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. [Operator Instructions] 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 disruption. 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 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 emerge 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 in 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 generated power to provide the care for patients from six nearby facilities. We and others…

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 the 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…

Thank you, sir. [Operator Instructions] 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 4Q 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 mistreatment rate. In Q4, I don't think this does much to change how we were thinking about Q4 before hurricanes.

So Q4 -- so the hurricanes aren't expected to have an impact on Q4 volumes?

Less -- significantly less than the 10 basis points from what we've seen so far. The quarter is not over, obviously, so there could be additional challenges. But so far, no, 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 think that's -- yes, I think that's right.

Great. Thanks for the color.

Thank you. Our next caller is AJ Rice with UBS. You may go ahead.

Thanks. Hi, everybody. I think I know the answer to this point of clarification, but I'll just make sure to get on the record. The $10 million to $20 million of hurricane impact that -- I assume, that's EBITDA, not revenue. And then maybe just more broadly on the treatment patterns. I know last quarter you said that new to therapy was back to pre-pandemic levels. It sounds like it was positive again this quarter. I just want to -- is there any -- is it stronger or is it about the same? And then the elevated mistreatments, is that strictly the hurricane impact or is there anything else going on there? And then, on mortality, it sounds like you're now extending that into 2025. Is that just because this is the first time you're commenting on '25? Or is there something new that's making you call out '25 on the mortality -- heightened mortality rates?

Yes. So let me try and get these in order. So first, in terms of the Baxter impact in Q4, it would be largely in EBITDA. There'd be -- there's the potential for a little bit in the revenue line if we lose some patience to another provider that's able to provide peritoneal dialysis and a patient for whatever reason chooses to go that direction. But I would say the vast majority of it will be -- will not be revenue. On the three factors affecting volume, nothing new on admits. It's running consistent with what we've talked about in the past. Mistreatment rate is --it's never just storms, right? Historically, it's always been somewhere around 6% on average during the year, although not the same quarter to quarter Q1 and Q4 tend to be elevated and Q2 and Q3 less so. So the 10 bps from the storms was kind of the 10 bps more than what we probably otherwise would have expected. But it's not the total mistreatment rate. And then on mortality, I don't think there's anything new here that negatively impacts our view of 2025. I think the fact that the elevated mortality continues and hasn't gone back to pre-COVD levels. Every quarter that that happens, it informs our views a bit. But I don't think we saw anything over this quarter that changed our views for next year significantly.

Okay, thanks a lot.

Thank you. Our next caller is Pito Chickering with Deutsche Bank.

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 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 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. Sort of follow-up here on IKC. Usually you true up with your payers during the third quarter. Pairs have had a lot of -- we'll say slightly volatility this quarter. Just curious how that true-up 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 was -- 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 then don't you guys do your big annual true-ups from the previous year during the third quarter? Is that the --

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 so much.

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

Great, thank you.

Thank you.

Thank you. Our next caller is Lisa Clive with Bernstein.

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?

No, no. I was just -- yes, I mean, I think just trying to think through the potential growth of IKC, both on the top line and revenue, just -- it would be helpful at some point to get some indication of how the economics work in there. Thanks. But I'll wait for you to get back on that.

Great. Thank you.

Thank you. [Operator Instructions] Our next caller is Joanna Gajuk of Bank of America. You may go ahead.

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. So for next year, as Javier mentioned, it's pretty -- most of the story is about mortality and what happens to mortality next year. To put a little bit more color on that, I would say, if you take the middle of our range for this year of 75 basis points of growth, if you want to think about how to model next year, there is a slight headwind on treatment days for next year, about 25 basis points. And then there's one headwind and one tailwind. The headwind would be associated with clinic closures. We called that out last quarter as a source of headwind on volume for the year. And as the clinic closures come further into the background, further into our history, then I think we'll see a little bit of tailwind of that. And then we could also potentially have a headwind next year associated with PD and the Baxter issue that we're having and that's pretty simple. There are some patients who might want to start PD now. We don't have the ability to start all of the new PD patients over the quarter, and they might go to another provider. I would call those two things, the clinic closures and the Baxter PD as offsetting. So you really have next year, starting with a base of this year 75 basis points, less 25 basis points of day mix. And so you start with a base of 50 basis points. And then getting back to what Javier said, it's up to everyone to figure out what they think will happen to mortality next year versus this year. And then obviously mistreatment rate can also be another source of variability from one year to the next. So that's the framework I would lay out for how to think about it.

Okay. That's very helpful. Thanks for flying in the day’s impact. But if I may -- I have another question, but before I go there, just follow up on the PD patients. So I guess, yes, what's your home dialysis mix? And then inside that, what's the 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.

Okay. That's super helpful. If I may, another question I had on next year's outlook. I guess following up on your comment around, you expect the RPT growth next year to be still elevated. So are you kind of implying 3% to -- 3.5% to 4% that you're guiding for this year is the number to think for next year or is it a little bit less, a little bit more? How to think about it? Thank you.

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

Okay, so slightly lower than 3.5% to 4%, but you're saying higher than like your historical range?

Yes.

Okay, great. Thank you so much for taking the question.

Hey, Joanna, this is Javier. Just to clarify the comment I said because I don't think I was clear as I should have been. 15.5% is our mix of home patients total, of which 2% are HHD and 13% in change are PD. I don't think that, that was correct.

Okay. 13% is PD. Okay, great. Thank you.

Thank you.

Our next caller is Ryan Langston with TD Cowen. You may go ahead, sir.

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 restore 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.

So they're still -- mistreatment rate is still running elevated relative to pre-COVID levels. So I think without additional storms, we would expect them to continue to tick down over time. The pace of that is to be determined. That said, remember, they do go up seasonally in Q4. So, with -- even without additional storms, you'd expect mistreatment rate to be up in Q4.

Got it. Appreciate the help. Thank you.

Thank you.

Thank you. Our next caller is Justin Lake with Wolfe Research.

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.

Okay. And I'll take that offline. Then the $135 million of interest expense, is this a good run rate or does it potentially migrate higher into 2025?

No, I think it's a good run rate. Our caps for next year are actually slightly lower than our caps for this year. So that could work. Just to be clear, the $135 million is the uptick for next year. So I think you should think about this as $270 million for the year. Oh, hold on one second. My team is looking at me. Let me come back to you in a second, Justin.

Sure, sure. To be clear, I wasn't talking about the year-over-year. I was just talking about the --

I'm sorry, the $135 million for the quarter, that is a reasonably good number. For next year, it could come down as a quarterly number because our caps are a little bit lower. But if you think of the two things that are driving the number up, it's more debt, which I wouldn't expect us to incur more debt over the next few quarters and then our caps aren't going to change materially.

Okay. Do those caps expire or are they kind of at a reasonable rate? Like, you could re-up them right now? If they expired at the end of next year and interest rates didn't change, you'd be fine.

Yes. So we changed the way we do it. We have about a -- we have a cliff -- we had a cliff at the end of Q2 because we used to do a three-year or four-year cap. Now we do it rolling. So going forward, you wouldn't see a big change like this. It'll gradually move up and down depending on where interest rates are when the caps are put in place.

Perfect. And then lastly, just apologize if I missed this, but did you give a mix number for the quarter versus, I think, the 11% you talked about last quarter commercial mix?

Yes, there was really nothing material changes in the mix for any of our usual mix numbers.

Great, thank you.

Thank you. Andrew Mok with Barclays. You may go ahead, sir.

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.

All right. Thanks for all the color.

Thank you.

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

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. So, doing just some quick back-of-envelope math, mortality I get -- on the lack of a PD, that hurts. But Baxter's ramping up their facilities pretty rapidly. So that's pretty much solved in the first -- part of the first quarter. The Justin's questions on interest rates caps, that's just math. In center closures, international, that's again just math. Depending upon where the bundle goes, when you put together the headwinds and tailwinds, depending upon the bundle, isn't this a possibility this will be more of a tailwind than headwind? But we just want to see where the bundle ends up. Is that a fair way of think of thinking about this?

I'm -- Just help me again with the end of the question, Pito. What specifically are asking if it's a headwind or tailwind? The bundle?

Yes. So the tailwinds seem -- just putting the math together on the headwinds, understand those and understand the math of the tailwinds. The biggest variable here seems to be with the bundles. And so depending upon...

Got it. Okay.

And depending upon where the bundle goes, that will define whether the headwinds or tailwinds are a tailwind versus a -- maybe your commentary about a push. If depending upon the pricing we got soon, this could be, I guess, more favorable, depending upon what the government says in a week or two. Is that a fair way of thinking 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 go -- could go either way, a net headwind or a net tailwind.

Okay, fair enough. Thanks, guys.

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 except to -- 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…