went from just above 11% to just below 11%.

Ryan Langston, Analyst

Okay. And last thing, I guess, over the past year or two, we've seen nice growth in RPT, the binders, of course, but focus on the revenue cycle improvements. I guess where are we at in the life cycle of those or seeing at least some outsize benefit from those? Javier, I heard you mention some initiatives in your prepared remarks. But just anything on revenue cycle initiatives and improvements would be helpful.

Joel Ackerman, CFO

I would say some people might wonder what stage we are in, but I believe that analogy is not quite right. This is an ongoing process that doesn’t end; we will be working on it for many years to improve. A 1% increase in ROPS collections corresponds to approximately $120 million in operating income. So, even a small increase of 10 or 20 basis points each year adds significant value. The recent cyber incident did cause some delays, but we are still making investments in this area. As Javier mentioned, AI presents an opportunity, and traditional automation also offers potential. There are still more opportunities to be explored. It may not feel like the significant progress we saw in 2023 and 2024, but I believe there will continue to be opportunities every year.

Operator, Operator

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

Javier Rodriguez, CEO

Okay. Thank you, Michelle, and thank you for all of your questions. As we wrap up today, I will leave you with four thoughts. First, early in the year, we faced two unexpected challenges with meaningful economic impact. We navigated through those issues, delivered clinical excellence for our patients, and remain on track to achieve our annual guidance. All the while, we continue to invest, creating long-term capabilities. Second, we will continue our disciplined capital allocation strategy, including share repurchases. Third, we provided a few forward-looking thoughts on next year. Although the current dialogue is focused on enhanced premium tax credits, more broadly, we'll be monitoring open enrollment which is perhaps the biggest variable heading into 2026. And finally, the clinical and operational processes behind middle molecule clearance will take approximately three years to see results, yet the potential to enhance patient lives is meaningful and exciting. Thank you all for joining the call, and be well.

Operator, Operator

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