DaVita Inc. ($DVA)

It's my pleasure to be hosting the meeting with DaVita. We have Joel Ackerman, who's the CFO of the company; as well as Nic Eliason, who's Vice President of Capital Markets and Investor Relations. I think we're going to jump right in if you you're good with that. All right. Excellent.

So I know your favorite topic is volumes. So maybe we should start with volumes.

Sounds good.

So I guess Q1 incremental treatment guidance was raised from flat to kind of up, call it, 25, 50 basis points. What drove the increase there? And how confident are you in the durability of that improvement?

Sure. So first, good afternoon, everyone, and thanks for having us, Kevin. So we really divided the increase in the guide into 2 buckets. First is increased census from Fresenius clinic closures. They have announced the closing of about 100 clinics, and we expect to get our fair share of the patients that they don't retain. So that would be about half the volume increase. The second is just what we observed during Q1, our treatment volume came in about 20 basis points better than expected, largely as a result of census being ahead of plan, and we expect that to continue. You can look across all the different inputs and tweak any one of them. The one I'd highlight is that really came in above plan was mortality. As you know, mortality has been elevated since COVID relative to pre-COVID levels. And it's nice to see it starting to come back down, and we would hope it will continue to come down given all the great clinical work our team is doing.

Yes. How do you separate the improvement in mortality relative to like the light flu season, which I think would also kind of lift the mortality side of things?

Yes. So first, you're absolutely right. Relative to last year, flu was easier and less of a headwind on mortality. I would remind everyone, it was still relative to the last 15 years, it was still quite a tough flu season. And we think we've gotten pretty good at modeling the impact flu has on mortality, so we can look through that, not just in Q1, but over the last few quarters and believe we see some signal in what is a relatively noisy number.

Okay. And then I guess like Fresenius was closing sites through kind of the quarter. I think they're still maybe even doing it into this quarter. So does the benefit they're going to be more back-end loaded or ramp more? And then how do we think about next year as the starting point? Like is it the half that we should kind of think about as the starting point for next year? Or is it this ramp?

Yes. So we saw almost no benefit in Q1. They did start closing clinics in the quarter, but it was very much back-end loaded. So almost none of the volume performance in Q1 above plan was related to that. What they have announced is that they expect the clinics to be largely closed by the end of Q2. So our expectation, if you wanted to kind of decide from when to annualize this, it would probably be the end of April or the end of May. So we would expect to get most of the benefit this year, but there'd be a bit of a tailwind again next year.

All right. And then when you think about the core growth, like is this -- the improvement in mortality, is that something you expect to build as the year goes on as well? Or can you pinpoint anything that drove the improvement in mortality that's not flu?

Yes. So I'd start with the history of the industry. And if you go back to a time frame, call it, 2000 to 2015, when the industry was growing 3%, 4%, 5% a year, I think there's a misperception that the growth then was because of increasing incidence of diabetes and obesity and all that. And that really is not the major driver of volume growth in those periods. The major driver growth, about 2/3 of the growth was declining mortality in the industry. So the industry investing in better clinical outcomes to drive better mortality is really the history of volume growth. And our belief is we are at the beginning of seeing that reinvigorate. And it's about new medications. It's about higher flu vaccination rates. It's about time on therapy and other clinical interventions, middle molecule clearance is coming. And we think that's largely what's going to drive the mortality improvement. Timing is hard to predict. There is certainly a delay in some or all of these interventions between when you successfully drive the metric and when you start seeing it in mortality. But we called out we would expect to get back to the 2-plus percent growth rate by 2029. What that curve looks like between now and then is hard to predict.

And then I think that when people see weak volumes, they think GLP-1s and how that impacts things. I mean, can you talk a little bit about how you're seeing the impact there? I think in the quarter, you said something along the lines of that the mortality improved, but the admissions were down. Was there anything -- is that just noise? Or is there anything to that side of the equation?

We haven't called out any trends with admissions. It is a noisy number and Q1 was noisy. In terms of GLP-1s and SGLT2 inhibitors, and there are 2 sides of the same coin. What we called out when this growth in the GLP-1 started was that absolutely, these will delay progression for CKD4 patients who are taking these drugs. We think that's -- there's a lot of clinical evidence to demonstrate that. There's equally good clinical evidence to say CKD4 patients will have lower mortality. So most CKD4 patients will unfortunately pass away before they're ever incident to ESRD because of their diabetes or their heart disease or some other issue. And so we see these 2 dynamics, slower progression offset by lower mortality as roughly evening each other out. We've relooked at the data since we initially rolled out that hypothesis in late 2023. And our clinicians continue to believe that's the right way to think about it with maybe a slight positive that our patients, ESRD patients who are taking GLP-1s might benefit from lower mortality when they're on dialysis. So that would be a bit of a tailwind. It's probably too early to really be seeing that effect though yet.

What percentage of your people are taking GLP-1s now?

Roughly high single digits of our patients are on GLP-1s, right now.

Is there a way to -- is it something that everyone could be or should be taking? Or is it -- that number?

It is not something everyone should be taking. Again, I'm not a clinician, so maybe getting a little out over my skis here. But generally, you think of patients who are diabetic as being the ones. Roughly 60% of our patients are diabetic and about 40% are on ESRD because they're diabetic. So that might be a way to think about GLP-1s. GLP-1s, remember, though, have been available to these patients for a lot longer than they've been available just for weight loss.

And then when you I know you said you weren't quite ready to talk about the progression back to 2% by 2029, but let's see if I can pitch and hole you into something. I mean there is reason...

Shouldn't warn me you're going to do that.

I don't know. But is there reason why it wouldn't be more ratable? Like what would the reason why it would happen sooner versus the reason why it would happen later?

I'd start with the middle molecule clearance, which are either new machines or new dialyzers. They're not widely available yet, but that will grow over time. I think there's reasonable evidence and if you look at the CONVINCE trial, you can see it there, that it takes about 18 months from when this clinical intervention starts, when the better clinical care starts until you really see the curve separate and the better mortality show up. So there is a delay between the implementation of better clinical care and when you will start seeing it in mortality. That delay is different depending on the intervention. It might be a lot quicker, for example, for higher vaccination rates. But it's that reason and some of the questions around what that path will look like that we would expect we'll have to wait a bit until we get back to the 2-plus percent.

And maybe talk about the middle molecule then. Just -- so Fresenius has a new device. They're very excited about it, but they're kind of doing it to themselves first. They are selling it externally. But like how do you think about your potential adoption or the rate of your adoption of that? Start there.

So I'd start with -- we are very excited about this new modality. Everything I know says it's going to be great for patients and extend their lifetime and they feel better. It's not just about living longer. The reports are that patients who've had middle molecule clearance, they're less tired and they just feel better. And that could have other benefits. It might mean patients miss fewer treatments, for example. There are 2 paths forward here. There's the new machine, high-volume HDF, and that's the machine you're referencing. There are also dialyzers that could potentially deliver a similar benefit of middle molecule clearance. We are watching the data carefully to see what these different paths have to offer. Clinically, there are other considerations as well. There are supply chain considerations, there are operational considerations as well. So we're testing both out, and we're excited to see where this goes and the benefits it can deliver to our patients.

Yes. So I think they're talking about a 2030 kind of full penetration to themselves. Like if you -- if this other option of the dialyzers potentially delivering similar efficacy, like is that something that could happen much sooner? When could you start to roll that out if you?

Well, it depends on a whole bunch of things. It depends on the FDA. It depends on supply chain and the manufacturer's ability to create it as well. So I think it's a little early to speculate what sort of speed that could happen.

Okay. And then can you talk a little bit about -- it always seems like something new from the reimbursement side of things like phosphate binders or calcimimetics or what have you. So I guess maybe just start with phosphate binders. Like how much is that going to be adding to your kind of OI this year? And how should we think about it into next year? And then is there some next drug that you're kind of looking at and saying this has an opportunity to be meaningful?

Yes. So last year, we called out $50 million of contribution from OI. We expect this year to be something similar to that. In terms of 2027, it is too early to tell. There are a lot of dynamics yet to play out largely from CMS about how they're going to think about binders next year and when they fully bring them into the bundle and how they fully bring them into the bundle. I would expect we'll get a lot more clarity on that when the preliminary rule comes out typically at the end of June or early July. So TBD on that one. In terms of other drugs coming down the pipeline, what I would observe is DaVita has, I believe, a core competency in terms of how we manage drugs to deliver great care to our patients, deliver great savings to the systems, but also deliver OI to our shareholders. And I think you saw that with calcimimetics. You're seeing it with binders now. You can see it with how we're able to manage down the cost of EPO over time. And I think this will continue to deliver. There's no specific drug I would call out. But I do think as we think about how we continue to maintain our margins and deliver cost savings for our payers and the system, I think there will be more pharma opportunities going forward.

And then like the RPT number in the quarter was pretty strong, 4%. I guess, is there a way to break that out why it would only be 1% or 2% kind of for the year?

Sure. So RPT is a source of a lot of variability from quarter-to-quarter, and we've called that out. We called it out in Q4 -- called out in Q3 about Q4, and it came out as we expected. Q1 benefited from positive variability this year. It also suffered from negative variability in Q1 of 2025. So those 2 things combined to partially explain the high growth in Q1. There are 2 other dynamics that you have to think about in terms of progression for the year. One is enhanced premium tax credits. And as we've called out about a $40 million headwind from lower commercial mix as patients leave the exchanges, that's a number that will grow over the course of the year. So that's one reason you would expect lower RPT growth later in the year. The second would be binders. We think RPT contribution from binders will come down over the course of the year. No impact to OI because we think costs will come down as well, but that would be the other thing. Also, I said about variability, Q4 had very positive variability in 2025, and we called that out. So you would expect Q4 of '26 to have a very tough comp as well.

And is the binder impact, is that just a natural result of the way that the rates are based off of ASP on a lag? Or is it because, I guess, there's like a new generic that's coming out this year? Like is that influencing that? Or is that separate?

Yes. So you're right about both. It's more the former than the latter. There is a new generic Auryxia, which has been approved, but there isn't much supply of it. So it's really not having an impact on ASP.

And then can you just talk a little bit about the rate updates that you're getting because I guess the Medicare rate is 2%. So why is it only 1% to 2% overall?

Yes. So you're right, 2% is probably a more typical average rate increase we would get. The big headwind is on the binders that the decline in ASP in the binders is about a 40 basis point headwind for us in the year, which is why we're at 1% to 2% rather than 1.5% to 2.5% and I would remind you, as I said before, that has no impact on OI because cost per treatment is coming down with that.

Yes. So then the commercial side is in that 2% range as well. Why aren't you able to get something more than that?

I ask our payer partnerships team that every day. Look, it is full contact sport as our former CEO used to say, we would love to get better rates. I think we're comfortable forecasting 2%, and that's kind of where we are.

And although the market has been very much focused on volumes, you guys have been pretty confident in your ability to do your 3% to 7% OI growth even if volumes are a little bit lighter. Like can you talk a little bit about the cost side of the equation? What gives you confidence in being able to manage costs down to deliver that?

Yes. So look, we've -- it's been a strength of DaVita for a very long time. We are a provider with a national footprint at scale, and there's no doubt that gives some advantages on the cost side. And I would say we benefit from just staying ahead of the curve. We have been investing in IT for many, many years now, even through some of the more challenging years in '22 and '23. We did not take our eye off the ball and investing in the future. The best example is CWOW, which is our electronic medical record system. And what you see in our P&L is true this year and has been true in the past, and I think will be true in the future. We continue to invest in IT and our future, and you see the benefits of that in other parts of the P&L. You see it in cost per treatment. You see it in revenue per treatment through better revenue operations. And we think that will continue.

So I guess like if you think about, say, 50 basis points of volume growth, how do we get from 50 basis points of volume growth plus 1% or 2% pricing to 3% to 7% OI?

Yes. So I'd start with a point of OI growth from international and 1 point of OI growth from IKC, our value-based care business. They won't be exactly a point every year. But as you think about the theoretical model, I think you can count on, call it, $20 million or so of OI from each of those. And then you're dependent on 1% to 5% from the U.S. dialysis business. To get to 3%, you need, call it, 2 points of RPT growth and 1 point of volume growth and constant margins. There are other equations you can get there with -- we got there with 0 volume growth by tweaking some of the other components of our Trilogy but there's no doubt it gets easier as volume growth comes back.

So how durable is the 1% from each segment? I mean, I guess, internationally, you can keep investing potentially theoretically. The value-based care side probably has an upper limit to where that can be. How many more years do we have of that?

Yes. So international is just inherently a higher -- we're in higher growth markets than in the U.S., and we've got more room to run on margin improvement. So I think the model there is relatively easy to see. On IKC, we've had a lot of strength in delivering shared savings, and that continues to improve. What I think you will see over time is growth in lives under management and dollars under management and some fixed cost leverage which doesn't lead me to worry that somehow this $20 million a year model is going to fall apart in IKC anytime soon. I think we've got a few years of visibility to continue to deliver that.

And then why are you -- why is international so interesting? It seems like Fresenius, obviously, some of the clinics you bought was from them that they were getting out of some markets you were getting into those markets. So what makes it interesting to you? And why were you able to make that work for you?

I'm reluctant to speculate about why Fresenius chose those -- chose to sell those markets. I think based on what they've said publicly, they were solving for lower leverage and higher margins. Neither of those were issues that we were solving for. We were solving for return on capital and OI growth. And so we're quite happy with the markets we bought from them. It's been enough time right now where I feel like those were good investments for us. We expect higher returns internationally because of the risk, and we are getting those. So I like the international markets. We're cautious. We're hesitant when we get into new markets to make sure they meet our criteria. And the thing that I would emphasize that I think I and Robert Lang, the Head of International, are all very proud of is in every single market that we enter, we demonstrably improve the quality of the clinical care.

Great. And then maybe just pivoting back to the ACA for a minute. You guys talked about that or the impact of that growing bigger to '27. I guess it's more about the new incidents into dialysis, not having coverage. So is there a way to think about how that will progress for the rest of the year? Is that kind of like a growing number each quarter? And what are you seeing now? I don't know -- we're now in May. So it seems like with the effectuation rates, maybe you'd start to have some color on how that's trending?

Yes. It's still early to tell on exactly how it's trending. But what you called out is exactly right that the way we expect this to really play out would be our newly incident patients, you said won't have coverage, just to be clear, we would expect they'll have Medicare coverage, but they won't have commercial coverage, and we get a lower rate on Medicare, as you know. So that's the impact. And we would expect that to continue to build over the rest of the year and into 2027. And the big question is what has happened to CKD4 patients and how many of them have retained coverage on the exchanges despite the higher premiums because that ultimately will dictate what the incident commercial mix rate is for us.

And to be clear, you're basically assuming that exchanges go back to 2019 as a percent of total? Or is it different than that?

Yes. Well, we're using our numbers, we are expecting that roughly 1% of our patients were on the exchanges as a result of enhanced premium tax credits, and we would expect that number to go away over multiple years.

Over the 3-year period.

Correct.

Okay. And then one of the things that everyone seems to be really excited about is AI. Can you talk a little bit about what you guys see AI, what the opportunity is for you? And is there anything that maybe the market gets too excited about their skis on?

I'm not going to touch the second part of that question. Look, AI is something that we are absolutely leaning in on. We're investing a lot in it, both in the infrastructure that is ultimately needed to deliver AI, and that's both having clean data and having good systems because I'd say, in general, our AI benefits will come through our core systems. For example, the AI benefits I would expect to see in accounting would largely come through our Oracle system rather than some stand-alone AI system. And I would expect similar things for a lot of our technology. So we're excited about it. We are moving, I think, at a judicious pace, recognizing there's a lot of infrastructure that needs to get -- needs to be put in so we can really take advantage of AI, but we would expect benefits in lower software development costs, better revenue operations, labor productivity is an area we're excited about call centers. So in line with what I think most people are looking at initially, then ultimately, opportunities in clinical care.

And can you give a little sense of timing of when we should start to see some of these things, the fact that ultimately, clinical care makes it seem like it's a farther out thing, but is there a way to think about timing?

Well, I think each of these things has many, many subprojects, and there are areas of clinical care that dosing being one of them that you could attribute benefits to AI already today. I would say using a CFO's lens, I would expect AI to be a net cost to us at least for '26 and probably much of '27 before the benefits start outweighing the expense.

And I guess when you think about the best ROI, what's the best ROI of the things that you kind of mentioned?

The best -- I mean, a lot of them are quite inexpensive to implement. So I'm not sure ROI is the right lens. The question, it'd be more about what's the total dollar savings you could benefit from. And I would say right now, the largest ones would be software development, productivity and revenue operations. And those aren't necessarily about the percentage savings, just 2 of those things, revenue operations and labor productivity, in particular, are just very big items on our P&L.

And then when we look at the P&L, probably the cost number that jumps out the most is that G&A. It's been up a couple of hundred basis points over the last several years. On the call, Javier was kind of saying you didn't really care where the cost per treatment came from as well to keep in that 2%, 2.5% range. I mean is there -- the outside that looks high, but is that not the case? Or is there an opportunity to bring that G&A number down?

I think the point Javier was making is that if we can invest $20 million in G&A to drive $40 million of better revenue collections or $40 million of lower labor costs, we don't care if G&A goes up for that reason. We're investing in G&A and the returns are excellent. And we will continue to do that. And I think most of our AI and technology costs wind up in G&A, and they generally result in savings that are in another line or benefits that are in another line in the P&L. So we're comfortable with G&A going up as long as we're getting the right return for those investments. DaVita for many, many years that certainly preceded my time as CFO has been praised for its cost management. I think it's well deserved. We bring the same lens to G&A, but we are comfortable with G&A growing as long as we're getting the value for it.

And then when we think about capital deployment, I think it was one of the things that probably wasn't well understood by the market when you guys came out with Q4 results and just kind of showed how much cash you have and how much share repo you could be doing. You guys have invested in some things along the way, whether it was a device JV and then the home health investment. Like how should we think about share repo versus some of these ancillary things? And is there a view that there should be another leg to the stool? Or how should we think about that?

Yes. So share repurchases are the last thing on the list. When we don't have other appropriate good uses of capital where we're investing in our future at good risk-adjusted returns, we'll buy back stock. I love finding other uses like the Mozarc, the joint venture you mentioned or Elara, the home health investment. So we will continue to do those. I don't think of either of these as another leg to the stool. These are supportive of our dialysis and kidney care strategy. In terms of are we out looking to put billions of dollars of work to diversify, the answer is no, we are not.

Maybe just last question on that. How do you think about leverage? Obviously, you're growing OI now. So do we think about leverage as something that you plan to use for share repo or for share repo, will be?

Yes. So we think about it differently. We think about -- our comfort is with our leverage in the 3x to 3.5x range. And if EBITDA is growing and it has been growing to stay in 3x to 3.5x, we have to take on more debt. And we don't do it because we want to buy back more shares. We do it because of a fundamental view on how we're going to fund the business between debt and equity. And to keep in that 3x to 3.5x, we borrow more money. We don't generally like to have a lot of cash sitting around on the balance sheet. So if we can't find other uses for it, we buy back stock. So it's not that we're taking on debt to buy back stock. We're taking on debt to keep our leverage levels where we want them to be. And as we think about what are we going to do with that cash, buying back stock happens to be the option we end up needing.

That's all we have time for. Thank you very much.

Thank you, Kevin.