DaVita Inc.

Good evening. My name is Darren, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then number one on your telephone keypad. If you would like to withdraw your question, press star and then number two. Thank you. Mr. Gustafson, you may begin your conference. Participants, please stand by. The main speaker got disconnected. Participants, please stand by. We have Jim Gustafson in a minute. Gustafson, you may begin.

Thank you, Darren, and welcome, everyone, to our first quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today are Ken Theory, our CEO, Joel Ackerman, our CFO, Javier Rodriguez, CEO of DeVita Kidney Care, and Jim Hilger, our Chief Accounting Officer. Please note that during this call, we may make forward-looking statements within the meanings of federal securities laws. All of these statements are subject to known and unknown risks and uncertainties, that could cause 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 and quarterly report on Form 10-Q. 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. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website. I'll now turn the call over to Kent Therry, our Chief Executive Officer.

Thank you, and greetings to all of you, and thank you for your interest in DaVita. The first quarter results, as many of you have already seen, were slightly ahead of our expectations. Javier and Joel will elaborate on that. But as we are first and foremost a caregiving company, I will start, as we always have, with a clinical highlight. In this case, readmissions, hospital readmissions, of course, remain the top priority The normal 30-day hospitalization readmit rate for ESRD patients is about 35%. That's more than double for the normal patient population in Medicare. Our Q1 readmit rate was 31.8%, so significantly lower, also continuing to improve versus the prior quarter and prior year. And our readmit rate is steadily trending down since we launched a number of transition of care initiatives, really pretty much starting in 2017. which focus on delivering the right care to patients when they are discharged. If you do the math, just to get a sense of the impact on the overall system and the savings and quality improvements associated therewith, that improvement over the last two years equates alone to about 45,000 fewer patient days in the hospital. Good for patients, good for taxpayers, good for their families, and we're only gonna get better. Moving on, this is just shy of my 20-year anniversary. here at DaVita. I think it's my 102nd earnings call when I combine that with my time at Vibra, where some of you were with me slash us there as well. It's nice to finish in a call where we're going to reaffirm our annual guidance. And I was told the other day by one of the capital markets players that we have, in fact, hit our annual guidance in every one of the 20 years, Javier and I together. It is also a good thing about this call that I'm turning over the ranks to Javier, whom Some of you know, and all of you will soon know, we worked together as friends and partners for over 20 years. He's been my heir apparent for several years, but this was a board-directed process, really according to all contemporary best demonstrated practices. But it's nice that both the board and I feel like we're leaving you in very, very good hands. A quick DMG update. There's really three positive things to say about DMG before I turn things over to J.R. figuratively as well as substantively. But the three positive points on DMG, number one, we do have a clear path to obtaining FDC approval, which is the exact same perspective that was shared by United quite recently. Good fact number two is that since those statements, there have been a number of recent developments that have moved us along that path and have us feeling even more positive. And then third, DMG itself has had a solid slash strong operating performance in the first quarter. The rest of the year looks even stronger, making the close all the more attractive to United. Now, over to JR.

Thank you, Kent, and good afternoon, everyone. I am humbled and I am excited about the opportunity to serve as CEO of DaVita, where I have been for 22 years. I look forward to giving you all a detailed view on my plans for the company at our Capital Markets Day, which we're in the process of finalizing and scheduling for August or September. That said, let me reassure you that I do not expect any major changes in our strategic direction, so let me reaffirm six elements of that. First, we're a caring company, and our focus on clinical excellence will remain at the core of everything we do. We will use our strong platform of over 2,900 clinics including 1,400 home programs and 900 hospital relationships and a network of over 5,000 nephrologists to help provide continuity of care for the patient as they transition between the sites of care. Third, we will continue to pursue integrated care with the intensity that it deserves. We will plan a robust set of patient data and innovative analytic tools that will help improve patient care while lowering overall costs. Fifth, we will continue to build our unique DaVita culture. And finally, we will continue to be disciplined with our capital. Now, let me transition to first quarter results. Our adjusted operating income for the kidney care business is off to a good start for the year, generating $382 million for the first quarter. As you see in our results, we're experiencing slower trends in unit growth than we expected a few months ago. There are many variables that contribute to the non-acquired growth, and they're difficult to individually quantify. That said, let me call out a couple of those factors. One, the growth of transplant volumes continued in the first quarter. We've talked about in the past about the opioid crisis driving much of this. As to what will happen in the future, it is hard to say. It is tragic. There is an increase in the deaths due to the opioid crisis, yet it is a gift for our patients with kidney disease who benefit from the organ donors. Two, we have seen an increase in competitive activity. For example, in the back half of 2018, there was a pickup in number of competitive de novo. Despite this slowdown in volume, we are reaffirming our guidance for both adjusted operating income and cash flow from the year. Regarding calcium and medics, you may recall that we mentioned that this would be one of the biggest swing factors in our adjusted operating income for the year. We expect that things will remain quite dynamic as the number of generic entrants and pricing remains fluid, making it hard to predict the full-year financial impact. Before I turn it over to Joe, let me make a few comments on policy. Over the last few months, HHS Secretary Azar has articulated four priorities to focus the department's work, one of which is transform the healthcare system from one that pays for procedures and sickness to one that pays for outcomes and health. He's starting with some bold proposals in primary care And given the comments he's made about the dialysis industry, we are optimistic about the opportunities to transform the kidney care sector. Overall, we support his vision to slow the incidence and progression of kidney disease, broaden the availability and uptake of home dialysis and transplantation, and support the continuity, evolution, and adoption of value-based care delivery models. We have advocated for these policies and have implemented innovative programs toward each of these objectives over the years. We are philosophically aligned and are eager to learn more about the specifics. Now on to Joel to provide some additional details on the quarter.

Thank you, Javier. First, I will walk you through some components of our U.S. dialysis and lab segment. Non-acquired growth for the quarter was 2.4 percent. Absent a turnaround in future quarters in the underlying metrics Javier referenced, We expect to come in below our non-acquired guidance range of 2.5% to 3.5%. Revenue per treatment for the quarter was in line with our guidance and was up sequentially by 40 cents. Before I move on to cost per treatment, I did want to address a question that came up last quarter about our Medicare Advantage mix. For context, the MA mix for all dialysis patients with Medicare, as disclosed in the most recent USRDS data, was 21% in 2016. In 2016, our percent of MA in Medicare was in line with the rest of the dialysis industry. As you would expect, that number has grown for us, and we assume for the industry as well, given the secular shift to MA in the broader marketplace. In Q1 of 2019, our MA mix stood at 24% of Medicare patients. We expect this number to continue to grow roughly in proportion to the MA market growth before the 21st Century Cures Act in 2021. Patient costs were down $1.52 per treatment quarter over quarter, driven by lower drug costs, partially offset by higher employee benefit costs, and seasonally higher payroll taxes. Dialysis and lab segment GNA was down quarter over quarter 86 cents per treatment as a roughly $3 per treatment decrease in advocacy spend was largely offset by higher compensation and benefit expense. Now some details on Calcimimedics. In Q1 2019, we generated revenue of about $17 per treatment with costs of about $11 per treatment from Calcimimedics, creating a temporary quarter-over-quarter tailwind of just over $20 million. For the rest of 2019, we continue to expect Calcimimedics to be one of the biggest swing factors in our OI forecast. Longer term, We continue to expect that calcium emetics will be margin neutral to slightly negative depending on how reimbursement is set. As a reminder, the first quarter tends to be the seasonally weakest quarter of the year due to fewer treatment days, higher payroll taxes, and the impact of the flu season. Moving to international. We generated a $2 million adjusted operating loss in the quarter, which included a currency loss of approximately $1 million, but excluded the $41 million non-cash goodwill impairment charge in our German dialysis business. The small decline in adjusted operating income from last quarter was a result of approximately three fewer treatment days. For the full year, we continue to expect to achieve profitable adjusted operating income internationally before any currency gains or losses from our APAC joint venture. For the quarter, our effective tax rate on adjusted income attributable to DaVita from continuing operations excluding the goodwill impairment charge was 30.1%. We continue to expect our adjusted tax rate attributable to DaVita for the full year to be 28.5% to 29.5%. Our adjusted earnings per share for continuing operations was $0.91. Now on to cash flow. Operating cash flow from continuing operations for the first quarter was $73 million. This cash flow was adversely impacted by the timing of working capital. There was an increase in accounts receivable as DSOs for the US dialysis and lab business increased sequentially by four days to 64 days in Q1 2019 due to some temporary factors that we expect to normalize over the next couple of quarters. We also saw a reduction of accrued compensation due to timing of 401 contribution, bonus payments, and a reduction in accounts payable. CapEx for continuing operations for the quarter was $179 million, excluding the impact of $12 million of proceeds from sale-leaseback transactions. In light of the changes in our growth rate, we continue to scrutinize our capital deployment. Keep in mind that the timeline from inception of a project to signing a lease and eventually providing a dialysis treatment is nearly two years, so much of this impact will be felt in 2020 and beyond. We are reaffirming our adjusted operating income guidance for the year of $1.54 billion to $1.64 billion and our guidance on cash flow from continuing operations of $1.375 billion to $1.575 billion. As always, our guidance is built to incorporate the impact of expected swing factors although there are scenarios in which we could end up above or below this range. Now I'll turn it over to Kent for closing comments.

Before we go to Q&A, I'd just like to share a few of my perspectives on the industry, on the community, looking back over the 20 years in the hope that that might be useful, particularly to a number of the people who are much newer shareholders to the space. Please allow me eight points. Number one, we never want to forget that we're providing an essential therapy. It's not disputable, it's not debatable, it's not controversial who needs dialysis or why the value it provides. That is a good thing for people, it's a good thing for shareholders. Number two, the presence of an uncomfortable cost subsidy, perhaps one of the most extreme in American healthcare where the private sector has to subsidize the roughly 90% of our patients that our government pay. This is bad. It's a bad way to organize the healthcare system, but it's been this way now for 30 years. And the good news about it is it's the same for every single player in the space. Number three, we've never been without intense productivity pressure. The derivative benefit of that is we are perhaps the most productive healthcare service segment in all of America, in all of the Medicare program. Number four, there's been a continuous stream over the 20 years of existential threats towards the business model. By that I mean existential threats that people said would either dramatically impair or destroy the economic viability of the business model. Things like everybody's going to be able to do a wearable kidney. Things like diabetes incidence is going to plummet with a new drug or stop advancing. I could list example after example through the course of the last 20 years. Of course, none of those existential threats have ever materialized, which is not to say there haven't been activities in all those realms, but never have they done anything like what some people feared and always we've been able to adjust and ride those new waves successfully and sustain their leadership. Number five of eight, DaVita in particular, excellent clinical performance and a fervent belief in transparency around clinical outcomes. And in addition, our entire industry has improved care and the productivity care in ways that most of the rest of chronic healthcare America would envy. Number six, periodic policy opportunities and threats. We are and we work in very close concert with the federal government and to some extent the states. will always be the case where sometimes they will do things that temporarily impair us. There will also be opportunities where we can improve our value alignment with the government. I'll just give one example of how significant the math can be. We recently had to endure five years of essentially flat Medicare rate reimbursement. Cumulatively, that made a $386 million per year difference in incremental revenue versus not. The resiliency of the business model to endure that over the prior five years, the recent five years, and now entering back into a period of rate normalcy is quite noteworthy. Number seven, the inexorable march towards integrated care. And this is relevant on a couple different levels. First, the degree, the depth and breadth and fervency of policy support from both these and ours for integrated care, not only for our patients but for all chronic care patients, is really at an all-time high and shows no signs of reversing. So from a policy point of view, that march is picking up speed. Let's also not forget, however, that we are in a unique pole position to take care of these very expensive and needy patients who just happen to have Dialysis is a common denominator because what they also have are diabetes, hypertension, cardiovascular disease, anxiety and depression, et cetera, et cetera. And therefore, our pole position, our unique position and relationship, combined with all the capabilities that we've invested in, put us in a great spot for what is an emerging tidal wave, we hope, for America and for its patients. And finally, number eight, the ability of this business model to convert operating income into free cash flow and free cash flow into sustainable earnings per share accomplishments. In the context of all that, those eight points, we have moved equity value from about $150 million 20 years ago to over $9 billion today and hopefully significantly more value for you soon, for our patients soon, and for our taxpayers soon. And if I were to just step back for a second and stare at the current platform, three things are quite striking. The resiliency of us and our community is noteworthy. Second, our relative performance within that world consistently over the last 20 years. And third and finally, our opportunity for increased differentiation moves up with every rise of integrated care. And so we're looking forward to being ever more differentiated in ways that are ever more driven by our historic capabilities, our historic investments, and our current market position. With that, operator, if we could please turn it over to Q&A.

Certainly. Participants, if you would like to ask a question, you may press the star followed by the number one on your phone and mute your phone and record your first and last name clearly at the prompt. Your name is required to introduce your question. To cancel your question, you may press the star followed by the number two. We have a couple of questions in queue. Our first question comes from Kevin Fishbeck from Bank of America Merlin. Your line is now open.

Great, thanks. Just wanted to see, I guess, Kent, I think you said that the quarter came in slightly ahead of your expectations, but then when Javier was talking about the revenue number, you talked about the volumes coming in lighter. Can you just go into it? What was it that came in better than your expectations to get the operating income number, I guess, a little bit better?

Sure. Hi, Kevin. It's Joel. I'll take that. Our internal number was a bit lower than the streets, largely driven, I think, by timing related to seasonality. So that's, I think, the genesis of that comment. I would say the single biggest thing that drove the number stronger was calcium emetics. And I mentioned in my script about a $20 million tailwind in calcium emetics in Q1 versus Q4.

And can you kind of remind us of what you think the pace of that? You talked about ultimately that becoming a neutral or maybe even a slightly negative thing. Is that slowly by year-end or is that a two-year? How do you think about that process?

Yeah, so I think you have to think about the margin in calcium emetics in two buckets. So start with what we had last year, which we've called out as mid-to-high single-digit margin, which is kind of where we were as 2018, think of that as the baseline. That will go away over time, probably measured in years, but not many years, as the whole dynamic of generic entrance plays through, and that gives the temporary tailwind, which is the 20 million. That's the second piece. but then ultimately plays through to ASP. So the $20 million, that extra tailwind that we saw in Q1, we don't know how that will play out over the rest of the year. There's certainly a possibility that we will be able to continue to buy at generic rates, in Q2 before ASP falls and there'll be a continued tailwind in Q2, we don't know what will happen in the second half of the year. There is a scenario where that completely reverses, where generic availability in the market disappears while ASP is falling and what was a tailwind in Q1 will turn into a headwind in the back of the half of the year. So I think to try and sum this up, I think the mid to high single digit number that we called out in 2018, we think that will persist through 2019. How long it lasts after that is a question mark. This added $20 million tailwind could persist for a little bit while longer, although it could flatten out and it could potentially turn into a headwind in the back half of the year, all depending on what happens with generic supply and ultimately what happens with ASP.

Okay, that's helpful. And then I guess, I'm not sure if you said it, I didn't catch it, but commercial mix in the quarter, any comment on how that trended?

Yeah, the mix was slightly higher quarter over quarter. And I'll just add, since you asked, as we step back and look over what we said at J.P. Morgan, I wish the range was a little wider because that number sort of bops up and down. But in general, we were slightly up and there's nothing in the mix that would change or impact our guidance.

Can you talk a little bit about some of the things that you mentioned as far as volume headwinds? Is there anything within the volume headwinds that would have a directional impact on mix? Some of the things you mentioned as far as transplants and stuff, I think that might actually be more of a headwind to commercial mix than to Medicare mix, for example. I don't know how you think about that, but we'd love to hear your comments on those pressures and how they apply to mix.

Sure. Let me take a stab and see if I'm answering your question. First, I just want to say I'm embarrassed we got it wrong at J.P. Morgan, and we missed the number so quickly after that. Two is that we have a track record of outperforming on non-acquired growth, and we've had some episodic quarters where our competitors have outperformed us. And three is that there's a lot going into this number. There's incidents, there's mortality, there's transplants, there's competitors, there's payer dynamics, and they're all moving in opposite directions sometimes, so it's very hard to pinpoint the number. But at the end, what we're trying to do is work really hard to make sure that we get the right tradeoff between growth, rate, and capital deployment. And that's really what it's all about.

All right, and then maybe just my last question. You know, clearly you're seeing a slowdown in volume. I guess your competitors are ramping up de novos. Is there any way to kind of quantify, in your view, market share, I guess, losses maybe that are happening? Would you have said that we'll never should have been 2.5 to 3.5, it was just the market share that pushed you down below that, or how do you think about market share?

Yeah, it's a good question. I mean, if you look at market share and you look at what, what that 1% difference is over a year. This is only a quarter, but over a year, it'd be about 2,000 patients. So you gotta look at it in the base that we have roughly 200,000 and so does FMC. But we don't take it lightly, of course. Compounding is very powerful. But again, our track record is that we will outperform over time. But when you look at it, sometimes you would rather have a lower growth if it's got an impact on your deployment of capital. And so you can't isolate each one of these in micro, but you've got to look at the sort of overall portfolio, because we could get you a higher NAG number, but it might be with lower returns on certain de novos. And so we're being quite disciplined and scrutinizing that number.

Okay, great. Thanks.

Thanks, Kevin.

Our next question comes from Justin Lake from Wolf Research. Your line is now open.

Thanks. Good late afternoon, I guess. First off, congrats, Kent, on 20 years in retirement. And, Javier, no surprise, but congrats on you taking the reins. Very exciting stuff. The first question I had is, Javier, as you kind of step in here, I feel like a big part of Kent's role as you've kind of been running the dialysis business for a while, Kent's role has been very much kind of strategy and capital deployment and the move to international, for instance, the DMG. So I'd love to hear your kind of thoughts on how you see the next kind of three to five years From a capital deployment perspective, that might have been different than Kent's. And specifically, you know, given this deal looks like it's moving towards close, your thoughts on, you know, how to deploy that capital, especially given where the stock is.

Well, as Kent articulated, Justin, we've worked together in partnership for 20 years. And so I've gotten that question asked a fair amount. And what I've said, it's not like I've been shelving my ideas waiting for the time to where I got to home, and now I get to execute on them. We've been partners, and we think a lot alike as it relates to the discipline on capital. And as I said in my opening remarks, there's more that's going to look the same than anything that's going to look different. Things that will likely look different will be more around the evolution of time, technology, and the needs of the business, integrated care policy, and those things that we will be driving. As it relates to capital, we have and we will continue to have a very strong discipline around capital, and we are going to be sharing our three-year plan in capital markets in August or September. I don't want to provide any more detail at this point.

Got it. And then you talked about the – and the $20 million of benefit versus the fourth quarter. Can you give me the total benefit in the quarter here?

I'm sorry. I'm not sure I understand the question, Justin. Are you saying the total benefit in the quarter? So it's roughly double the $20 million. So it's It's a $20 million headwind combined with the number we had called out in the past, which you'd call it $18 million. So $38 million would be the total Q1 profit from calcium emetics.

Got it. And is your view that calcium emetics, you know, potentially will not be a benefit next year? So we should think about that as a headwind year over year of the numbers?

I think it's hard to call out the timing. We think ultimately, uh, most, if not all of this will go away. Don't know whether it's a 2020 event or 2021. Got it.

Is there anything you could share with us in terms of how, uh, you know, the, so if you're at a $40 million run rate, it sounded like the answer to Kevin's question was that you thought that that could continue in the quarter. in the second quarter and then couldn't moderate in the back half of the year. But what do you have baked in the guidance for the full year in terms of the calciometrics benefit, even if it's a range? It would be helpful to kind of understand.

Yeah, you know, there are a lot of scenarios that play through the ranges in the forecast. So I don't think I'd be comfortable articulating just a single number that flows through. But I think it is safe to say what we've said in the past, which is some of this variability in the near term around calcium emetics is the single biggest swing factor in the 100 million of OI range that we gave in our guidance.

Okay. And I think I had, you know, obviously it's early for 2020, but Is there anything that, if this does start to moderate, is there anything that you can think of that could, you know, that could benefit, that could kind of be an offsetting benefit in 2020, some kind of tailwind, like maybe the, you know, your EPO contracts could, you know, potentially help offset that? Anything that you want to point us to before we think about, you know, as we think about 2020 headwinds and tailwinds?

Yeah, so... I think there's a lot going on in pharma in general, and that applies to unit price, it applies to unit volume, it applies across a number of the drugs we use. So I wouldn't point out a specific headwind or tailwind, but I don't think you can look at this as one isolated factor in the P&L and just handle it as its own issue.

Got it. If I could sneak in one more. I know last year, and I apologize for not having run these numbers myself, but just kind of thinking it through. Last year, I remember your first quarter had a benefit from a Medicare receivable trough of some sort. And this year, obviously, as a Calcemedics benefit, if I remember correctly, last year did not have much of a benefit from Calcemedics. I think it started ramping slowly. Is that correct? That is correct, I believe, yeah. Got it. So if I net the two, right, and if I kind of think about growth year over year in the first quarter, excluding Calcemedics and the Medicare true-up, can you do that math off the top of your head and give us an idea of what the year over year first quarter looked like?

So if you went back to Q1 last year, you'd have to take out the Medicare bad debt. You'd also have to take out the DHS $17 million debt. one-time pickup that we called out back then. If you looked at that number relative to where we came out this quarter, I believe it would be up a bit.

But that would not be adjusting for calcium and medics. I think that math would be somewhere at 371 to 382, and we had one less treatment day

Year over year. The 371, the 382, and then I would back out 38 million for Calcemedics. Is that what you're saying?

I think that 38 would be high. I don't remember what we had in there, what exactly we called out, but the 38 would be high. We can take it offline, Justin, and get you a better number. We've just got to look back at

what we disclose. I just offer a cautionary note on two levels here. One, when we start to throw in too many variables on a live call, there's a lot of room for potential confusion on exactly how people are defining different numbers. And then second, it's sort of stating the obvious, but worthwhile, that in any given year, we've got lots of variables that move $15, $20 million recurring, non-recurring, up, down. It gets pretty tricky to start paying too much attention to one or two of them because there's a lot of them all the time.

Got it. Thanks for all the callers.

Thanks, Justin.

Thank you. Next in queue, we have Steven Tannell from Goldman Sachs. Your line is now open.

Good afternoon, guys. Congrats to Kent Javier as well. I guess just the first question, just in light of the updates on DMG and the commentary around the industry growth and more de novos from competitors, could you kind of give us your latest thoughts on the potential deployment of DMG proceeds and, you know, what your thought process is around that at this point?

Yeah, so our thinking on that hasn't changed. You know, the DMG proceeds will go to pay down debt. After the deal closes, we're going to do a subsequent financing, and we'll use those proceeds to bring us back to our historical leverage range three to three and a half times and use that to buy back stock. So nothing really has changed around our thinking there.

Perfect. Thank you. A couple more sort of granular ones. I guess just on the calcium and medics discussion, just to round that out, the $11 cost per treatment, would you be able to give us that figure sort of for last quarter, just so we think about how this is developing?

Yeah. It was, hold on, bear with me one second. It was about $13. Got it.

Okay. So it really does sort of seem like I guess the generic availability is maybe what changed here. And just thinking broader about, you know, patient care costs for treatment, it was considerably lower. Is there any other drivers that you could talk about in that line that we should think about as potentially more sustainable? Are you talking about the calcium emetics question? I'm sorry. No, I'm sorry. Just inside of patient care costs or on like a per treatment basis came in quite a bit better. Just trying to understand some of the other moving pieces as well.

Oh, yeah. So, the other piece is EPO.

EPO is better? Yeah. Got it. Okay. That's helpful. And then just one more maybe on the commercial side, you know, sounds like mixes up a little bit. Maybe if you could just comment on rate as well, just as we think about RPTs in the quarter.

I think there's no headline on the rate side. It's basically in line with where we expected it.

Got it. Okay, and sort of a continuation, I suppose, of what was laid out at the JPM day. I think there's a decline in out-of-network rates and some of the outlier stuff, but an increase on the rest of the book. That's all still pretty much what's playing out? Yes, nothing to call out. Great. Okay. All right. Thanks. Actually, I guess there's one last one. I'm just on the advocacy side. Is anything to note there just with AB290 or anything else on your mind? Are you still really comfortable with the $60 million step down in the guide? It sort of sounds like it, but I just want to check in there.

Yeah, the short answer is we continue to work with AB290, and we are comfortable with our advocacy spend and our progress in our relationships. in Sacramento and another state capital. All right. Perfect. Thank you, guys.

Thank you, Steven.

Thank you. Our next question comes from Mayo from UBS. Your line is now open.

Hey, thanks. Congrats. Kent and Javi are both well-deserved. Maybe just wanted to follow up on the competitive dynamics one more time. just might be helpful to define competition a little bit more. Is this new competitors that you're seeing, or is this de novo activity from existing competition within your markets? And do you have any view on last year's AKI regulatory changes with SNF reimbursement and whether or not you're seeing any activity on that side?

Yeah, on the first part, it is not the new entrance. We are not seeing any significant activity there. So, it is with the existing competitors. On the AKI, for those people that are not familiar, it stands for acute kidney injury. And basically, that's before a doctor concludes that your kidneys are end stage, meaning they could come back. And so, there was a change in philosophy there. because they wanted to get the patients out of the hospital and into the most efficient side of care, which is our centers. And so there are more diagnoses now of AKI because the system adjusted to that. I think that that volume has gone through the system, and I don't think it's relevant for NAG factors.

Okay. And maybe one more on calcium and medics. Is there any way to maybe frame up what percent in the quarter was generic versus branded since APAR, just in terms of dosing, and did anything really surprise you positively or negatively since your last call on this one topic?

On the mix, the majority of the mix ended up being on the generic side, and as it relates to surprise, I would never call it a surprise. We just knew it was going to be a fluid and dynamic time. And so we're going through a bit of the waves, if you will. In this particular quarter, it was helpful in that we were able to purchase some at a discount. And then, of course, as Joe already explained, that could be reversed at any time, depending on how it plays out, who enters, and how deep the pricing curve drops.

In any way to maybe frame up what the inventory looks like going forward, just to get a sense of how much visibility you have into additional generic opportunities?

No, it's been very hard to tell because of dynamics in the legal system as to what inventory is available and who's going to enter, and then, of course, that will drive the price to have any entrance and how much inventory. So we are just as interested as you are in those numbers, but they're very hard to find.

Yeah, no, totally got it. Maybe just one, one last one. And just curious, Javier, as you, you know, make the rounds and talk to, you know, your medical directors and nephrologists, are you hearing anything new from, you know, clinical protocols, therapies, just, you know, anything aside from, from sense of harm, just, trying to think from an upstream perspective if there's any change you're seeing within the nephrology practice setting. Thanks.

No, there's nothing to call out. The physicians are continuing to prescribe as they have in the past. Of course, they're always looking at the journals and the studies to see if there's anything in the signs that indicates anything new, but there's nothing that I would call out right now.

Great. Thanks a lot.

Thank you.

Thank you. Next in queue, we have Gary Taylor from JP Morgan. You're up, sir.

Hi, guys. Just a few quick ones. I think Joel mentioned, in terms of patient expenses, better EPO costs. Was wondering if that was price or utilization? Price. Thank you. Wanted to ask, you know, I've been on the calls for a long time, not 20 years, but a long time. Haven't heard you talk about competitor de novo activity a lot. I understand you're saying it's existing competitors, but wanted to see if you had any comment on some of the new startups that are focused on the CKT market, like Cricket and Samadis that are, you know, basically saying not enough. Resources have been expended. At CKD, we spend all our resources once a person hits ESRD, and I think Azar's comments were hinted at that or alluded to that a little bit as well. But how do you see that developing as positive, negative, possible risk to ESRD volumes, et cetera?

Sure. Thanks for the question. As it relates to competition, the first thing I'll say is, Competition makes us sharper and we respect all competitors and so it's with that approach that we go paranoid at it because we want to make sure that our patients get the best and we believe that we are best prepared to deliver that in a platform with all the sites of care. That said, of course, when you are small and you're getting capitalized, you need to generate a story And so their provocative story is one that says that they're going to, quote, unquote, disrupt and innovate. And we believe that we've been self-disrupting and innovating for quite some time. And we do a lot of patient education more than anyone else. We send more patients to the proper modality than anyone else. We have amazing transplant education. And so we know we have the entire suite. But, of course, they can't compete with that platform. And so what they want to do is create a narrative that we are, by definition of being big, that we somehow or other are not innovative, which is, of course, not the entrepreneurial spirit of DaVita. So, again, we want to be sharp and we want to take them on and we respect them. And, Gary, I would go ahead and add on a little bit here, give them the thoughtful question that,

Number one, it's easy to say, I found 1,000 CKD patients, people with kidney disease, but the kidneys haven't failed yet. It is tough to say which ones of those are most likely to have kidney failure and when. And it is impossible to say what would have happened otherwise. So in order for anyone to pay you anything other than a low, unsatisfactory fee-for-service rate means you need to have sufficient data to be able to take a scale population, know what they would have cost, so you can give someone a share of the savings of what they did cost after you intervened. There is no one better positioned than we are to turn those unknowns into knowns, and none of the new entrants have that capability currently, which is not to say they're smart and if they get enough money, it's a doable thing. It's not an easy thing, and it's not a cheap thing.

I appreciate the comments. One more quick one for Joel, if I could. You alluded to the fact that if non-acquired treatment growth stayed at this level, you'd be at risk of missing the treatment growth guidance for the year. Obviously, this quarter, despite the weaker volume, you made it up on the OI side. When you look at the year, you're contemplating the possibility you could come at the low end on treatment, but you've reiterated the OI guidance. Is the messaging just from that, there's enough other puts and takes that even at the low end or slightly below the low end on volume, you'll hit the OI range?

That's exactly right, Gary. We've got enough other things that we're not worried about the OI range, even if we come in below on that.

Thank you.

Thank you. Our next question is from John Ransom of Raymond James. Your line is open.

Hi. Just wondering when you think you might get some color from CMMI on the reimbursement changes relative to home reimbursement versus clinic reimbursement?

This is KT here. It's difficult to predict these things, and they have a couple of times predicted when they'll have stuff done and they haven't been able to get it done. Not because they're not smart and hardworking and don't have good ideas. We applaud so much of what they're working on and so much of what they're creating. But they have to go through a multi-agency approval process over which they do not have total control. So it's very difficult to know and sometimes they can't even know. If someone gets to it in the next two weeks, it's done in two weeks. If they don't get to it in 10 weeks, it's not done for 10 weeks. even though the elapsed time of the work might only be a week or two, things get pretty busy there. So unfortunately, we can't give you a helpful response.

So those of us who get paid to speculate with zero information, would you wildly object to the notion of, so let's say today we have 100 treatments and 88 are in the clinic and 12 are at the home. I guess they're going to pull some money out of the total pie, but would it be as perhaps as straightforward as saying, well, maybe we'll pay 5% less at the clinic and we'll pay 20% more for home and those dollars kind of roughly balance out? Or do you think it'll be a lot more dramatic and complicated and hard to figure out?

Yeah, I don't think speculating is a good idea because that's literally what the accurate verb would be. So, Well, we'll just have to wait. I'm very, very sorry, but we can't predict.

Okay, that's it for me. Thank you.

Thank you. Next in queue, we have Pito Shikarin from Deutsche Bank. Your line is now open.

Hey, good afternoon. It's Justin Bowers on for Pito. And congratulations, Kent, for moving on, and Javier for assuming the reins. Just in terms of some of the moving pieces with the receivables, can you provide us a little more detail on why the jump there in terms of timing? Should we expect that to go back to... where you ended at 4Q towards the end of the year, the middle of the year? A little better sense of some of the drivers there would be helpful.

Sure. So, Peter, there wasn't any individual thing. It was a bunch of things, some of which are operational, some of which are seasonal, but all of which are temporary. We would expect... in the next couple of quarters that this will all play through and we'll be back to the range where we were in kind of the back half of 2018. And to give you a flavor, I'll call out one thing. We did a system change in one of our smaller businesses, a billing system change, and that led to some operational complexity that led to some just temporary spike in the in the AR, but we've worked that through. Now we're just catching up. That was the single biggest thing. That was roughly 40% of the four days.

Okay, that's helpful, Joel. And was any of that related to not the 40%, but let's say the other 60% related to any of your contracts, maybe on the commercial side? And then in light of kind of the improvement in the mix quarter over quarter, is there any way that we can narrow the range there from the guidance you gave earlier in the year in terms of the commercial RPT?

Yeah, Justin, first I apologize for getting your name wrong. I don't see any linkage there. I don't think you can connect the two.

Okay, okay, and then in terms of the commercial RPT for where we are, you guys still, are you sticking to your guns there in terms of the guidance that you provided or?

Yeah, no change on that.

Okay, okay, and then just shifting gears a bit, looking towards like 2020 and MA and the opportunity there, you know, any kind of color you can provide on some of the discussions that you're having with the payers, maybe in terms of some of the different programs you'd set up and maybe some of the programs that you can run with them, thinking of the comment you made on the hospital readmissions and, you know, overall, like what's the rate environment there from MA

Yeah, Justin, as you can imagine, there's interest because people are trying to run their models as to what's going to happen to that population. The reality is that it's got a lot of variables, and at the end it ends up in being a patient choice as to what product they have. And so as it relates to the actual negotiation, we're continuing to have very constructive conversations with the payers as to how we can take risk on the MA business and we're actually innovating quite a lot in that book of business. So it's a constructive, productive conversation.

Okay. Thank you, Kent. That's all from us.

Thank you. As a reminder, if you would like to ask a question, you may press the star file button number one and record your name with your company name as the prompt. Next in queue, we have Murali Ghante from Lord Abbott. Your line is now open.

Hi, just a quick one for me. It looks like you had a $400 million revolver draw sequentially. Just wondering what the use of proceeds was for that.

I think you should tie that to some of the comments we've made about DSOs and the move in AP. So it was just largely around working capital.

Okay, so then that's expected to come down then in the ensuing quarters? Yes. Okay, thank you.

Thank you. Speakers, we show no further questions in queue at this time.

All right. Thank you all very much for your kind attention. We'll talk to you again soon.

And that concludes today's conference. Thank you for your participation. You may now disconnect.