DaVita Inc.

Good evening. My name is Jordan and I will be your conference facilitator today. At this time, I would like to welcome everyone to DaVita's third quarter 2023 earnings call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. 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 the number one on your telephone keypad. If you would like to withdraw your question, press star and then the number two. Thank you. Mr. Eliasson, 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 Nick Eliasson, Group Vice President of Investor Relations, and joining me today are Javier Rodriguez, our CEO, Joel Ackerman, our CFO, and Dr. Jeff Gillian, our Chief Medical Officer. Please note that during this call, we will 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, Nick, and thank you all for your interest in DaVita. We delivered another strong quarter. We began the year by making progress earlier than expected across many of our key operating priorities, And that momentum has continued into the third quarter. We have balanced a strong focus on near-term operating discipline while continuing to invest for future growth. At the same time, we're creating a differentiated experience for our teammates and, of course, delivering the highest standard of care for our patients. Today, I will address our performance in the third quarter, share our perspective on the potential impact of GLP-1 drugs, provide an update on 2023 guidance, and then wrap up with some thoughts on next year. Before we get into third quarter details, I would like to start, as I always do, with a clinical highlight. This time, I will highlight our international business, which provides care for more than 40,000 patients across 11 countries. Each country is unique in terms of health status, local methods of practice, and regulation. Over the past five years, we have developed universal protocols to combine our kidney care experience with local practices within each country. Since launching this proprietary framework, we have seen consistent and meaningful improvements in clinical outcomes. We now outperform the clinical benchmarks of every international market in which we operate. And at the aggregate level, all-cost patient mortality across our international countries has dropped by 20% since 2020. These results energize the soul of our company, which is to extend life and improve the quality of life of our patients. Transitioning to our financial performance, we had a strong third quarter, delivering adjusted operating income of $525 million and adjusted earnings per share of $2.85. This was ahead of our expectations for the quarter. We continued to perform well across our key operating metrics and also had additional benefit related to seasonality and timing. Now, let me go to the next level of detail and highlight three drivers, including patient census, patient care costs, and integrated kidney care, or IKC. First, our patient census has remained steady following the growth we saw in the first half of the year and we expect to end the year with a census of 1,500 to 2,000 patients higher than the end of 2022. Mortality continues to decline in 2023 in line with our expectations. Assuming these trends continue, we expect to return to positive volume growth in 2024 and beyond. Second, patient care costs continue to decrease during the third quarter. Outside of the seasonal items, the conversion to Mercera for anemia management was a key driver of the decrease. That said, wage growth remains above historical trends and exceeds growth in revenue per treatment, but was below our expectations for the quarter. Our experience on labor is consistent with recent macroeconomic trends. The tight labor market and low unemployment has continued to put pressure on retention and training, offset by slight easing in the wage environment. And finally, Our IKC business had a strong quarter and is tracking ahead of our forecast for the year. We're improving patient health outcomes and reducing the total cost of care, which generates savings that is shared between DaVita and our partners. We also realize that revenue associated with these savings earlier in the year than anticipated. We continue to invest in growth while carefully managing our model of care costs, and we remain on track with our multi-year plan to achieve break-even by 2026. Transitioning to a topic of recent focus, there's been a lot of discussion on GLP-1 drugs, including speculation on their potential impact to dialysis growth rate. We're excited by the evidence that these drugs could improve the health of many people worldwide. That said, despite the evolving body of evidence about the positive impact of these drugs will have on obesity, diabetes, and cardiac disease, we continue to believe that the impact on dialysis volumes will be limited. We believe this is true, even if results from near-term clinical trials prove to be positive in regards to progression of chronic kidney disease, or CKD. To explain our perspective, it is important to segment the population based on disease state. In the group that is upstream from CKD Stage 3, it is intuitive that lower obesity should lead to lower incidence of diabetes and hypertension, lower incidence of chronic kidney disease, and ultimately, fewer people on dialysis. This thesis is built on many uncertainties within a progressive disease, but the one area where we can have clarity is in regards to timing. In this population, the progression to end-stage renal disease is typically 15 to 20 years or longer. Suffice to say, this scenario is beyond the horizon of our strategic plan. Now, turning to late-stage CKD population. we believe that there are four key factors. First, GLP-1 adoption rate in CKD population. Second, the impact on CKD progression. Third, the offset impact of cardiac mortality benefit. And finally, the impact on payer mix due to any changes in the average patient age. For the purpose of building a conservative forecast, we assume robust adoption and long-term adherence. supported in part by the possibility of strong uptake by those who may take GLP-1s for obesity rather than for the CKD benefits. We also looked at a wide range of possible clinical impacts from current and future clinical trials. Stimulating across these assumptions, the midpoint of our model reflects a neutral impact on 10-year dialysis growth rates with a small but immaterial impact on payer mix. We recognize this may not sound intuitive, which is why we must consider several misunderstood characteristics about kidney disease. If we look at the approximately 16 million people in the U.S. today with CKD stage 3 and beyond, over the next 10 years, approximately 75% will pass away before reaching end-stage kidney disease. This compares to less than 10% of those individuals who will ultimately progress to dialysis. Since major adverse cardiac events are the single largest cause of this mortality, the positive impact of reduced cardiac event has a much larger population to influence than the effect of timing from slower disease progression. To better quantify the downside case on dialysis growth, we also modeled a scenario in which efficacy is found across all kidney endpoints in each of the flow and select trials, with zero offsetting cardiac mortality benefits This scenario, which to be clear is not something we expect, reflects a 0.5% annual growth headwind over the same 10-year period based on our model. This would equate to approximately $25 million of operating income headwind per year. Let me wrap up by acknowledging the disconnect between our view and what we believe is the market's perspective. To be clear, the disconnect is not related to the popularity of GLP-1 or their numerous health benefits, but specific to the impact on kidney care. Because of this, we have pressure tested our analytics with external epidemiologists and consultants with extensive review available research and across a wide band of assumptions. We have focused not on the midpoint, but on the downside scenario on volume and incorporated possible financial headwinds from lower commercial mix. In the end, our conclusion, based on what we know today, is that strong adoption of these drugs will not prevent us from achieving our long-term operating income growth targets in the next 10 years. This is a complicated topic, and we're happy to elaborate or answer any questions on our assumptions. Transitioning topics. Looking forward to our fourth quarter. We are revising our 2023 adjusted operating income guidance range of $1.565 billion to $1.675 billion to a new range of $1.65 billion to $1.725 billion. We're also updating our adjusted earnings per share range of $7 to $7.80 per share to a new range of $7.80 to $8.30 per share. It's too early to give guidance for next year, but we expect 2024 to be a year of positive growth in volume and adjusted operating income. Despite continued cost pressures and our ongoing commitment to invest in our teammates, we expect the midpoint of our 2024 adjusted operating income guidance will fall within our long-term target growth rate of 3% to 7%, driven by continued progress on our operating initiatives. We will provide more detail during our fourth quarter call. With that, I will now turn it over to Joel to discuss our financial performance and outlook in more detail.