Good evening. My name is Michelle, and I’ll be your conference facilitator today. At this time, I’d like to welcome everyone to the DaVita Second Quarter 2022 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. [Operator Instructions] Thank you. Mr. Ackerman, you may begin your conference.

Thank you, and welcome, everyone, to our second quarter conference call. We appreciate your continued interest in our company. I’m Joel Ackerman, CFO and Treasurer and joining me today is Javier Rodriguez, our CEO. 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 and 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, Joel, and thank you for joining the call. Today I will cover five topics health equity and Supreme Court case, second quarter performance, an update on our Integrated Kidney Care or IKC business and I will conclude my remarks with our current thinking for 2023. Before we discuss business matters, let me start with a clinical topics that is critical for society. Health Equity. Given the disproportionate impact kidney disease has on patients of color, health equity is of utmost importance. Across the key dimensions of access to care, access to information and clinical outcome DaVita in the kidney care community have achieved unparalleled equity relative to the vast majority of other disease states. We have used the focus of our scale to provide consistent equitable access to care and education. Our leading clinical outcomes and protocols have reduced variability across all patient populations, regardless of race, or socioeconomic status. Our black and Hispanic patients, are at parity when it comes to dialysis adequacy, phosphorus, and calcium lab values, as well as hospitalizations and mortality. As another example of our efforts to drive health equity, our Kidney SMART program is now available in 10 languages and we're participating in a pilot to develop culturally tailored education to underrepresented and underserved patient communities. As it relates to access, dialysis services are available to most patients within 10 miles of their home. We are proud of these results, and now have set our ambitions to improve access to transplant and home dialysis. Now, moving on to SCOTUS, the ruling in the Marietta Memorial Hospital matter opened a loophole for plans to circumvent the historic protections for our patients in the Medicare Secondary Payer Act, or MSPA. We continue to believe that this narrow interpretation is not only contrary to Congress's…

Thanks, Javier. First, let me start with some additional details on our second quarter results. U.S. dialysis treatments were up 2.3% compared to the first quarter. This was the result of one additional treatment day and an increase of approximately 1% in treatments per day. excess mortality was down significantly from Q1 as the impact of the first Omicron surge receded. I will note this benefit appears to have reversed in June and July, as a new wave is having negative impact on volumes. Mistreatment rates declined in the quarter as a result of typical seasonal patterns but remained higher than usual in Q2 because of the new Omicron subvariants. Revenue per treatment grew quarter-over-quarter by $4.19. primarily due to normal seasonal improvements driven by patients meeting their coinsurance and deductibles, as well as the continued shift to MA plans partially offset by a seasonal decrease in acute treatment volume and the partial loss of Medicare sequestration relief in Q2. Patient care costs per treatment was lowered by $5.47 per treatment quarter-over-quarter, primarily due to seasonality of health benefits, and payroll taxes and lower costs across multiple other categories. G&A was up approximately $24 million versus Q1. In Q2, there was approximately $23 million of contributions to the industry's campaign against the ballot initiative in California. This is a pull forward of expenses originally planned for Q3. Our estimates for the full year impact of the spend on the ballot initiative have not changed, although it does impact the timing between Q2 and Q3. Additionally, it was a one-time gain on the sale of some self developed properties of $22 million, which approximately offset the pull forward of the ballot initiative spend. The increase in G&A relative to Q1 was largely the result of higher compensation expense, and increased T&E.…

Thank you. [Operator Instructions]. Kevin Fischbeck from Bank of America. You may go ahead, sir.

Okay, great, thanks. A couple of questions here. So it sounds like you're saying you took up your pricing outlook for next year, I guess, is any way to think about what has changed along those lines, like how much of it is because of a better view on the Medicare rate update versus MA rates versus commercial?

Yes, Kevin, there are really three components to it. One is the Medicare rate as you referenced. The second is some operational and systems changes that we're going to make internally that we think can drive higher yield or higher cash collections, which ultimately results in a higher RPT. And the third are some benefit changes that will impact the patient component and improve our bad debt because the lower the patient component comes back related to out of pocket costs, the lower that goes, the higher we will ultimately collect. None of this is about our expectation of higher rates on commercial or MA.

Okay. And is there any negative view I guess, obviously, with this Marietta there and you just talked about, the initiatives that the industry is pursuing to fix that, but I guess, is there an expectation or any early indication around how commercial contracts are being negotiated?

Kevin is Javier, the short answer is it's too early to tell. And so we continue to watch it. And we will let you know if we see anything. As we said last time, there's a segment that's more likely than not, which is that small employer but these things take time. And so we don't have anything new to report on it.

Okay. And then I guess, you mentioned that you've changed versus your original outlook, a bridge for '23, you have a different view about volumes, how much of that is because of mass versus what's already happened in the math of that going forward versus kind of your changed view or more conservative view about what how things might develop going forward.

I think it's more about what will happen going forward than what we've seen so far. Volume is a little bit below where we were expecting. But this is more about our expectations for excess mortality going forward, rather than what we've seen so far.

Remember, Kevin, we talked a little about a pull forward, we call it sort of COVID unwind at one point, which is we thought that once that excess mortality unwound, that we would have a little richer growth in one year, and now we just don't have visibility. Mathematically, of course, it will happen but we don't have visibility as to when it will happen. And so that's the math that the Joel just talked.

Okay, so the total OI number has not changed. It's just the timing is too difficult to predict. So you're just taking some of that out next year.

Well, the total OI for 2023 has changed, it has been brought down in the middle of the range by 75. So it was 250 to 400. We've moved it to 200 to 300. So 75 at the middle of the range, I think it's fair to say that 75 is fully accounted for by our change in volume expectations. There's some other puts and takes as well.

I guess I thought that you guys talked about, like 150 to 200 OI from the COVID normalization on the volumes over time. Is that still the right way to think about, is that number hasn't changed?

I don't think our views on normalization from COVID have changed in terms of volumes. I think we've stopped kind of thinking about what's the negative impact on OI from COVID and more recognizing where we are today is the new baseline, and how are we going to move forward from here. But the comments we've made about the pull forward, and ultimately, excess mortality, at some point needing to go away and become lower than normal, we still believe in that.

Excellent, thank you.

And our next caller is Justin Lake with Wolf Research. You may go ahead, sir.

Thanks. A couple of follow ups from Kevin's question there. First, you talked about some benefit changes that are going to help reduce patient out pockets, you might give us a little more color.

Yes. This relates to changes in the way Medicare is calculating the maximum out of pocket for --and for duels in particular, that's where we see the impact, we have a very heavy dual population in our MA book and as the change in Medicare -- in maximum out of pocket changes. And these dual eligibles reach their maximum out of pocket quicker than ultimately the patient component of which as you know, we collect very little, they'll hit that earlier in the year. And the result is the -- call it the patient bad debt number goes down.

How is that going to impact that half of the revenue for treatment, if we're thinking about next year in dollar terms?

I'd say somewhere in the dollar and a half range.

Got it. And is that just effectively show profitability in terms of that falls right to the bottom-line in terms of price.

Yes.

Got it. And then, thinking about the mix for next year. I know it's possible to say what employers are going to do with this Marietta stuff at this point. But have you built into that range that you've updated any assumption around deteriorating payer mix? Or are you assuming that stays constant?

We're not expecting any material impact in '23 from Marietta, so no change to the mix.

Got it. And then just a question on salaries and benefits. So and I think that number you would put in for this year in terms of your framework of typically 2% to 3% increases? I think you added something like 75 million for this year, can you give us an update versus that target that extra 75 this year? And then what are you assuming in that number next year? By our calculation, it looks like it might be more mid-single digits assumed again next year? How much above that 2% to 3% normal are you assuming per wage pressure next year?

Yes. So Justin as a reminder, we called out a number more like 125 for this year, so call it a salary wage and benefit increase year-over-year in 22 of about 6%. And that's what we saw on the first quarter. It's what we saw in the second quarter. We're expecting that for the full year. As you look forward to next year, we're expecting the number to come down but remain well above that 2% to 3%. So somewhere roughly halfway between the 3% and the 6% number.

Okay. That’s helpful. Appreciate the comments.

Your next caller is Pito Chickering with Deutsche Bank. You may go ahead, sir.

Hey, good afternoon, guys, thanks for taking my questions. Going back to the IKC part, you broke the $50 million of shared savings and $10 million of prior period, can we just step back a little bit and say, what's changed sort of in 2Q versus what you're expecting at the Analyst Day and expectations? Can you remind us, what's your process for getting true ups from men's care planned at this point? And then any more details as you get this true ups about how these costs savings progressed in '21?

Well, I'll let Joel answer some of that technical questions you asked. But one of the things that I really want to make sure that we jot down on this one is that this business is -- has a lot more ups and downs. And to look at it quarter-over-quarter, it’s probably not a great way to look at it, but rather to look at it on an annual basis because of these true ups and the lumpiness and the seasonality of the flu and all the things that happen in this type of business. But that said, Joel, one chance at the technical part.

Sure. So the prior period development is on the snip business and it's no different than the kind of prior period development you'd see in a managed care plan and that's because our accounting there, we take the full revenue and the full expense through the P&L. The $15 million of shared savings, the process there obviously the year has to end, the claims have to run out to some extent, data is exchanged and reconciled and when we become confident that the shared savings numbers are clarified, that's when we will recognize that revenue. So for some of the 2021 plan years, we got that level of confidence earlier than we expected and that's what led to the $15 million of revenue in Q2 versus the back half of the year when we originally expected it. If you step back in terms of where we are versus capital market today, and I'll use specific numbers just to make it clear. So we were anticipating a loss for the year from IKC roughly $175 million. We now expect that number to come in a bit better, maybe I'd say probably a $10 million to $30 million improvement relative to where we were, part of that is prior period development, part of it is a lower cost structure as we're scaling the business, we're seeing some advantages relative to what we thought. But overall, I would emphasize it is still early in the development of this business. We are expecting ups and downs but it was a good quarter for IKC.

Just digging there. One more question -- and I'll go to something else. But as you look at your -- the patients that you’ve got sort of in the first quarter of 2021, I need your color and sort of where those margins are today, are these sort of profitable after 18 months kind of -- any visibility in sort of how you transition from losing money to making money on these patients?

Yes. So first, let's be clear, we're not making money, we just had positive prior period development and positive savings, there's still a huge expense base against those. So it's to some extent playing out as we expected with 2021 just the timing is a bit different in the year.

Okay. I guess let me ask that in a different way, with what you're tracking today, how fast before you convert from losing money on these patients into making money?

Look at Capital Markets Day, we laid out a plan where the business should become breakeven in 2025 plus or minus as the year where we think we'll crossover anything on our views around the path to IKC profitability has changed yet.

Okay. Moving to the cost side of the equation, just a follow-up [indiscernible] questions. How easy is it to hire people today? Where is the turnover today versus the net hires? So how is it progressing throughout the year, and do you see a pressure on treatment growth in the back half of the year due to lack of staff?

I’d grab that. It's hard to talk about the entire country as a unison because there's sub-markets and labor markets are a very different market-by-market. I would say that it feels that we have crossed the most difficult period that this quarter feels a lot easier than last quarter, but that was on the hardest quarter in the history of the company. So contextually speaking, it's still a difficult labor market. As it relates to the second part of your question, are there markets where we're not accepting patients? The vast majority of our clinics are accepting patients, vast majority. There are a couple of pockets, five or so markets that are the vast majority of the ones where we have pressure. And so the way to look at it is that if you're a patient, the first thing you want to do is of course, get out of the hospital. There's lots of stress around acclimating to your new life on dialysis. But that said, the most important thing is you want safety and once you get to the right staffing, then you save time away from home in the right location. Right now we have more centers than usual, where a person has to travel longer than they wish, but they are getting placed and so we're working through those dynamics and hope to revert to normal over the course of the year.

Great. And three quick number questions. Where is your home penetration today? How should we think about both interests, costs in the back half of the year as well as tax rate? Thanks so much.

Thanks. On the home penetration we had flattish growth due to all of the COVID dynamics. So that mix is still in the 15% range and as it relates to the interest expense. Joel?

Yes. Interest expense, we expect it to go up in Q3 and Q4. There are really three dynamics there, one is just the outstanding amount on our revolver is higher than normal. Second, LIBOR continues to increase and while we are capped on most of our floating rate debt, we're not capped on all of it. And third, because our leverage level is above 3.5 we go into a different tier on our floating rate debt and we're now paying 175 above LIBOR, rather than the spread of 150 above LIBOR. You put that all together, I think, $100 million a quarter of interest expense for Q3 and Q4 is a reasonable estimate.

And then, tax rate, I guess, how should we think about tax rate for the back half of the year?

Tax rate, I'd say we're not changing our guidance for the year so staying at 25 to 27.

Right. Thanks so much.

Thank you, Pito.

Thank you. Our next caller is Sarah James with Barclays. You may go ahead.

Thank you. I was wondering if you guys have given any more thought to expansion of the KPIs to give insight into commercial mix, breaking out things like pricing versus volume, but understand some of the dynamics going on there?

Sorry, Sarah and did you say IKC? Is that where you started? Or did you say something at the beginning? I didn't catch it.

Yes, I was wondering if you're thinking about expanding key performance indicators, or the metrics you disclosed around commercial mix to break out pricing? So we can understand the dynamics going on a little bit better.

I think, Sarah, we’re relying on giving the commentary during the call making sure the analysts and the investors understand what's moving up and moving down. In terms of putting this in a table on the press release, that's not something we've been thinking about recently.

Okay. Are there aspects of partnerships that you guys can explore for efficiency and thinking about companies that look at efficient dosing to help bring down costs or transportation, just anything that would help offset the headwinds in the next few years?

Yes, Sarah. We've been looking at them for quite some time, hopefully our track record, if you look compounded year-after-year, our cost structure has gone up less than a percent over time and so that takes maniacal focus and discipline and execution of some of the type of things that you've said. If you look at ESA, which has been historically our most expensive pharmaceutical, we have personalized dosing and AI algorithms of the type of that you described.

Okay. Any sense on what scale of savings opportunity there could be over time in that area?

Well, it's embedded in the $200 million to $300 million that we cite for next year and so it's in that range right there. And if you look at that slide, we have in there is a -- the cost savings that's embedded in the pharmaceutical line there.

Okay. Thank you.

Thank you.

Our next caller is Gary Taylor with Cowen. You may go ahead, sir.

Hi, good afternoon, guys. Couple of numbers questions, first, just going back to last call and I missed the first couple of minutes here, so I apologize. But I thought on the first quarter, you had said towards the bottom half of the OI range this year you reiterated that range in the release, but is there any commentary around bottom half for this year, does that still hold?

Yes, Gary I think we're sticking with that. No change to where in the range we think will come in.

Okay. And then, I hadn't realized before, certainly we've seen the proceeds on the self-developed properties to the cash flow statement, but I hadn't realized any accounting games were running through G&A. So I appreciate you calling that out this quarter. Has it ever been as large as this? Like when I look back on proceeds last year $56 million, in 2020, $93 million. I was just curious if there were any other material gains that ran through G&A?

Yes. So the reason it was so big this quarter is it related to one of our central business offices, so a much bigger building historically they generally related to clinics. So the numbers for individual clinics were much smaller but there -- when we were building more clinics historically, there were more of them. So yes, you would have seen numbers like this they were, I'd say reasonably consistent historically. So the reason we call this out is because it was so big and it was anomalous relative to what you've seen recently.

Got it. Cash flow a little softer than we thought, DSOs is still hanging up there around 65 and I thought some of that was related to what you thought at one point or sort of a timing related issues. Any updated thoughts on DSO and if and when that could head lower?

Yes, so cash flows were hurt by cash taxes this quarter, so that was the big hit there. In terms of DSOs, we do think there's an opportunity to bring it down. That said, I would call out that the shift to MA from Medicare Fee-For-Service that we've seen over the last couple of years, will structurally increase our DSOs by a couple of days. Medicare is a very quick payer, the MA, DSOs are more typical to the DSOs you'd see in a commercial book and as we have less Medicare Fee-For-Service and more MA, it does structurally increase the DSOs. That said, I think there is an opportunity to bring it down a little bit.

All right. Last one for me, can you just -- and I know you guys for obvious reasons don't talk a lot about this publicly, but just [indiscernible] contract, are we back on year-to-year on that now or is that multi-year? How do we think about if and when there's opportunity around rate on ESA?

Yes. Gary, good memory, our contract does expire at the end of this year. We have renewed a contract on the ESA front and the savings are embedded in $200 million to $300 million increase year-over-year.

Okay. Thank you.

Thank you.

Our next caller is Justin Lake with Wolfe Research. You may go ahead, sir.

Thanks. Just a few quick follow-ups here, first on leverage, in the press release you were at 3.8 times, can you give us an update on where you see kind of your leverage targets and where you see this kind of going by year end?

Yes. So our leverage target hasn't changed at 3 to 3.5 times and I think we've always been consistent that this is a range we want to be in most of the time but not necessarily all of the time and if you go back a few years you would have seen us well above it and well below it. Where we wind up in year end and in 2023, I think will depend on a few things, share buybacks being one of them obviously earnings being another, free cash flow being a third. So we're not, we're not going to give out a number because it will depend on all those factors. But I'd say over time, we continue to believe 3 to 3.5 times is the right range for us and we plan to get back there.

Got it. And then in terms of share repo, the company has been extremely consistent in deploying cash back to shareholders via repo. Any thoughts on, you talked about leverage potentially being even higher? Is it possible that you buyback more shares over the next 6 to 18 months, versus just free cash flow? Would you keep that at a higher level and use some of that debt to buy back more stock?

Justin, we’re staying at it, as you know it's a complicated topic but the one thing you can count on is that we're going to stay consistently focused on returning to shareholders. And then, on the margin, the question is, do you get a little more aggressive and you lever up a bit, because you think it's a good opportunity and then of course, you also have to look that the world has a little more uncertainty. There is a little more uncertainty right now and so you have to take all those trade-offs, but everything is on the table.

Okay. And then just lastly, in terms of leverage, I've gotten a couple of questions just because your debt is trading at a decent discount to par at the moment. Any thoughts on buying back that debt at a discount to lower leverage versus share repurchase?

Yes. I mean, we look at the relative trade-offs of -- we think of those both as to some extent opportunities to return capital to our shareholders. So we'll look at both of them, depending on where they're trading. Although I think the history is clear, we tend to lean towards share buybacks over buying back our debt.

Got it. And last question, just the industry was facing dialysis shortage over -- earlier in the year, haven't heard much about it recently just I know, they’d expected to kind of get back to normal in the June-July timeframe so just wanted to get an update there.

Yes. Thanks, Justin. The inventory levels are a little below what they normally are but we've passed the period of high anxiety and having to share et cetera. So I think the worst is behind us and we can move forward.

All right. Thanks again.

Thank you.

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

Hey, guys just one last follow-up here, just on that the Medtronic deal that you guys announced in May, just can you go into a little more of a detail on these, the goals or the transaction sort of, so why you thought that was best use of shareholder cash. Thanks.

Well, there's not much to report Pito. We're excited to partner and develop medical innovation and technologies with Medtronic. I think the only thing that we have to report is that the FTC has passed the period of Hart-Scott-Rodino and so it's a pro-competitive deal. So we anticipated it to be low scrutiny and that's how it went of course, the FTC can always come back and ask, but that was a positive thing and directionally exciting for us and its early, of course the transaction will probably close in Q1 of next year, and so not a lot more to report.

Fair enough. Thanks so much.

Thank you.

And at this time, I am showing no further questions.

All right. Thank you, Michelle. Just got two closing thoughts. First, we've been talking for over a decade about the potential contributions of Integrated Kidney Care toward improving the quality of life of our patients and lowering total costs. Now we have a sizable population, and we are very hard at work, building systems, the capabilities needed to deliver on this potential. Second, the operating environment and macro landscape as we discussed are very tough. I am very proud of the teammate’s resilience and agility to offset some of these headwinds by creating the cost savers. We appreciate your interest in our company and we'll be talking soon. See you all.

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