DaVita Inc. (DVA) Earnings Call Transcript & Summary

All right. Thanks, everybody. I'm Ryan Langston, I'm the health care services analyst here at TD. Very happy to have DaVita with us here. So up on stage, we have Chief Financial Officer, Joel Ackerman; and we have Nic Eliason, who's Group VP of Investor Relations and on other hats he wears. So DaVita, just real quick, 1 of the largest operators of renal dialysis clinics, about 3,200 centers in the U.S. and internationally, generates over $13 billion of revenue in 2025. Also has risk arrangements on dialysis patients in the IKC segment manage a little over $5 billion of annual health care spending. I hope I got that, right?

All right. So get into it. Look, solid fourth quarter print which was good, guided 2026 OI, a little bit above the low end of the long-term growth algorithm. Maybe just don't just spend too much time, but maybe just kind of walk us through some of the components within that guidance and maybe any places you think are prudent, conservative? And maybe what are the biggest swing factors?

Sure. So thanks -- first, thanks for having us. Hello, everyone. So the guide is basically 1.5 points of OI growth from U.S. dialysis and the way I think about that is about 1.5 points of revenue growth, and that's all revenue per treatment. We've guided to flat volume and steady margins. And what we've committed to and we're sticking with is our ability to maintain our margins in the U.S. dialysis business even without volume growth. We expect the volume growth to come, but we can continue to maintain our margins in the meantime. The other contributions would be international and IKC, both adding 1% to the enterprise OI growth. That's consistent with what International has delivered over time and a little bit of a flattening of the curve for IKC, which has actually been driving more than that going from a negative number now getting to positive, but we think can continue to grow from here. In terms of prudence, which is I'll -- let me take the prudence and the variability question together. So I'd go down the list. On volume obviously, there can be -- there are swing factors in both directions. More important for our long term than the economic impact in year, it's the accumulation of volume growth year-over-year that has the big impact in any 1 year, the upside is likely to be small at the bottom line. On revenue per treatment, definitely the biggest swing factor is enhanced premium tax credits. As a reminder to everyone, we called the baseline out as negative $40 million. And we're seeing what the rest of the world is seeing initial enrollment better than expected and just waiting to see what happens with the effectuation rate over time. And then on the cost side, look, cost is always been a strength of DaVita. I'd say wage rate and wage pressure is probably the biggest question there. And we're in a -- we're in a labor environment that's getting easier in the U.S., although health care remains the standout in terms of where there remains employment growth and how those 2 factors play out together on our wage rate will be an important factor over the course of the year. Other than that, I'd call out IKC as another swing factor. We're playing for a very thin profit dollar associated with more than $5 billion of cost. So small swings in performance can have a pretty outsized impact on the bottom line there.

So you touch and we'll get to it more in detail in a minute, but the APTC expiration that's going to put probably a little bit of pressure on rate, a little bit of pressure on mix, certainly. So maybe what are some of the opportunities you mentioned effective cost controls. What specifically can you do there to kind of keep that margin very similar? Or if you knock it out of the park, maybe you can grow that margin a bit?

Yes. So look, this has been an ongoing question for DaVita. How do we continue to cut costs, if you will. So I've got a few responses that. One is it's not all about cost cutting. And what we've done on revenue operations and improving our bad debt line has been a huge component of that over the last few years. And the second is, I think the question comes from this concept of we have a fixed amount of opportunity and haven't you gotten all of that already. And the answer is the opportunities are not fixed. They evolve over time as new technologies develop, as new drugs come to market, as new drugs go generic or contracts come up for different products. So we've got a new set of opportunities that comes up all the time. As I think about it now, I would call out labor certainly as 1 opportunity pharma as another and G&A as a third. And they each have their own dynamics. Labor is -- got a new opportunity because of some new IT we have in place in terms of a new scheduling system. Pharma has got new drugs coming to market, new contracts and generics. And then on G&A, we've invested a ton in IT over the last 5 years we will continue to invest a lot, but G&A has been a margin headwind for us. Our G&A spend has grown faster than revenue. And we think over time, we can flatten that out and maybe even have it grow lower than revenue for some time and actually be a tailwind to margin.

On the subsidy expiration, I think you've also guided the Street to another $70 million of pressure and then I think $10 million in 2028. So maybe walk us through how you get to those numbers? And just maybe more specifically about this year. When do you think you'll have sort of a better idea and if that $40 million is really the right number?

Yes. So on the $40 million, I think we'll know by the Q1 earnings call, which -- my understanding is consistent with what other players, including the health plans are saying about when they'll know. In terms of the staging of that $40 million this year, $70 million and then $10 million -- what we're expecting is a little bit of an upfront impact on our existing patients. But in general, our existing patients, who have commercial insurance will find a way to maintain commercial insurance even if they were relying on enhanced premium tax credits and those go away. So the real impact is on incident patients. So new patients coming to our clinics, who historically about 3% of them have had exchange coverage, we think that number will come down. And so as our existing patients go off the exchanges at the normal rate they would have historically, the incoming patients will have lower commercial mix, and that's why it takes a bit of time for us to see that in our numbers.

Okay. Anything on the flu, I mean, this time last year was a little bit of an issue for you. I guess maybe where is it trending sort of versus your expectations, maybe what's built into the full year guide? Anything fallout.

So flu season isn't over you yet. And for those of you who do what I do, which is wake up every Monday morning, pour yourself a cup of coffee and check the CDC fluview, you'll know that they've started reporting the data on a little bit of a lag. So we don't have as much visibility or clarity as we had historically. That said, from what we see now, it is trending in line with what we expected in our guide. What we said was it's not going to be as bad as last year. So we're modeling it as if it's what it was like 2 years ago, which in the grand scheme of things was a pretty tough flu season, but nowhere nearly as bad as last year. And from what we can see now, it's kind of -- it's trending in that direction. The hospitalization number is way down off the peak, but still remains pretty high. But if you look at historical years, where there was a second peak you would have started seeing that by now, and we're not seeing it in the data.

Great. Last thing on the guidance. So we noticed the free cash flow guide a little about flat year-over-year and OI growth, obviously, you laid that out. So maybe walk us through the difference between where the OI growth is coming from the guide versus sort of a flat free cash flow number?

Yes. I would not call that out as anything particularly notable about OI versus free cash flow. It's more about the fact that free cash flow can be quite a lumpy number and just depends on little things that can happen at the beginning or the end of the year, especially with working capital swings. So there's -- I wouldn't say there's any fundamental business driver behind that. Our free cash flow guide is also much wider than our OI guide as well.

You talked about it on the fourth quarter call, Ben talking about it now, but these clinical programs, really mortality is really the issue, right? I guess maybe just on some of these clinical programs that you're working on have implemented, et cetera. Maybe kind of walk us through a sort of initial inception, how long some of those programs need to take into effect and maybe when you will really start to see some of the benefit and hopefully get those volumes back up to closer to 2%?

Yes. So there are a lot of clinical programs at play, and some have quicker impact, some have slower impact. So getting flu vaccines up relatively small, but can have a much quicker impact, for example, increasing the utilization of GLP-1s among our population would be a much slower impact. It's going to take time to ramp that number and then there can be a fair bit of a delay between when you ramp it and when you see it in the mortality. The other one would be what's happening with middle molecules. And that one is similar to GLP-1s. It will take time to ramp that up -- and then if you look at some of the historical data, it's probably 18 months until you start seeing any major impact from that. So as Javier said on the call, we think we'll start seeing this in the next year or so, but it's really 2029 where we would expect it to really be in full force.

So on those programs, you mentioned G&A is growing a bit faster than revenue. What types of investments do you need to make into these programs? Are these heavy capital intensive? I mean just anything in terms of trying to stand those programs up. And then maybe even more broadly, once you get 1 stood up, I mean you have 3,000-plus clinics. Is it easy, hard, not so hard to sort of spread that out across those clinics?

Yes. So -- there's not a lot of capital investment in general in these. IT is probably the place, where we'd spend the most money in terms of moving forward on some of these clinical programs. They can be challenging to move forward because -- it's not like lowering our G&A cost is all within the 4 walls of DaVita. We have the ability to execute on that on our own. These clinical programs involve both our physician partners and our patients in making decisions. Vaccines is a great example. We can't just go and vaccinate every patient we want that's ultimately up to the patient. Some of these other decisions, GLP-1s is you need a physician to prescribe it. Nephrologists in general, are reluctant to prescribe it. So it's a matter of finding an endocrinologist or someone else who's comfortable prescribing that for our patients. So again, it's -- the patient wants to be on the medication and the physician needs to prescribe it. And on middle molecules, it remains to be seen how challenging that will be. I think it will be different, if we go with the HDF route versus the new dialyzer route.

Anything different internationally with these programs? Are they structured sort of the same way, rolling them out any different?

Very different. And as our Head of International likes to say, international is not a thing, right? It's 14 different countries, each with their own radically different dynamics some Saudi Arabia is an interesting example. Saudi Arabia has 3 physicians in a clinic at any given time. So the interaction with the doctors is very different. And then every country is different on each of these issues. So we're extremely proud of what we've done clinically internationally. Our Chief Medical Officer of International has created and implemented a very interesting piece of technology and data collection we use to monitor and compare clinical results across countries, which is not easy. And what we can say unequivocally is we have improved the clinical performance in every country that we have entered.

Back to the volume growth. Obviously, the goal is to get from 0 to 2% over time. Should we expect the opportunity to see some margin expansion as we move up closer to that 2%?

Yes. So I'll answer it 2 ways. One is taking any variable in isolation is always danger when we out on 1 metric, investors will always ask, so should we up the guide by that level of outperformance? And the answer is there are a lot of things going on at any moment in time. That said, I'd say in the shorter term, we're in a good place for margin leverage from volume expansion. And I say that because of where capacity utilization is in the clinics. It is -- there's a lot more margin associated with a new patient in an existing clinic, especially if they're filling out a shift that's not full. That's the most margin expansive. Second would be opening a new shift in an existing clinic -- and then when you get to a point, where you're opening new clinics to accommodate volume, it's still margin accretive because our G&A won't grow that much. But there is fixed cost in the field that will grow at that point. So I'd say in the short term, we would expect more of that over the long term, it probably will contribute less as capacity utilization gets to a point, where we need to start opening new clinics again.

On capacity, it's a perfect segue. I think one thing that's always stuck out to us in our model is if you look back maybe a decade ago, certainly longer, it looked like that capacity utilization was in sort of the mid to upper 60s. The way we calculate it, I think we get to kind of upper 50s right now. I think that was the last public disclosure you've given. So I guess, is this an opportunity could you ever get back to that? Or is that just sort of a pipe dream at this point? What can we do other than just closing clinic to get that back there.

So I would expect our capacity utilization growth to come from volume growth rather than closing clinics. We closed about 200 clinics a few years ago. We thought that was a prudent number. And -- it probably wasn't perfect, but nothing we've seen since then would lead us to conclude we dramatically undershot it. So I don't expect us to start closing clinics again in any big new wave -- so I'd expect it to come from growth in terms of where we get to, some of that will be driven by what the industry does, we would love to drive capacity utilization up. But with growing capacity utilization comes patients dialyzing unless favorable shifts, right? Patients want to -- would prefer to dialyze Monday, Wednesday, Friday rather than Tuesday, Thursday, Saturday, they don't want to dialyze on Saturday. And in general, they prefer to dialyze in the morning rather than in the afternoon. So if you're relying on the fifth or the sixth shift, right, a late afternoon shift on Tuesday, Thursday, Saturday, you're at risk of losing patients to competitor clinics, who have a better shift that's open. So we've got to keep an eye on that competitive dynamic, and that will also drive where we wind up on capacity utilization.

IKC bright spot in the fourth quarter, actually profitable this year, I think about a year before you thought. I think that's a testament to you and Javier. But just does that sort of faster ramp to profitability, does that do anything with your strategy to grow that business over time?

Yes. So first, I'd say it's a testament to the team that runs IKC and kudos to them about what they've been able to accomplish. In terms of our strategy, I think the right way to think about IKC is really 3 metrics that drive the business. One is cost under management, which has been relatively flat. There is shared savings, which is the percent of cost under management that we've been able to reduce and that we get to keep, we share some of that with our physician partners, with our health plan partners and then the costs of running the business. And we've done a nice job on watching the shared savings go up over time. So that percentage, while the medical cost under management has been relatively flat for the last 3 years. I think there's less and less opportunity in shared savings percentage over time. I think that will flatten out as we continue to deliver more savings and the baseline gets tougher and tougher. So I would like to see it grow through the medical cost under management. I think that's the opportunity long term. As we gain confidence in our ability to deliver shared savings, there are certainly opportunities we might think about differently in terms of a contract that we might not have signed 3 or 4 years ago that we go after this year. But remember, those 2 things are linked. We could grow medical cost under management a lot faster, if we were willing to sacrifice shared savings, meaning if we were willing to sign bad contracts where we didn't think there was an opportunity to both deliver quality care and lower the costs, we could grow the top line, if you will. It's not technically our revenue, but it's kind of like a top line figure, but it could come at the expense of shared savings. And we've been disciplined. We are not going to grow the top line at the expense of the bottom line. Growth for -- without profit is not something we tend to chase.

And I think you mentioned on the fourth quarter call, you see the advanced notice, at least for your patients, I think is maybe -- I don't call it a tailwind, but it's kind of a nice rate, right, for '27?

Yes, yes. So we will see something in the 5% to 6% range. And the baseline, the starting part of CMS' calculation is not very different for our population than for the broader MA population. The big difference is all the adjusting associated with coding. And the ESRD population does not use V28 coding. We have a separate coding regimen and CMS just does not view that as negatively as they view what's happening in the broader MA market. I think there's just less opportunity for companies to code aggressively. Our patients are all part of the health care system. They're all actively seen. So the odds of there being these miscodes and all that is just much smaller. So we're happy with the rate increase, and we think there is catching up to do. So we appreciate this.

Got it. So taking out the APTC expiration, just commercial mix in general. I mean, it seems to be pretty stable. I guess how should we think about that in the future, again, excluding that sort of expiration?

So excluding the enhanced premium tax credits, it has been pretty stable. And the growth we've seen in mix over the last few years has largely been driven by growth on the exchanges. I can't think of any factors that are on our radar that would lead to a significant change in that mix. So I think stable is the right way to think about it, excluding the enhanced premium tax credits.

Yes. And I think about the Marietta [indiscernible] a little bit different, but California AB 290. Any updates to those 2 things? We haven't really heard much about them, which is a good thing?

Yes. It is absolutely a good thing that we haven't had to talk about those. And no, there's really not a lot to say. The AB 290 is still unsettled and challenging in the way it's playing through in the courts and whether it can be implemented even if it moves forward. And on the Marietta side, no, we haven't seen a lot of bad behavior from employers or plans as a result of the ruling, and we think that's a good thing.

Yes. Another sort of topic is GLPs, of course. I mean, a couple of years ago, you did a fairly detailed job on one of the calls of laying out kind of how you think those will play out over time, I guess, anything to update us in that sort of model to get to your sort of modest headwind from a commercial mix standpoint or anything now that you're seeing that make a little bit different?

No, is the short answer. Remember that what we called out as it relates to admits was 2 factors that largely offset them. One was a delay in incident to ESRD for CKD 4 patients -- the offsetting factor was lower mortality in the CKD 4 patients. So more would survive to be incident to ESRD. And we view those 2 things as largely offsetting. So nothing new to report there. I'd say the one piece of good news is what I mentioned before that we do think there's an opportunity for GLP-1s in our prevalent population. So our existing patients to use GLP-1s and live a longer and healthier life and that could be a tailwind to mortality.

But net-net, still a potential modest headwind over time?

I'd say what we called out was net-net on the admissions side no impact in either direction, potentially a modest headwind to commercial mix, but I think we sized it at about 3 bps a year.

Okay. On the supply side, supply chain, any sort of large things you'd call out in terms of expiring contracts over the next couple of years and thinking about back to the Baxter IV kind of issue. Maybe any work you've done there to sort of spread out some of that supply chain potential issue, something like that happened again?

Yes. On the contract side, nothing to call out. We take a very forward-looking view of how we contract and when we recontract. So nothing that I'm worried about over the next couple of years. The Baxter issue, I wasn't worried about the day before it happened. So we don't always have visibility on these things. That said, as a result of that incident and the cyber outage and the problems with change the year before, we are absolutely putting in a much more rigorous approach to business continuity planning and thinking extensively about all the different processes we're relying on taking a different approach rather than thinking of it team by team, right? You can take the payroll department, which reports up to me and worry how will payroll get disrupted? How will they get disrupted if ADP went down, but there are a whole bunch of other things that could get disrupted if other things happen. So taking a longitudinal look at these processes and making sure we are mitigating the risks that we're uncomfortable with.

Anything we should be thinking about with the phosphate binders. Is there an opportunity for sort of more pickup as we move through the year. I mean, I know those decisions are left to the providers, but thinking in terms of education, rolling out, just experience, et cetera. Anything we should be thinking about there?

I'd say the biggest swing factor on my radar right now is about one drug going generic or not and how that plays out and the timing of all that. But other than that, I would say phosphate binders in '26 are pretty stable relative to what we saw in 2025, and it's not going to be much of a story for DaVita from an OI perspective. International, still probably the source of growth or capital spending outside of share repurchase. Yes, although the capital spending is quite lumpy. We're doing fewer kind of single clinic acquisitions than we had in the past and seeing a bit more organic growth. That said, if we see a big acquisition like the one we did in Latin America, we would jump on that again. That acquisition has worked out well for us so far. So we would -- we think that will be a great use of capital going forward.

Got it. Last thing, just one thing you'd want to leave investors with walking away from here.

Just one, I think the message is that our story has been relatively consistent for the last few years. We can get back to volume growth. And we think we've got OI growth and EPS growth in the interim, those coming through our ability to continue to grow U.S. dialysis, maintain margins there, add to it from international and IKC, so you've got that 3% to 7% OI growth with a very strong cash flow and very disciplined capital deployment leading to that double-digit EPS growth. I mean, this year, it's not triple digit, but well into the double digits, 30-plus percent, which you're not going to get every year. But it's been a pretty consistent story. The stock swooned down over the last months. And that was driven by investors. It wasn't driven by us. Our story didn't change from Q3 to Q4 and we did what we said we were going to do. So nice to see that the stock has recovered.

Great. Well, I think that's all the time we have. Thanks for coming. Thanks, everybody. Enjoy the rest of the conference.

Thank you.