DaVita Inc.

Good evening. My name is Missy and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the DeVita second quarter 2021 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'd like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw your question, press star then the number two. Thank you, Mr. Gustafson. You may begin your conference.

Thank you. And welcome, everyone, to our second quarter conference call. We appreciate your continued interest in our company. I am Jim Gustafson, 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 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 subsequent quarterly reports on Form 10-Q and any subsequent filings that we make with the SEC. Our forward-looking statements are based upon the 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 submitted to the SEC and available on our website. I will now turn the call over to Javier Rodriguez.

Thank you, Jim, and good afternoon. We are excited to talk to you today about our strong Q2 performance, our 2021 financial outlook, and recent developments on our efforts to transform kidney care. First, let me start the conversation with a clinical highlight. A kidney transplant is the best treatment option for eligible patients with kidney failure. DaVita has worked hard over the years to help our patients gain access to transplants through education, and direct support for patients to get on and stay on the transplantation wait list. The cumulative impact is meaningful. Last December, we announced a milestone of 100,000 DaVita patients who have received a transplant since the year 2000. To further advance the cause of transplantation, DaVita and the National Kidney Foundation are collaborating on a year-long pilot aimed at improving health equity in kidney transplantation with a focus on living donors. Increasing living donor transplants expands access to transplantation by increasing the availability of organs, which has been the limiting factor in the number of transplants performed annually. This pilot provides high touch and customized information to patients and families seeking a kidney transplantation from a living donor. We look forward to learning more from this pilot, improving the health equity of kidney transplants, and continuing to be the leader in supporting our patients to receive kidney transplants. Shifting to the latest update on COVID. We have made incredible progress in our efforts to combat the COVID-19 pandemic over the past several months. New COVID infections among our patients continue to drop significantly through the last week of June, down more than 95% from the peak in early January. However, similar to the rest of the country, we have started to see an uptick over the last few weeks. As of last week, on a rolling seven-day average basis, new infections are still down more than 90% from the peak. Thus far, our mortality continues to remain low on an absolute basis as we believe that our vaccinated patients are more protected from severe cases of COVID. We continue to educate our patients about the benefits of vaccine to reduce vaccine hesitancy, and we remain confident in our policies and procedures designed to keep our patients and our teammates safe while they're in our care. Now let me turn to our financial performance in the second quarter. We delivered strong results in both operating income and earnings per share. Our margins expanded as we continued to manage costs while delivering quality care. As a result, we delivered 6% year-over-year growth in adjusted operating income and 35% year-over-year growth in our adjusted earnings per share. Our free cash flow was particularly strong this quarter, and we continue to return cash to our shareholders through our stock buybacks. With the first half of the year behind us, we are now increasing the midpoint of guidance for the full year. Let me transition to update our progress in our integrated kidney care efforts, otherwise known as IKC. Value-based care for our patients with kidney disease is gaining momentum and appears to have reached an inflection point. We have always believed that coordinating dialysis care with the broader healthcare needs of CKD and ESKD patients could simultaneously improve outcomes and reduce total healthcare costs. For years, we've been participating in a variety of small programs and pilots to build our integrated care capabilities and better understand the economics. We believe we are at that point now where we are ready to shift to the next stage of the evolution of integrated care. You might be wondering why now? The trend towards value-based care is not new either in kidney care or other segments of healthcare. So what's changed to make the developments of scale business viable today? There's a couple reasons. First, with the growth of Medicare Advantage, Payers are looking for innovative ways to manage the increasing number of ESKD patients choosing MA plans. These patients tend to be more complex than most MA patients and should benefit from tailored care management. Second, CMS recently initiated the payment models in kidney care. We're preparing to partner with nephrologists in up to 12 markets beginning in January of next year to participate in CKCC voluntary programs. Our participation in CKCC model will also provide us with operational scale and more geographies to enter into other value-based arrangements. Lastly, we've increased our confidence in our capabilities to deliver clinical and economic value at scale and have leaned in on our willingness to take risks. We believe we're well positioned to win in integrated care because of our strong partnership with nephrologists, our regular and consistent interactions with patients, a broad kidney care platform that spans various modalities and care settings, and a clinical data set and analytics that we use to create, develop clinical interventions to support our patients holistically. We have a demonstrated track record of improving patient outcomes, coordinating care, and lowering costs for patients in risk arrangements. For example, in our ESCOs, we were able to generate non-dialysis cost savings in the high single digits, which translated into more than double the average savings rates compared to the rest of the industry over the life of the program. With our special needs plan, we have been able to lower mortality by 23% relative to other patients within the same center and county. To give you a better sense of the scale of the business, as of today, approximately 10% of our U.S. dialysis patients are in value-based care arrangements in which DaVita is responsible for managing the total cost of care. This represents almost $2 billion of annual medical costs under management. In addition, We have various other forms of value-based care arrangements with payers in which we have economic incentives for improving quality and lowering costs. In 2022, we expect our integrated kidney care business to double in size, both the number of patients in risk arrangements and the dollars under management. We also expect to see a dramatic increase in the number of CKD lives we have under risk in 2022. To prepare for this growth, we are currently scaling up our clinical teams and furthering building out our support function. Because of the investment, as well as the delays in cost savings impacts of our model of care and revenue recognition, we expect to incur a net operating loss of $120 million in 2021 in our U.S. ancillary segment. This outcome is consistent with the OI headwinds from IKC growth we called out at the beginning of the year and is, of course, included in our full-year guidance. The doubling of the business next year could result in an incremental operating loss in our ancillary segment of $50 million in 2022. We expect significant improvements in our financial performance beginning in 2023, as we begin to recognize savings from the new contract that we entered in 2021 and 2022. Over the five-plus-year horizon, we believe that our IKC business could become a sustainable driver of significant operating income growth. Currently, we serve approximately 200,000 dialysis patients across the country who utilize over $12 billion in healthcare services outside of the dialysis facility, including the cost of hospitalization, outpatient procedures, and physician services. In addition, we see an opportunity to manage the care of upstream CKD patients who currently do not dialyze in our centers. that we are managing the total cost of care for more than half of our dialysis patients as well as other CKD patients at low to single digit margin, we believe that this could be meaningful financial opportunity. In summary, all of healthcare has been talking about value-based for years. We are excited for DaVita to lead the way. With that, I'll turn the call over to Joel.