DaVita Inc.

Thank you, and welcome to our first quarter conference call. I'm Nick Eliasson, 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 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 maturely 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, 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. With the conclusion of the first quarter and reflecting on the events of this past few weeks, it is clear once again the strength and dedication of our caregivers shine through each new challenge. We're in the midst of remediating a cybersecurity incident that disrupted portions of our operations. Despite these challenges, we remain steadfast. We continue delivering life-sustaining care, creating meaningful career paths for our teammates, and returning value to our shareholders. Today, I'll share information on the cyber incident, highlight our first quarter results, discuss key policy developments, and close with our outlook for the balance of the year. But first, as always, we will begin with a clinical highlight, the true foundation of everything we do. Last year, we launched a community-based collaboration with the YMCA to support chronic kidney disease education and prevention. Through the collaborative community kidney health program, YMCA locations nationwide are helping to bring vital education, pre-chronic disease screenings, and critical kidney health resources directly to the communities that need it the most. Our early results are eye-opening. In our initial pilot, 30% of participants screened were found to have previously undiagnosed CKD, creating powerful opportunities for early intervention and life-changing care. Early detection and education are the cornerstones of kidney disease prevention, and through this collaboration, we're setting ambitious goals to reach thousands of people, empowering communities with the knowledge they need to close the gap in kidney health awareness. Partnership with the YMCA is more than just a program. It's a reflection of our unwavering commitment to building a healthier, stronger tomorrow. Before getting into the first quarter performance, I want to address the cybersecurity incident we disclosed last month. On April 12th, we identified and swiftly began addressing a cybersecurity incident that encrypted parts of our system and affected our operations. While it's deeply troubling that bad actors continue to target the healthcare community, the incident highlighted our team's unwavering commitment to patient care. I'm grateful to report that we provided uninterrupted dialysis care for our patients on the day we detected the incident and every day since at all of our centers worldwide. Thanks to the incredible responsiveness of our teams and our investment in IT infrastructure, we've been able to restore most functions as of today. All of our major systems used for the patients, physicians, and teammates, including the lab and billing, are up and running. Work on the remaining applications will continue over the next few weeks. While the restoration of our systems is nearly complete, there will be some regulatory and legal follow-ups to address as we work to identify the extent and nature of the data that was taken and make the required notices. We expect that the majority of the costs related to this incident will be one-time items recognized in the second quarter, and our current expectations regarding the financial impacts are included in our guidance today. Transitioning to the first quarter performance, adjusted operating income and adjusted earnings per share came in slightly ahead of our expectations. At a high level, this was driven by outperformance within patient care costs, phosphate binders, and our international business. Disfavorability was partially offset by a modest underperformance in treatment volume partially due to an abnormally high flu season. Let me offer some additional color on phosphate binders, which contributed to positive results for the quarter. As a reminder, phosphate binders are oral drugs prescribed to help dialysis patients avoid mineral bone disease. Beginning this year, CMS transitioned phosphate binders from Medicare Part D into the dialysis benefit. VITA's dispensing these drugs per physician orders in receiving reimbursement from CMS and Medicare Advantage plans on a per-script basis during the initial Tdapa period. As we predicted last quarter, the largest source of variability would be in drug mix, where we have seen higher than expected prescriptions of iron-based binders. This is a win for our patients who are receiving the most effective medication for their individual clinical needs. We're still in the early days of this transition and expect further variability over the course of the year. That said, with initial data on drug mix, we now expect the full year operating income contribution from phosphate binders to be at the upper end of our previous guidance range of zero to positive $50 million. I'll offer one final note for the first quarter regarding capital allocation. our priority remains to invest available capital in innovation and high return growth opportunities, such as our recent Latin America acquisition. Beyond those opportunities, we remain committed to returning capital to our shareholders who share repurchases. Since our last earnings call, we repurchased approximately $680 million of stock, representing an accelerated pace over this timeframe. 2025, We expect share repurchases will be more front-loaded than typical and should slow down over the remaining of the year. To be clear, our capital allocation strategy remains unchanged. Now, I'd like to shift gears and share some thoughts on the new administration and potential policy changes. Despite a fast-moving environment, our top priority remains the same, advocating for our patients at the state and federal levels. Today, I'll focus on three policy topics impacting the broader healthcare landscape, tariffs, Medicaid, and enhanced premium tax credits. For the first two, although the policy is fluid on each and there's a lot to learn, we don't currently believe either tariffs or Medicaid reform represent any material financial impact. As it relates to qualified health plans and enhanced premium tax credits, we previously shared a cumulative operating income impact of $75 to $120 million. This impact is cumulative over three years and assumes a full expiration of the enhanced premium tax credits. We continue to believe this reflects the most likely range of outcomes, and as we've shared, we're likely trending toward the higher end of that range due to a strong 2025 trend. open enrollment for exchange plans. While we're grateful to be largely insulated from recent policy development, we remain vigilant and committed to strong patient advocacy. In addition to outlook, we're maintaining our 2025 guidance range for adjusted operating income and adjusted earnings per share as disclosed last quarter. Although we've experienced headwinds from the cyber incident, Our strong first quarter operating performance has put us in a good position to achieve our financial guidance for the full year. I will now turn the call over to Joel to discuss our financial performance and outlook in more detail.

Thank you, Javier. First quarter adjusted operating income was $439 million. Adjusted EPS was $2, and free cash flow was negative $45 million. Adjusted operating income was above the guidance we gave last quarter, largely as a result of strong expense management, profitability from orals in the bundle at the high end of our range, and strong performance in international, partially offset by lower than expected treatments. I'll focus first on the details behind our Q1 operating income performance, followed by an update for 2025 guidance. U.S. treatments per day declined 40 basis points versus the first quarter of 2024 and was approximately 50 basis points below our forecast. Weakness was largely the result of higher missed treatment rate, which was caused by a severe flu season and a higher than expected impact from storms in January and February. Adding to this shortfall was the negative impact on census from higher than anticipated flu mortality in the quarter. Admission growth was strong during the quarter, which supports our hypothesis that the negative admissions growth we saw in the fourth quarter was the result of normal variability and not a trend. Looking forward to the remainder of the year, the flu-related census impact in the first quarter will contribute to lower treatment volume for the remainder of the year than we had previously expected. Additionally, we believe the cyber incident that Javier described resulted in lower than normal admissions for about two weeks in April. Taking these two factors together, combined with the treatment shortfall in Q1, we are now expecting an approximately 50 basis point decline in treatments for the year. As a reminder, 2025 volume is also negatively impacted by the PD supply shortage we faced in Q4 2024. Despite these temporary challenges, we still expect to return to 2% volume growth, although the timing is hard to predict. Consistent with what we have forecasted in the past, these forecasts are for number of treatments, not treatments per day or non-acquired growth. Revenue per treatment increased $4 in the quarter. Approximately $10 of increase is attributable to new reimbursement for phosphate binders, partially offset by $5 of decline due to typical seasonality of patient responsibility for co-pays and deductibles in the first quarter. Patient care cost per treatment increased by $7 sequentially. This was driven by approximately $8 per treatment of new costs associated with phosphate binders and partially offset by a decline from the seasonally high fourth quarter. First quarter G&A costs declined by $33 million sequentially, again, as a result of a decline from typical seasonally elevated spend toward the end of the year. Adjusted international OI increased by $29 million versus the fourth quarter. As a reminder, the fourth quarter was impacted by a $19 million reserve recorded against age accounts receivable in Brazil. Integrated Kidney Care, our value-based care business, had operating losses of $29 million in the quarter in line with expectations. As a reminder, IKC has seasonally stronger operating performance in the second half of the year. This quarter, we realigned the operations of an IT product from our IKC segment into our U.S. Other Ancillary segment, which moved approximately $4 million of operating loss from IKC into U.S. Other Ancillary results for the quarter. We anticipate the full year impact of this change to be approximately $17 million. Below the OI line, we incurred $18 million of other loss, mostly related to Mozark, our joint investment with Medtronic. We expect this to be a consistent quarterly run rate for the remainder of the year. In the first quarter, we repurchased 3.7 million shares and we repurchased an additional 1.7 million shares since the end of the quarter. Our repurchases continue to be informed by our typical assessment of leverage ratio, liquidity, and market price relative to our view of intrinsic value. This accelerated purchase pace brought our leverage level at the end of the quarter to 3.27 times, near the middle of our target leverage range. Q1 debt expense was $135 million. Beginning in the second quarter, we anticipate debt expense will increase to approximately $145 million per quarter for the remainder of the year. Let me now turn to our expectations for full year 2025. We are reiterating our full year adjusted operating income and earnings per share guidance. Despite challenges associated with a difficult flu season in Q1 and expectations for some headwinds related to the recent cyber incident, the underlying strength of our business performance in the first quarter and the increase in our forecast for profitability of orals in the bundle give us confidence in our full-year guidance. That concludes my prepared remarks for today. Operator, please open the call for Q&A.