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 First Quarter 2024 Earnings Call. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference.

Thank you, and welcome to our first 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 first 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 our call today. Through the first quarter, we continued building on the momentum generated through 2023, demonstrating operational discipline while continuing to find opportunities to invest, innovate and most importantly, deliver clinical excellence. Today, I will cover our first quarter results, provide color on our expanding international business and wrap up with an update on Change Healthcare claim disruption. Before we get into our first quarter performance, I'll start as we always do with a clinical highlight. One of our strategic goals is to provide solutions for patients at every stage along the kidney care journey, including helping to support transplantation. Our aspiration is to enable as many patients as possible to receive this life-changing gift. Let me highlight 3 ways that DaVita is helping to address the systemic challenges of kidney transplant. The first is patient referrals to transplant centers. We recently achieved our highest monthly rate with more than 2/3 of DaVita patients under the age of 75 years old being referred for transplant. The second is living donation. The number of living donors in the United States has essentially been flat over the past 2 decades. To encourage more living donors, we partnered with the National Kidney Foundation on its Big Ask, Big Give campaign to educate the community on living donation. We also offered patients a range of resources to support them through the conversations about living donation. And finally, because there is a gap on transplant rates across race and ethnicity, we created a new Health Equity Learning Lab. By deploying transplant navigators, we're testing novel approaches to drive a more equitable distribution of patients succeeding on their quest to receive a transplant. Through these and other efforts, more than 8,000 DaVita patients received a kidney…

Thank you, Javier. First quarter adjusted operating income was $463 million. Adjusted earnings per share was $2.38, and free cash flow was negative $327 million. Our Q1 results reflect strong core operating performance as well as the impacts from delayed submission and payment of claims due to the Change Healthcare outage, which I will expand on shortly. With that, let me dive into the detail for the quarter. U.S. dialysis treatments per day were slightly lower in Q1 as compared to Q4, consistent with our expectations for the quarter. Q1 was our fifth consecutive quarter of year-over-year new-to-dialysis admissions growth, although mortality remains elevated relative to pre-COVID levels. For the full year, we maintain our expectations of 1% to 2% treatment volume growth. Revenue per treatment was down approximately $2 quarter-over-quarter. This is primarily due to typical seasonality related to patient coinsurance and deductibles offset by typical rate increases, contracted escalators and mix improvements. We continue to see strength in RPT as the result of revenue cycle improvements and we're trending towards the top of our original RPT range of 2.5% to 3% growth year-over-year. Non-GAAP patient care cost per treatment declined $8 sequentially, down from the seasonally elevated fourth quarter. As a reminder, Q4 seasonality was higher than typical and we see this reflected in the sequential quarterly change. International adjusted operating income increased $15 million sequentially, a return to normal from a low in Q4 related to higher bad debt reserves. Additionally, Q1 benefited from foreign exchange tailwinds. As Javier mentioned, this quarter, we announced acquisitions in 4 Latin American countries, including our entrance into Chile and our anticipated entrants into Ecuador. These acquisitions are expected to close at various points during 2024 and we anticipate that their partial year operating income in 2024 will largely be offset…

[Operator Instructions] Andrew Mok with Barclays. You may go ahead, sir.

Treatments per day. I want to follow up on those comments. I think they're in line with your expectations. They were down sequentially and the normalized growth was up 40 basis points year-over-year. So one, trying to understand if there was any impact, whether it's weather or other seasonal impacts on the quarter? And two, any confidence on your levels to get back to 1% to 2% treatment growth for the year? Like what sort of visibility do you have on that? And what's going to drive that from here?

Yes. Thanks, Andrew. So the big difference between the year-over-year number on treatments per day versus the NAG number or the treatment number is actually day mix. So Q1 in '24 had an extra Tuesday and it also had New Year's Day on a Monday and what happens then is about half the volume gets pushed to Sunday. Those 2 things combined can lead to more than 0.5 point of volume swing. So I think of Q1 year-over-year as a positive number of 40 or 50 bps of year-over-year growth, but as you highlighted, below the 1% to 2% range. As I think about how do you bridge the range of 1% to 2% versus the Q1 number, I'd point to 2 things. First is clinic closures. The timing of clinic closures in the back half of 2023, and the pattern we're expecting for '24 is a drag on volume early in '24, but much less so towards the next 3 quarters. That would be one. The second is there's a lot of seasonality, both in new to dialysis admits as well as to mortality, and that could move from month to month. And just looking at the pattern of what we saw in '23 versus what we're expecting in '24, we still feel good about the 1% to 2% growth but we think it's going to come a little later in the year than anticipated. So I'd emphasize again, Q1 was in line with what we were expecting, the general pattern of new-to-dialysis admits being strong, offset by continued challenges on mortality. None of that has changed, and we feel good about the 1% to 2% for the year.

Got it. And then I think on that mortality comment, I think you said mortality remains elevated relative to pre-COVID levels. Any trends on how that's been tracking kind of year-to-year or quarter-to-quarter post COVID?

It has generally come down significantly since its peak. It does move around from quarter-to-quarter, and it's frankly, still a little early to know exactly where Q1 landed. As you know, we don't find out mortality until a few months after the period. So we're keeping a careful eye on it. It's -- as I said, it's come way down, but remains elevated.

Got it. Okay. And then maybe just one more on patient care costs. Cost per treatment were down another 1% year-over-year, and I think 3% sequentially. Anything in particular to call out there that helped drive the strong results.

Yes. So sequentially, it's a lot about the higher seasonality we saw in Q4 that we called out. Year-over-year, wage pressure continues, as we've said, it's offset versus Q1 of '23 by lower contract costs and also a productivity pickup in the quarter.

Our next caller is Pito Chickering with Deutsche Bank.

So revenue per treatment, really strong in the quarter. Was that due to sort of HIX enrollment or any other one-timers in there? Usually, it goes up sort of $4 to $5 sequentially as we burn through copays and deductibles. Is that the way to think -- is that the right way to think about it for rest of the year?

Yes. I think that is right. The seasonality of, call it, $5 a treatment that we typically see in Q1, we saw this quarter. So we'd expect to pick that up in RPT in Q2 and the rest of the year. In terms of anything unusual in the quarter, nothing that I would highlight. I think the Q1 number is a pretty clean number off of which to model the rest of the year.

Okay. So that's sort of tracking above your guidance, like, if we move back to kind of where you guys are guiding revenue per treatment, you're basically guiding sort of almost mid-single digits. I mean sort of -- above sort of 3% range, and already and this continues, right?

We're right around the high end of the range, right around the 3%. If you think of the guide as being up $25 million at the midpoint, and you attribute that to RPT, which is, I think, a fair way to think about it, that would put you right around 3% year-over-year.

Okay. Fair enough. Was the Street mismodeling the first quarter operating income looking at the adjusted operating income beat of $39 million and the raise of $25 million. It looks [ again like you ] didn't raise the high point of the range. Just curious if you're missing it. And then is there any reason why you can't analyze the first quarter in OI sort of 23% to get to sort of $2 billion. I guess, why would that -- assuming trends don't change, why would that not be the right way to thinking about sort of where things could go if first quarter trends continue?

Yes. So look, seasonality is something that's -- I think there are clear patterns in our seasonality, but it does vary from year to year. The RPT pickup from Q1, I think, is probably the clearest part of our seasonality. Other things would be wage pressure tends to grow over the course of the year as does other parts of RPT, but the wage pressure tends to be higher. And then we often see Q4 expenses going up for year-end and other items. So we've seen, as we did in '23, some real negative seasonality in Q4. That's all around U.S. dialysis. . IKC is tougher to call out. We tend to do a little bit better in the back half of the year. But as you know, that can move around from year to year. So annualizing Q1, I don't think is the best way to get you there. I think actually, if you annualize our OI, you'd come in a little bit below our range. So I think you've got to adjust for the RPT. You've got to think about the Q4 seasonal weakness, and you'd get a number in our range.

Okay. Great. And then one quick numbers question. Can you quantify the number of new patients to dialysis in this quarter versus where that was this time last year?

I don't have a number for you. That number typically grows with -- around the volume growth -- around our historical volume growth numbers, and I think it's right in there with that this quarter as well.

Our next caller is Kevin Fischbeck with Bank of America.

Great. I guess, it does kind of seem like going back to the RPT that like it feels more like you're raising the guidance for the outperformance in the quarter on that rather than a continuation of that higher rate sustaining? Is that true? Or you're saying the guidance now assumes that this higher rate is actually sustained throughout the rest of the year?

We're not raising it, assuming that this beat persists throughout the year. We're -- the quarter came in better than expected, but I don't think you can multiply that by 4 to get to the new number.

So why is that the case? It sounds like you're saying there is something unusual in it. So why -- Pito's question before, like why isn't it the seasonal kind of growth for the space and then therefore flow through every quarter?

It's -- I think part of it is how we were modeling it for the year, and it came in -- the pattern came in a little bit different than we expected.

Okay. So you had a higher year-end number and you're just getting there faster according to what you've seen in [ Q1 ].

Yes.

Okay. And then, I guess, just on the IKC business, obviously, there's a lot of focus on cost trend within Medicare Advantage companies seem to be all over the place on in another year. Your experience is going to be a little bit different to Medicare Advantage broadly, but just love to kind of hear how you're seeing utilization play out under your managed programs there?

Yes. Let me grab that one. I think the question that comes often is why are the MA players in kidney saying different things. And the reality is the utilization in the broader MA population has more volatility. Our patients while have many comorbid conditions, they're more predictable, so we have less volatility. In addition, as you know, broader MA had some coding changes that didn't apply to our population. And so that, again, removes some of the volatility that they're experiencing. And so our trends are a lot more stable in our population. Does that answer your question?

Yes. No, it does. I guess you're basically saying that it's coming in line, not -- it's not higher or lower than what you were predicting so far in Q1.

Correct.

Okay. And then maybe just last question. International business acquisition, it sounds like you guys are really excited about it. We always just kind of wondered that sometimes like when one large-scale player exits an asset and another large-scale player comes in? Like how do you think about what you can add to those assets? Or how do you just think about what the opportunity was there, if someone else in theory had similar optionality felt like it was time to get out.

It's a great question, and we're not arrogant enough to say that we're better operators. What we're looking at is that there's some efficiencies to be gained by economies of scale. We were present in these countries, and we had offices that we could leverage. So in essence, the fixed part of the business was levered in a more meaningful way. And so I think that that's how one entity can exit and the other entity, you can see, it is an attractive asset. But as we said in the beginning, we look at our normal filters of clinical differentiation. We wanted to scale and help them with the scale, and we thought we could get to a good attractive risk adjusted return.

And our next caller is Justin Lake with Wolfe Research.

This is Dean Rosales on for Justin. Any color you can share on wage inflation. What are you assuming for the year? And my second question would be any update on how mistreatment rates are tracking sequentially, yearly. Any trends there?

Yes. So on wage inflation, we called out at the beginning of the year, we were expecting something around 5%, and it's tracking pretty consistent with what we were expecting. So not a lot to update on that. . In terms of mistreatment rate, it's doing what we had largely expected, which is slowly improving year after year post COVID, not a lot to call out. It's a pretty small magnitude. We think we'll get back to our historical mistreatment rate over a few years. So in any given year, it's not really a significant number.

Got it. And last one, what should we expect in terms of center consolidations for the remainder of the year?

Thanks, Dean. I think the number will be somewhere in the 30 or so closures sort of net, that would be the right number to have on the net build and closures.

Gary Taylor with Cowen.

Maybe just to follow up on that last one. That's a [ 30 ] net for the next 3 quarters or that's the full year number?

That's a full year number.

Got it. I just -- I wanted to ask, first, I'm going to commend you for producing margin growth well in excess of what the Street is able to model. I think there's a third quarter in a row where you've produced 30% to 50% OI growth on 6% to 8% revenue growth. So it's really stunning cost management, productivity, all the things you guys are doing. Once we anniversary that, so maybe there's another quarter there, but when we get into the back half of '24, are there still some good reasons to believe that, that operating leverage can sustain at something above your long-term 3% to 7% OI guidance, like what would be a couple of key swing factors to be optimistic about some level of operating margin leverage continuing?

Yes. So first, thank you, Gary, for those kind words. As we look forward, I don't think we're changing our long-term OI growth number from 3% to 7%. So I'd start with that. That said, I also don't think we're running out of opportunities to continue to run the business well and deliver high-quality clinical care to our patients and continue to improve our bottom line and potentially our margins. we've done this not just on the back of cost cutting, I would highlight, right? We've done a lot on the revenue side that has kicked in nicely. But I think there are other opportunities as well. Continued progress on IKC would be on the list. I think capacity utilization improvements would be another important one that I point to. I think there are other components of our cost structure, which could be productivity, could be other things nonlabor-related that we can continue to manage. So I don't feel like we're running out of ideas. That said, we're also not ready to raise our long-term OI guidance above 3% to 7%.

Maybe last one for me. I just want to maybe understand tender [ consolidations ] a little bit. When we look at average patients per center, certainly multi-multiyear high. And just in the last couple of years, I think, patients per center is up 9% in a couple of years and your margins improved, I think, nearly 300 basis points as that's happened. Some of that's the consolidation. Some of that is expansion of your home programs driving that. Is this still a key lever going forward or beyond the 30 centers Javier talked about.

Well, I think the -- let me clarify because a couple of those numbers didn't resonate, but maybe we can clarify them here. I think the better way to think about it is how are we doing in utilization of our centers and preclosing of these centers pre the excess mortality, we were in the mid-60s of utilization. And right now, we're at [ 58-ish ] percent utilization. And so we have more capacity available, and therefore, we're less likely to have a need to deploy capital to build centers. And while our home has improved, it hasn't improved that much. Our mix continues to be around 15% of our patients at home. And so hopefully, that clarifies a couple of those points there.

Yes. And Gary, just to add one thing on to what Javier said, we can improve capacity utilization without closing any more centers. We're just absorbing treatment growth in our existing footprints.

Adding shifts, adding machines.

Right.

[Operator Instructions] Our next caller is A.J. Rice with UBS.

Thanks, everybody. First, maybe just to ask on the trajectory on IKC, I know you were forecasting for '24 a loss of about $50 million. And I think in the first quarter, you're at $26 million. I know there's seasonal factors and a variety of things going on. But I just wonder if you would say you're on track? Are you running a little better? Or how should we put that in perspective?

Yes. I would say we're largely on track. There's a lot of seasonality in this business. And obviously, you learn more as the year progresses, but there was nothing surprising to us in the Q1 results.

Okay. And then another coming off the fourth quarter, I think we had triangulated -- I don't think it's your specific guidance but triangulate it that you're sort of expecting share repurchases to be in the $1 billion to $1.5 billion range for '24. With your comments about how the first quarter played out, do you think you'll still get to something that maybe approximates that? Or should we just assume that the first quarter share repurchase activity has gone and you'll continue in the last 3 at the previous rate.

I think we still aspire to that goal. There's obviously a timing component to it, and we'll watch it, but we're still aspiring to get it all done.

Okay. And just lastly, a follow-on question and comments about the international acquisition. I guess, it sounds like that is, in your mind, more of an opportunistic deal that came along that allows you, like you said, to leverage in certain markets and enter some new ones. Is there anything that's happening on the international front that makes you think that the pace of activity there could step up?

No. I think you've got it in the right light, which is we are opportunistic, and we're always looking for a transaction that meets the criteria that we've outlined. And if we don't find it, we don't execute. And if we find it, we do. And so there's no urgency or rush but rather just doing business with discipline and according to our plan.

Our next caller is Lisa Clive with Bernstein.

A few questions for me. On the utilization figures that you mentioned, that's just looking at your in-center population, right? I'm just trying to think about how to layer in whole patients on top of that, assuming that population continues to grow faster than your in-center patients, whether essentially that improves the number of patients per clinic, but then in terms of utilization, you just think of the in-center. And then second question, could you tell us what percentage of your patients are on MIRCERA today? Just trying to understand how much more costs you could potentially squeeze out from that transition. And then lastly, do you have any preliminary thoughts, comments on online hemodiafiltration. I assume in your European centers, you use that technology. It obviously remains to be seen how quickly FMC can launch those machines and ramp up scale to be able to sell them in the U.S., but just would love your thoughts on that.

Sure. Let me take them in order. And if I miss anything, please remind me. On utilization, that number is the chronic center utilization, and the way to think about a home is, of course, it can add patients much easier and with much lower capital deployment. And so you got it right that utilization that we gave is in-center. As it relates to MIRCERA, that's pretty much the vast majority if not all are now on MIRCERA. And so that's played out. And then on hemodiafiltration, I think it will be interesting to see how that plays out in the United States because it's -- as you know, it's allowed in many different countries. And the numbers that we have are really all over the place, meaning in some countries, the vast majority of patients get it. While in others, it's a tiny percentage of the patients that get it. And so while there is 1 or 2 studies that say that it could be better because it gets the mid molecules through. There's a lot of holes that you can poke in those studies and so we'll have to see how that plays out. And then, of course, the FDA approved the machine, but we don't have any reimbursement guidance. So at the end of it, you'll have to incorporate, a, what the doctor wants, what the patient wants because it might take more time to do that treatment and then put the economic model on top of that. So we've got too many variables there that are still to be defined to be able to size it in a helpful way.

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

Okay. Well, thank you, Michelle, and thank you all for your questions and interest in DaVita. As we discussed on the call, we're off to a strong start of the year. And of course, we'll continue to work hard to stay on this trajectory. First and foremost, we remain vigilant in providing great clinical care for our patients. Thank you all for joining the call, and be well.

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