DaVita Inc.

Good evening. My name is Michelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Davida fourth quarter 2024 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, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Mr. Eliason, you may begin.

Thank you and welcome to our fourth quarter conference call. I'm Nick Eliason, Group 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 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 fourth 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 for joining the call today. As we embark on 2025, we're celebrating the 25th anniversary of Davida. During this time, we have focused our efforts on improving clinical outcomes, enhancing quality of life for our patients and care teams, and being a force for positive change for the health care system. It is an honor to carry on this legacy, and we look forward to pushing these boundaries in 2025 and the years ahead. Today, I will cover highlights of our 2024 performance, provide updates on several components of our growth trajectory, and conclude with guidance for 2025. But first, I will begin, as we always do, with a clinical highlight. As I noted, we're celebrating our 25 years, a period encompassing remarkable clinical progress. Together with our physician partners, we have achieved so much for the people who have entrusted us with their care. Among the many highlights, we have worked to dramatically increase the access to care for patients, especially those living in more rural areas of the country. We moved beyond in-center care and supported the proliferation of home dialysis with more than four of every five patients living within 10 miles of a Davida home program. Of the patients now treating at home, more than 80% use connected cyclers, a technology that enables our care teams to remotely monitor and improve patient health outcomes. We have expanded for being a dialysis provider to a comprehensive kidney care company, addressing each step in the kidney care journey. This includes our Kidney Smart program, where we have provided free education on managing chronic kidney disease to more than 300,000 people, and Integrated Kidney Care, or IKC, where we have pioneered value-based care delivery, successfully partnering with health plans and CMS to provide holistic patient care and addressing rising costs of the health care system. Finally, we have enhanced quality of care in 13 countries outside the United States, where we have consistently outperformed the clinical benchmarks in each market. I'm energized by the progress we have made to create better outcomes and improve millions of lives. And of course, we're far from done. Looking at the next chapter, our vision is to continue our unwavering pursuit of a healthier tomorrow. Transitioning to 2024 performance, we finished the year on a strong note, producing full year adjusted operating income and adjusted EPS in the top half of our guidance range, with -over-year growth of 21% and 26%, respectively. In a year with several unique hurdles, including change healthcare outage and hurricane disruption of our supply chain, I am reminded of the resilience of our organization and inspired by the passion of our dedicated care teams. Within U.S. dialysis, we continue to benefit from innovation in our revenue cycle operations. Enhanced collection performance and contracting propelled high revenue per treatment growth, offsetting slower than expected rebound in treatment volume. Although volume growth was positive for the first year since the pandemic, growth for the full year was below our expectations. Mortality and mistreatment rates remain elevated in the fourth quarter, and new patient starts were negatively impacted by supply constraints of our peritoneal dialysis solutions. On the expense side, we continue our track record of identifying efficiencies and executing on cost-saving initiatives. Beyond the U.S. dialysis, we expanded our international presence and continue to grow IKC. We have now closed on three of the four acquisitions in Latin America announced last year, with Brazil expected to close mid-year 2025. With IKC, we continue making progress on our journey of delivering sustainable integrated care. For 2024, results for IKC were in line with our expectations with an adjusted operating loss of $35 million. Our strategy remains focused on improving health outcomes and quality of life for our patients, minimizing avoidable medical expense, tightly managing our GNA costs, and pursuing the right opportunities to achieve scale. As a reminder, last quarter, we highlighted the temporary closure of Baxter's North Cove facility due to Hurricane Helene and the related impact on home dialysis. As a result of these challenges, we incurred approximately $6 million of operating income impact in the fourth quarter due to higher costs of saline, fewer patient starts due to the availability of PD solution, and lower productivity from our home caregivers. The negative impact was lower than we originally expected due to the extraordinary effort of our supply and physician partners, along with that of our procurement and operating teams. By year-end 2024, we had resumed admitting new home patients at historical rates. However, our inability to start new patients on PD contributed to lower new admits in the fourth quarter, which will negatively impact volume growth in 2025. This is included in our estimate of approximately $30 million of negative impact to adjusted operating income in 2025. Moving next to oral in the bundle, effective January 1st of this year, oral drugs transition from Medicare drug benefit over to the dialysis benefit. This policy is clearly positive for dialysis patients. We are excited to expand access for patients and expand options for prescribers. We estimate that up to 20% of patients did not have coverage and are now eligible to receive this therapy. Our patients will have support from dietitians and access to all major classes of phosphate binders, including both branded and generic options. We expect the 2025 OI contribution to be $0 to $50 million. For our 2025 guidance, we're back on a more normal adjusted OI growth trajectory. The midpoint of our 2025 guidance for adjusted OI growth is .2% and adjusted EPS growth is 11%. The detail ranges of which can be found in our press release. This comes on the heels of a strong 2023 and 2024 years in which we exceeded the top end of our original guidance ranges, despite weak volume growth by driving strength in other components of our core and ancillary businesses. A priority for 2025 will of course continue to be an intense focus on volume, as we believe in an eventual return to a 2% growth trend, recognizing timing is difficult to predict. Despite this uncertainty, we continue to have confidence in delivering adjusted OI growth in our target range of 3 to 7% for the years ahead. We will continue to invest in differentiated capabilities to drive performance across our platform with excess capital returned to shareholders through share repurchases. We remain committed to our capital allocation strategy as a means to achieve double digit growth in earnings per share. I will now turn it over to Joel to discuss our financial performance and outlook in more detail.

Thank you, Javier. Fourth quarter adjusted operating income was $491 million, bringing full year 2024 adjusted OI to $1.98 billion. Q4 adjusted EPS was $2.24, taking full year adjusted EPS to $9.68. Free cash flow was $281 million in the fourth quarter and $1.16 billion for the full year. I'll start today with some detail on the fourth quarter, followed by some details on our 2025 guidance. Fourth quarter US treatment volume increased by 30 basis points over the fourth quarter of 2023, while treatments per day declined 80 basis points versus fourth quarter of 2023. Q4 treatment volume came in below our expectations for two reasons. First, missed treatments were higher than expected, primarily as a result of severe weather events, driving a 40 basis point reduction on year over year growth in the quarter. And second, new to dialysis admits were below forecast, partially as a result of the impact of Hurricane Helene on PD supply. We estimate the PD supply constraint resulted in the loss of approximately 350 admissions during the quarter. For the full year, treatment growth was 47 basis points, just below the bottom of the range we gave last quarter. Fourth quarter revenue per treatment increased approximately $1 sequentially, primarily due to seasonality, bringing full year RPT growth to .7% versus 2023. Patient care costs per treatment were up $7 sequentially. This was primarily the result of seasonality, including health benefits and other field costs, with additional impact from higher sequential center closure costs. G&A costs increased by $15 million quarter over quarter. This is in line with expectations, as we typically see higher G&A spend in the fourth quarter. Depreciation and amortization declined by $14 million compared to the third quarter. The largest driver of the reduction was lower center closure costs. Adjusted international OI declined by $17 million versus the third quarter. This was driven by a $19 million reserve recorded against aged accounts receivable in Brazil. Underlying operations in our international business remain otherwise in line with expectations. During the quarter, we closed the third of our 2024 Latin American acquisitions, expanding our presence in Colombia. Our expansion in Brazil remains under government review, and we expect the deal to close mid-year. Integrated kidney care, our value-based care business, ended 2024 with a full year adjusted operating loss of $35 million. We continue to execute against our long-term plan, and while the full year came in approximately $15 million ahead of our 2024 expectations, this is largely due to timing of revenue from our value-based care contracts and normal variability. Below the OI line, fourth quarter debt expense was relatively flat compared to the third quarter. Our leverage ratio at the end of the year was just over three times EBITDA. In the fourth quarter, we repurchased 2.3 million shares, and since the start of 2025, we have repurchased approximately 800,000 additional shares. I'll turn now to our expectations for 2025. Our 2025 adjusted operating income guidance is $2.01 billion to $2.16 billion. At the midpoint, this represents .2% -over-year growth. Now for some detail, starting with treatment volume. The middle of our adjusted OI guidance range assumes treatment volume growth is flat in 2025 compared to 2024. For the key underlying drivers of treatment volume, namely admissions, mortality, and mistreatment rate, our guidance assumes no significant changes to the trends we saw in 2023 and 2024. Embedded in this forecast is approximately 50 basis points of headwinds specific to 2025 associated with the number of treatment days and the headwind associated with the disruption in PD admissions in Q4. Moving now to revenue per treatment. We anticipate .5% to .5% revenue per treatment growth -over-year. Around 40% of this expected growth is the result of new oral phosphate binder reimbursement. The remaining 60% is driven by rate increases, collections improvements, and changes in mix. On patient care cost per treatment, we anticipate growth of 6% to 7% -over-year. Again, oral phosphate binders are a key driver accounting for approximately 40% of the expected growth -over-year. We anticipate the remaining 60% of the growth to be driven by inflationary increases in labor and other costs, with some offset from declining center closure costs as compared to 2024. We expect U.S. dialysis G&A to increase by approximately 4%, which is driven by investments in our teams, capabilities, and processes offset by a decline in center closure costs versus 2024. We anticipate U.S. dialysis depreciation and amortization to decline by approximately $25-30 million, driven by declining center closure costs and lower levels of CAPEX in recent years. In our IKC business, we expect relatively flat -over-year adjusted operating income compared to 2024. This is consistent with our prior expectations, except for the acceleration of $10-15 million of value-based care revenue from 2025 to 2024. For international, we expect approximately $50 million of -over-year adjusted OI growth. This is the combination of the impact of the Latin America acquisitions we signed in 2024, the reserve against aged accounts receivable in Brazil impacting 2024's results, and continued growth in our existing markets. Shifting to EPS. Our guidance for 2025 adjusted earnings per share is $10.20 to $11.30. The midpoint of this range represents 11% adjusted EPS growth versus 2024, primarily driven by adjusted operating income growth and share count reduction due to share repurchases, offset by the full run rate of higher debt expenses. We anticipate other losses below the operating income line of approximately $75 million, roughly flat to 2024. We expect interest expense of $525 to $555 million, which is a continuation of approximately $135 million per quarter. We anticipate an adjusted effective income tax rate of 24 to 26%, consistent with 2024. Free cash flow guidance for 2025 is $1 billion to $1.25 billion. Our capital allocation philosophy remains consistent with prior years. We will prioritize capital efficient growth opportunities, target leverage between three and three and a half times EBITDA, and otherwise return capital to shareholders in the form of share repurchases. That concludes my prepared remarks for today. Operator, please open the call for Q&A.

Thank you. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Our first caller is Joanna Gajuk from Bank of America. You may go ahead.

Hi, thanks so much for taking the question. So I guess first on the volume outlook for 2025. So you said flat at the mid-point. Is there a range associated with the ROI range?

Hi, Joanna. It's Joel here. Thanks for the question. So, yes, there's certainly a range associated with volume. There's a fair bit of natural variability in all three of the inputs of admissions, mortality, and mistreatment rate. And that would be one of the factors that would drive the range we gave for ROI.

Given us like a range, I guess, you know, call it minus one to plus one or anything narrower like that? Or how should we think about that? Like, what's the, I guess, the range of outcomes here?

Yeah, we decided not to quantify it this year and rather focus on the mid-point of the range. I don't know that the variability we would see would differ a whole lot than the variability we would have thought about going into last year. But we missed our going into the year forecast in 2024 by a bit. So we were a little hesitant to give a range here.

On the comparable metric, right, the volumes were roughly flat in 24, right, just to make sure. So you're kind of assuming a similar dynamic for the full year at 25.

So the comparable number for 24 was plus roughly 50 basis points. I think it's 47 basis points exactly. And just to be clear for everyone, when we give a volume forecast here, we're forecasting treatment volumes. We give a number of volume metrics like NAG and others that you can calculate, but we're really forecasting total treatment volumes. So the 24 number was up 50 basis points. The mid-point of the range for 25 is flat. There are really two things driving the decline. One is treatment days. Remember 2024 was a leap year, and that's worth about 20 basis points of extra growth in 24 that won't happen in 25. And then we mentioned the disruption of PD supply from the hurricane. And the result of that was in Q4, we were unable to admit new peritoneal dialysis patients for some period of time. Some of those patients wound up in center, but we believe we lost roughly 350 patients who otherwise would have come to the VITA, who we think decided to pursue peritoneal dialysis with another provider. And because we lost those 350 patients in Q4, it didn't have much of an impact on Q4 volume. We'll have a much bigger impact on 2025 volume. And that's worth somewhere on the order of 15 to 20 basis points of growth in 2025. So you take that and the days, and that's really what accounts for the 50 basis point decline in terms of the core metrics of mistreatment rate, mortality, and admissions. We're viewing those in our guide as being roughly similar to what we saw in 24.

All right. Yeah, I appreciate it. If I may, on that number, when you quantified the benefit to OI from the inclusion of the oral drug into the bundle, 0 to 50. So I'm a little bit surprised that there is actually a zero. So can you give us a little bit more color, like why there is such a wide range and also, you know, under what scenario is it a zero versus a 50? Thank you.

Hi, Joanna. This is Javier. Let me grab that one. And for the people that haven't been tracking the oral in the bundle, this is a class of drugs that the largest is phosphate binders, which is a medication to reduce the absorption of dietary phosphate. And it was in part D and is moving to part B as in OI. And there are three variables to consider. One is mix. What kind of phosphate binder? And there's some generic and there are some branded. Two is volume. And then three is adherence. This has a heavy pill burden. You have to take it at meals and snacks, et cetera. And so many people for different reasons have low adherence. And so this is very new to us. And so with those three variables, we're being, I think, prudent and giving you a wide range. And once we get a bit of experience, we will we will see how that plays out. But the midpoint of the range feels the most likely spot with what we're seeing now. And then I'll add one last point on the volume side, which is it's hard to see volume up to now because in many instances people pick up the prescriptions for 90 days. And since we're now only in February, if you picked up your prescription in December or November, you might not we don't have visibility to what kind of medication you're on. So that's why you have such a wide range right now.

All right. I appreciate it. I guess I'll go back to the queue. Thank you.

Our next caller is AJ Rice with UBS. You may go ahead.

Thanks. Hi, everybody. I think if I got if I heard you right, you said patient treatment costs would be up about 67 percent. And that's largely due to the phosphate binder inclusion. Can you comment on putting that aside? Is there any change and significant change in the way you're looking at the growth in patient treatment costs versus what you saw in twenty four?

Sure. So the way I think about it and their ranges around this, but I'll use the midpoints here, the midpoint of growth in the patient care costs would be six and a half percent. That would be three and three quarters percent from our historical costs and two point seven five percent from including the the orals in the bundle. So if you're comparing it to what you've seen in prior years, that three point seven five percent would be the right number. And as we break that down, we typically typically think of it as labor and everything else. And we see them both moving at about the same pace of growth for next year. Labor continuing to anticipate some higher pressure than we saw pre covid and everything else growing at about that same three point seven five percent range as well.

OK, thanks for that. And maybe follow up question on the comments around capital deployment. Do you have a figure for what you think you'll do on share repurchase? Any comments on the deal pipeline, either international or in the domestic market and what you're seeing out there?

So I'm sharing purchases. I'll stick with what we've said in the past, which is our philosophy hasn't changed. We will look for capital efficient growth, either investing in the business or through M&A, and we'll keep our leverage or we'll target our leverage in the three to three and a half range, which it's in right now. And everything else will go back to to share repurchases. So we're not going to give a number, but I wouldn't expect anything different than what we've seen in the past. In terms of M&A, we're looking at a few things and I could certainly see a scenario in which we invest hundreds of millions of dollars. But as I've said in the past, I don't think we're going to do anything. I don't see anything on the horizon now that would be that would significantly change the share repurchase program.

OK, all right. Thanks a lot.

Thank you. Our next caller is Pito Checkering with Deutsche Bank. You may go ahead,

sir. Hey, guys. Good afternoon. The USRD data showing flat incidents for end stage renal disease in twenty four and your treatments have been pretty flat this year. There's definitely a pretty big debate now about the impact of STL-2 inhibitors on treatment volumes. Can you help quantify us the new starts that you guys saw in twenty twenty four versus twenty twenty three? I just helped her if the pair contrasts with the data is seeing versus what USRD data is showing us.

Let me grab a bit of that question and then Joel can give you the specific answer you asked because we have gotten several people assuming that the medications are having an impact. And the reality is that our physicians have looked at this very carefully and the odds that this is impacting our patient population are quite low at this juncture. And let me tell you why. Number one, the information that we have from CMS puts the prevalence of CKD patients, advanced CKD in the low teens and the adherence in the mid 60s. And so the ability to have an impact is unlikely. If it were to have an impact, you would also see the offset in mortality. So the math would hopefully be a positive, meaning it's stretching people's longevity. And so when we talk to our medical professionals and they're reviewing all this data, they are very confident that that is unlikely to be the impact. Now the second part of your question is a bit more specific, Joel. Yeah. So in terms of

the data, Pito, our admission growth has been running ahead of what you see in the USRDS data. It was stronger in the first part of the year and it actually weakened significantly for Q4. Our new dialysis admit growth was flattish in Q4, which is the first time it hasn't been running positive since for I think eight quarters. So we've been looking hard at that. And I'd say two things about this. First, if you look at USRDS year over year, new to dialysis or incidence growth, and we looked carefully at the 10 years leading into COVID. There was a lot of noise in the data during COVID. But if you look at the 10 years before COVID, it's noisy data. There were two out of the 10 years where incidence growth was negative. Those years did not indicate any sort of secular trend. The data bounced back. It would move back and forth. It could move up to 3% year over year. And I think there was a 6% total swing during those 10 years. So we don't see negative data, one year of negative data in USRDS as the start of a trend necessarily. And we're basing that based on history. So that's point one. Second, picking up on what Javier said, if there is negative admit impact in the industry today, we think the much more likely result is from mortality in CKD4 patients as a result of COVID than it is related to SGLT2 inhibitors or GLT1s for the reason Javier said. So again, two points. One, a negative year of incidence growth is not a new thing. We've seen it before. It hasn't necessarily been the start of a trend. And second of all, if there really is a signal in that noise, we think it's much more likely the result of COVID than these new drugs.

Okay. And then going on the PD, I guess, when did your PD supplies stabilize from Baxter? And then can you quantify how those new starts at this point return to normalized levels? I understand the leap year impact and understand the quantification from the drag from the 15, 20 base points of losing those 350 patients. But can you actually quantify how the new starts return to normal levels now that PD supplies have normalized?

Yeah, so we're back online, back to normal. And so you should see that number pick back up. Our mix pre-hurricane was in the mid-15s, right below that, about 15-4. So we are right around 14-9. So we should see that get back in line. It'll take a bit of time, maybe a year or so as the year plays out. But we're back to normal.

And just to clarify two things, Peter, we're back to normal, but those 350 admits that we lost, they're lost for all of 25. They're not going to come back to us, hence the impact, even though we're back to admitting at a normal level. And second, I'll remind everyone, even though PD patients treat every day, when we report our volumes, we normalize that to in-center equivalents. So we don't pick up volume or lose volume in our volume count if a patient goes from PD to in-center or vice versa.

But then let me sort of ask it one more different way. There was a 60-day time period when Baxter couldn't supply this PD supplies. I get you lost those 350 patients, but now that that's normalized, why is the midpoint of the range flat? Why is the midpoint range not sort of 50 or 100 basis points, you know, minus the 20 bips from VP or minus the 20 bips from PD? Why is flat the new level if patient trends are already normalized at this point?

Because those patients are in-center. They're just going to switch modality, but the treatments are the same.

Yeah, I would think of it as it's the same 50 basis point dynamic we had last year, driven by mortality, admissions and mistreatment rate. And then you've got to subtract off for these two dynamics, which are specific to 2025 and we're in the case, we're not the case in 2024.

Great. Thanks so much.

Thank you. Our next caller is Justin Lake with Wolf Research. You may go ahead,

sir. Thanks. I appreciate the questions. First, the non-controlling interest looked a little bigger than what I would have expected given the OI in the quarter. Am I missing something there? Is there like, which drives that number? And was that larger than you expected?

Yeah, thanks for the question, Justin. It was a little larger than expected. I think modeling NCI as a percent of U.S. dialysis operating income for the year is the right way to model it. And I don't think anything has changed there overall. There were some collection dynamics associated with change healthcare that moved things from one quarter to the next. But overall, there's no underlying trend there that I'd call out.

So you're saying the percentage of operating earnings isn't increasing? It might be flipping between quarters, but overall, the 25 should be in line with the 24. Exactly. Okay. And I was hoping you could, I mean, you ran most of the -the-line numbers, and yet EPS looks a little bit light versus what I would have thought. The only thing I can think of is the share account. You want to run that? You want to give us an idea of what your share account expectation is?

I'd

rather not.

I think I'm trying to think what might not be in there. It depends on how you're modeling it. If you're modeling it by business segment, I think the corporate segment is probably going to be $25 million worse in 25 than in 24. And that's just about the timing of some equity compensation. Other than that, I think if you're, you know, we gave the other income, we gave the interest expense, we gave the tax rate. So I think the share account will be ultimately the question. And look, that'll depend on a bunch of things. How much capital we deploy to buy back shares, obviously, what the share price is. It is impacted by when we buy the shares during the year as well, because it's a weight average count over the course of the year. Maybe we'll take it offline, Justin. We can make sure there isn't some arithmetic

difference. I appreciate that. The other question I have is on revenue for treatment. A couple things you said. One, there's still some kind of juice to squeeze from collections, which I had the impression, listening to you last quarter, that you thought that was petering out a bit. So I was curious how much of an improvement you expect there. You also mentioned PayorMix. Would be great to know kind of where you ended the year and what you're assuming next year. And while you're talking about PayorMix, can you give us your, you know, maybe the percentage of treatments coming from the exchanges or, you know, members with exchange coverage? Thanks.

Sure. So starting on the collections question, what you're seeing in here, I think, is what we've called out over the course of 2024, which is the annualization of collections improvement that kind of hit mid-year of 2024. And that's probably worth on the order of $50 million, call it. On the mix is really nothing interesting to call out about M.A. Mix. We'll move with the industry. There's really not a lot there. On commercial mix, we're at about 11% now, and we think we'll pick up a few tens of basis points on that. In terms of the exchanges, we're at about 3% of our population are on the exchanges today.

And where was that number pre-COVID, Joel? Exchange exchanges?

If you go back pre-COVID, I'll give you the number from before the enhanced premium tax credits came in place. Sure. It was right around 2%.

Appreciate it. Thanks for the detail.

Thank you. Our next caller is Andrew Magg with Barclays. You may go ahead,

sir. Hi. Good afternoon. I appreciate the comment that 40% of REV per treatment growth is from phosphate binders. It looks like that's worth about $25 per treatment from Medicare patients. Do I have that math right? And if so, like that feels a little bit light versus what CMS quantified ASP to be in the final rate. So just trying to understand the absolute dollars on the Medicare patient specifically.

So no, Andrew, the number is more in the $10 to $15 for a Medicare patient. And just to get everyone the math. So if you use the middle of that range and recognizing not all of our patients are eligible for Orals through the bundle, right? So if you're on commercial or managed Medicaid, there are payer classes that aren't getting this. And even for those who are, those on Medicare and Medicare Advantage, not every patient takes it. So that's why the 40% of our number, which is somewhere around $7.80 in our RPT is lower than the 10 to 15 because it doesn't apply to all patients.

Got it. Okay. And then on GNA per treatment, I think that was up 6% sequentially and 11% year over year. That looks like a big acceleration and maybe stronger than typical seasonality. Any additional color on what's driving that?

Yeah, thanks, Andrew. I think the best way to think of GNA is in two parts. One is the let's call it the traditional, which is just a sort of thinking of it as a cost basis. The second part is now an investment portfolio that we have in there. And so the examples that come to mind is IT, where we're getting a lot of benefit on another cost line item or our revenue operations where you're picking up the benefit, obviously, on RPT. And so the better way to think about that is that about half and half of that split. And so you're just getting the inflationary part of the cost item and we're getting good productivity on the other half.

Got it. Okay. And then on the patient care costs, I think that benefited from a gain on settlement in the quarter. Can you quantify that for us?

Hold on one second. Oh, yeah, it's not something that I'll want to call out. It's not a big deal and it's kind of relatively routine and small.

Okay. Thanks for all the color.

Thank you. Thank you. Ryan Langston with TD Cowan. You may go ahead, sir.

Thanks. Appreciate all the guidance details. Joel, I hope I didn't miss it, but did you touch on sort of seasonality, maybe at the consolidated level in the IKC, like anything sort of historically or different from historical seasonality or anything that we should be aware of, just sort of maybe even first half, second half cadence? Yeah,

here's the way I think about it. So from an operating income standpoint, I'd call out three things. First, revenue per treatment is always lighter in Q1 and builds over the course of the year. So typically there's about a $5 seasonality hit on RPT in Q1 as a result of bad debt associated with patient pay. And then the RPT tends to build over the course of the year. So that would be one. Second is IKC, which is always back half loaded. It is very hard to predict the seasonality of IKC, but I think you can reliably count on it being back half loaded and the Q3, Q4 dynamic can sometimes be complicated. And fourth, expenses tend to go up in Q4 and that can hit both patient care costs as well as GNA. So if you put that in the mix, I would say our Q1 OI will be roughly 20% of full year OI that grows through Q2 and Q3 and sometimes will drop down a little in Q4. That's at the OI line. As you're modeling EPS, you have to add to that the fact that share buybacks accumulate as the year progresses and as a result share count will typically come down. So you'll see a little bit more growth in EPS over the course of the year. So Q1 EPS will typically be even lower than that 20% number I talked about for OI.

Got it. And just one more thing. Anyway, you can tell us where you started out or where we're going to start out the year sort of an IKC between the SNP patient count and maybe just somewhere to the other IKCC lives and then just any thoughts on anything changed in terms of potentially hitting break even in that business by 2026. Thank you.

Yeah, thanks for the question. We see the business thing flattish this year and we had a bit of a timing thing that was called out about 10 million that rolled into 2024. So the OI line will look pretty similar in 2025. And what I would say is that we're still sticking to that break even in 2026 time period and we gave that guidance around 2021 and we've been kind of right on top of our model. And so no change in the expectation.

Yeah, and on the SNP thing, I wouldn't call out much change in 2025 relative to 2024. Okay, thanks a lot.

Thank

you.

Thank you. Joanna Gajek with Bank of America. You may go ahead.

Oh, yes. Hi, thanks. Thanks for following up. I mean, most of them asked, but the last one on my list was the free cash flow guidance implies that free cash flow could be down year over year. Is it because 2024 was that much better or anything to call out?

Yeah, I'd say probably the biggest thing to call out is just working capital changes. You know, there can be big swings at the end of each year, which is why we guide to such a wide range. There's nothing in particular I'd call out in the free cash flow.

Okay, any terms of clinic closures? Are you willing to give us a range of what you plan for 2025 in your guidance for closure?

I think we've now hit a pretty normal position. So we will close what I'd say pre-pandemic, which is somewhere in the 20 or so centers on a yearly basis.

Okay, that's helpful. Thank you so much.

Thank you.

Thank you. Our last caller is Pito Chickering with Deutsche Bank. You may go ahead, sir.

Hey, guys. Just following up on Ryan's questions on IKC, it looks like since last core, you know, you picked up 900 patients on the risk-based integrated care, but lost 2,300 patients in the integrated care arrangements. I guess why do you guys lose those patients? And then the second one there is, you know, if your point, the IKF is always sort of back-app loaded as you get the true-ups from managed care. And as you guys get more and more experience, at which point do you move from more of a cash-based accounting system into more of an accrual system just as you get more experience?

So my chief accounting officer is sitting across the table from me glaring about cash accounting. So I'll just clarify. We don't do cash accounting. We are careful about when we recognize our revenue and when the information flows in. That said, I understand the spirit of your question, Pito. And we have evolved, right? Our value-based care component, which is the work we do with MA, we have been more comfortable estimating revenue a little bit earlier. So we've made progress there on CKCC, which is the Medicare -for-service program. We still take a more prudent approach and wait for more information to come in until we have better experience with that. And when we might change that, I think remains to be seen. In terms of the count on members, I wouldn't read too much into that. Numbers will flow as attribution changes and small changes like this aren't indicative of any underlying change in our IKC business.

Okay. So, Apollo, do you see your chief accounting officer on that one? I guess, looking at sort of 25, I guess, how do the lives evolve this year? Do you see another step up as you have the last few years? Or is this more sort of the run rate you guys will have within IKC?

I would say for 25, we remain focused on driving margin. I think there are contracts out there that we just see as unattractive and we are not going to pursue just for the sake of volume growth and revenue growth. So, I would say 25 is likely to look like a much slower growth year from a membership standpoint.

Okay. And then last question, and apologies if I missed that. In the script, you talk about a reserve in Brazil of $19 million. Was that an AR write-off that impacted OI or kind of what was the details around that? Thank you so much.

Yeah. So, it flowed through OI this quarter. It was generally, it was not generally, it was all about aged AR generally from 23 and even before then. So, as I think about it and the core earning power of the international business in 2024, this really doesn't impact the underlying earning power of the business, but it did flow through OI from an accounting standpoint.

So, your adjusted operating income of $491.25, that was impacted by the $19 million reserve that you took in Brazil this quarter?

Correct. But it also benefited, I mean if you're thinking about headwind, tailwind, quality of earnings, whatever kind of analysis you're thinking, I would also point out it did benefit from that pull forward of IKC revenue from 2025 of about $10 million.

Yeah. So, it's $491 plus $10 minus $19, or plus $19 minus $10. Got it.

Thanks

so

much, guys. I think that's a reasonable way of looking at it.

Thank you. At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments.

Okay. Thank you, Michelle, and thank you for the questions. In closing, I will go back to where we began the call by highlighting 25 years of clinical innovation. We take our responsibility seriously to continue to beat his legacy of improving the lives of our patients and care teams. Regarding the financials, while the components of Davida OI and EPS growth vary from year to year, what remains constant is our commitment to operating excellence and innovation. We will continue to apply that discipline across the VEDA's platform, including our core dialysis metrics as revenue, cost structure, and volume while returning excess capital to our shareholders. Thank you all for joining the call and be well.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.