DaVita Inc.

Good evening. My name is Darren, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Dutvita Second 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 the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two. Thank you. Mr. Gustafson, you may begin the conference.

Thank you, Darren, and welcome everyone to our second quarter conference call. We appreciate your continued interest in the company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today are Javier Rodriguez, our CEO, Joel Ackerman, our CFO, Leanne Zumwalt, Group Vice President, and Jim Hilger, our Chief Accounting Officer. Please note that during this call we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties, that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our second quarter earnings press release, our most recent quarterly report on Form 10-Q, and any subsequent filings with the SEC. Our forward-looking statements are based upon 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. A 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 our CEO, Javier Rodriguez.

Thank you, Jim, and good afternoon, and thank you for joining the call today. It's nice to be with you as I host my first earnings call as the CEO of the enterprise. As I reflect on my first 60 days, it's been a dynamic time. In that short period of time, the President of the United States issued an executive order on kidney health. We closed the DMG transaction. We bought back $350 million of stock. We commenced the tender process to purchase up to another $1.2 billion of stock. We launched a new bank financing, and most importantly, our team of dedicated caregivers performed over 5 million life-sustaining dialysis treatments. Hard to believe that it's only been 60 days. Before providing financial details on the quarter, let me start with a clinical highlight. DaVita has had a long commitment to helping as many patients as possible receive kidney transplants. We have created award-winning educational programs to support our patients to increase their chances of receiving a transplant. These programs include peer testimonials and animated videos on how to prepare for a transplant evaluation how to stay active on the wait list, how to find a living donor, and what to expect after transplant. We're encouraged by the interest of our current administration to try to improve on the biggest challenge, which is actually organ supply. We will continue to support the efforts to help patients on the wait list receive a transplant so they can join the estimated 50,000 DaVita patients who are living with a transplant today. Now let's move on to the quarterly performance, which we previewed with you in a press release last week. We saw strong financial performance in the second quarter. On the positive side, we had a sequential increase in revenue per treatment and a sequential decrease in our costs. On the negative side, non-acquired growth was disappointing. Joe will walk through the numbers, but I thought it would be helpful to provide you with qualitative views of the drivers. Our year-to-date revenue for treatment continues to be in line with revenue guidance we provided at the beginning of the year. Commercial rates are slightly up year-over-year, and Medicare rates are growing in line with our expectations. The team performed well on cost management with solid improvement in the quarter, primarily due to productivity improvements. Transitioning to growth, We're disappointed with our performance of non-acquired growth, which continues to fall below our expectations. While some of the decreases related to the slowdown in industry patient growth, there is no getting around the fact that we're underperforming the industry. The question we've been working through are, what is the potential for improvement and when will we see the result? Unfortunately, our response is dissatisfying. We're not ready to commit to specific numbers or timing. On a local market basis, it's proven challenge to differentiate between true underperformance and just good decision-making. We're evaluating opportunities market by market and trying to balance the sometimes conflicting goals of growth, productivity, and capital efficiency. Let me drill down through an example to bring the point to life. A common decision in any given clinic is whether to open a new shift. Most new shifts are temporarily cost inefficient due to the low capacity utilization. If the market has scale, capacity constraint, robust growth, the decision is pretty easy. You open the shift. If the market is small or the growth rate is inconsistent, it might make sense to trade the growth for productivity efficiency. Another example that's playing out in real time is in California. We have only signed two new leases in California this year, which compares to a typical four-year of closer to 25 to 30. This will have a negative growth consequence in the future, but will reduce capital deployment in a market where we feel it is not prudent to invest at this time, given the threats of disruption from SEIU. These examples illustrate the trade-offs between growth, productivity, and capital, which highlight why we're not looking at any metric in isolation. Now let me comment on President Trump's executive order. My high-level takeaway on the executive order is we are aligned, we are well-positioned, it's early, and the economic impact is uncertain. Now let me expand on each. First, We're well aligned with the administration overarching goal to provide better education to patients to increase home dialysis and to increase the number of transplants. We agree that early education of patients is critical to slowing progression of kidney disease and to increase the chances that more patients will be able to choose the best treatment option for their lifestyle. Second, in partnership with nephrologists, we believe we're well positioned across the continuum of patient care. We're the largest provider of home dialysis in the country and have a full integrated technology platform to make it easier for patients to treat at home. We have a robust education resource offering over 12,000 education classes to CKD patients this year alone to empower more patients to choose home as their preferred modality. We have strong partnerships with over 900 hospitals across the country, and we believe that we have a head start in building necessary capabilities to manage full risk in an integrated care environment. Third, with respect with the economic model, the administration announced the intention to pilot five new programs for kidney patients, one mandatory and four voluntary. A few details have been provided on the voluntary models, so we're not in a position to provide much insight into our strategic approach to drive growth or profitability from these models. What we know about the mandatory model is that there is that there will be an increased payment tied to home penetration and transplant rates. This will consist of two major components. First is a rate increase of 3% in year one for home dialysis. We expect this to result in approximately $5 to $10 million revenue pickup for us in 2020, which will decline in subsequent years as the rate increase goes away. The second component, which is probably the most important, is the potential for higher or lower revenues based on tiering of clinics driven by performance on home and transplant. CMS expects this to have a negative impact on Medicare reimbursement to the dialysis industry. Given that the dialysis industry already loses money on Medicare reimbursement, we will have to work with CMMI to ensure sustainability long-term economics. However, if it remains as announced and if 50% of our clinics nationwide are part of the demonstration, we should expect to also have some negative impact on our Medicare reimbursement. The community is working hard to better understand the rule and its implications. We intend to provide input in the 60-day comment period to highlight where the regulation may be improved. Now on to Joel to provide some additional detail on the quarter.