DaVita Inc.

Good morning. My name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita third quarter 2022 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, Please press star, then number two. Thank you. Mr. Ackerman, you may begin your conference.

Thank you, and welcome everyone to our third quarter conference call. We appreciate your continued interest in our company. I am Joel Ackerman, CFO and Treasurer, and joining me today is Javier Rodriguez, our CEO. Please note that during this call, we may make forward-looking statements within the meeting 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 and all subsequent quarterly reports on Form 10Q 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. 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, Joel. Good morning, everyone, and thank you for joining our call today. Q3 was a challenging quarter for us. While national COVID statistics have been declining, the cumulative impact of COVID on the ESKD patient community continues to grow. Despite the economic challenges, we continue to deliver high-quality clinical care for our patients. We remain incredibly grateful for the amazing work of our frontline teammates who are unrelenting in their focus on caring for our patients. While our commitment to patients is a constant, It is particularly highlighted when a community is in need. As you know, on September 28, Hurricane Ian made landfall in southwest Florida, subjecting the community to sustain 100-plus mile-per-hour winds and significant flooding. This led to many health and safety issues for the people in the area, especially people who require life-sustaining dials of treatment. DaVita operates 230 dialysis centers in Florida with approximately 14,000 patients and 3,250 teammates. Through our comprehensive preparedness planning, I'm grateful that 100% of our patients were accounted for and all had received dialysis within days of landfall of the hurricane. We deployed water tankers, generators, fuel tankers, to quickly restore operations in affected areas as well as provide dialysis to patients from across the kidney care community. Now, turning to our financial results. As I mentioned, it was a challenging quarter. For Q3, our adjusted operating income was 351 million and adjusted earnings per share was $1.45. Adjusted operating income was down sequentially by 88 million from Q2 and was below our expectations for the quarter. The headwinds in volume have persisted longer than we assumed and contract labor costs and productivity did not begin to improve in the quarter as we had expected. We are now assuming these pressures will continue longer than previously anticipated. As a result, And given the continued uncertainty from COVID and the labor market, we are lowering our guidance for the year and our outlook for 2023 as well. We are reducing our 2022 adjusted operating income guidance to a range of 1.375 billion to 1.45 billion, and our 2022 adjusted EPS guidance to 620 to 670 per share. For 2023, we're updating our outlook for year-over-year adjusted operating income growth to negative 50 million to positive 150 million as outlined in our press release for this quarter. As we have said in the past, volume and labor continue to be the biggest drivers of uncertainty in our results. Let me walk you through the details on what we have seen on each of these and what we're assuming going forward. Let's start with the three main drivers of volume, census growth before excess mortality, mistreatment rates, and excess mortality. I will cover each of these individually. First, on census growth excluding excess mortality, we have seen a decline in patient admissions during each COVID surge, followed by a rebound after each surge. The decline we saw earlier in the year was attributed to Omicron surge which we anticipated would rebound in the second half of the year as it had in prior surges. We did not see the expected rebound in Q3 and are assuming continued pressure on admissions in Q4 and through 2023. Next, mistreatment rates. As we discussed during our Q1 earnings call, as a result of Omicron surge, mistreatment rates had increased and we're having a meaningful impact on the change in our treatment volume. We anticipated these increases would return to seasonal norms after the winter surge, and they have not. As a result, we're now assuming these will remain elevated through the end of this year and through 2023. Finally, on excess mortality. While COVID mortality rates in 2022 are down from prior years, excess mortality remains a challenge for us. We expect this to persist in Q4 and into 2023. The magnitude of the impact will depend on the size and the severity of COVID surges this winter and through the rest of 2023. Taking these three metrics together, volume remains the biggest source of uncertainty in our forecast for Q4 2022, and 2023. Moving on to labor, I will cover three drivers, wage rate, contract labor, and training costs. As we talked about in the past, we've been assuming significant wage pressure in 2022 with some offsets from lower benefit costs. Overall, we expected a headwind in 2022 of approximately 100 million to 125 million. Year to date, our results are consistent with this forecast. We had also seen significant pressure from contract labor costs in the first half of the year. We expected these to remain elevated in Q3, although at levels below Q2. In fact, the contract labor costs in Q3 increased relative to Q2, and we're now forecasting that that decline will be later and slower than originally anticipated. On training, we went into Q3 with elevated costs as a result of more hires, which is consistent with increases we have seen in past during hiring peaks. Training costs accelerated in Q3, which resulted in approximately 20 million higher costs in quarter than expected. Because of the elevated turnover, this has not yet resulted in a magnitude of positive impact we would normally expect on contract labor or staffing levels. As a result, we expect training costs to remain elevated in Q4 and early 2023. In response to these challenges, we continue to work on a number of cost-saving initiatives for 2023. First, we expect to deliver meaningful savings from our new contract from anemia management. We will begin to transition to our new contract for Mesera in 2023. Second, we're optimizing our clinic footprint for the current operational environment, which we expect to result in higher capacity utilization and better leveraging of our clinic's fixed costs, including labor costs. Finally, we have initiatives underway to reduce our GNA in several areas of the business while investing in our future. As discussed, the cumulative and continued effects of COVID and labor are the key drivers of the shift in our outlook for the balance of 2022 and through 2023. We have anticipated that volume declines from COVID and labor market pressures will impact our revenue growth and margins in 2022, but we had expected relief on both dimensions in 2023. We are now assuming these challenges will persist longer than expected, which is what accounts for the change in our guidance. As we step back, we remain confident in our strategy, and we are focused on responding to the current industry challenges. We're dedicated to delivering high-quality care of our patients, creating a great place to work for our teammates, and sustaining our investment in the future to drive growth in integrated kidney care have more patients treated at home, and increase access to transplants. I will now turn it over to Joel to discuss our financial performance and outlook in greater detail. Thanks, Javier.