DaVita Inc. 3rd Quarter 2026 Investor Conference Call - DAVITA INC

Explicit Guidance:

• Full-Year 2026: Adjusted operating income range narrowed to $2.175 billion to $2.25 billion; adjusted EPS range narrowed to $14.30 to $15.20.
• Full-Year 2026 Free Cash Flow: Expected to remain between $1.0 billion and $1.25 billion.
• Full-Year 2026 International: Expected adjusted operating outcome of approximately $135 million.
• Full-Year 2027 IKC: Adjusted operating income expected to be at least $65 million (an increase of at least $25 million over prior guidance).
• 2027 ESRD Rule Impact: Net financial impact on 2027 full-year results estimated at 1.5% to 2% (approx. $45M–$60M total benefit, improving on prior rule estimates).
• 2027 Volume/Cost Outlook: 2027 volume growth expected to exceed 2026 levels; Revenue Per Treatment (RPT) expected to face headwinds due to commercial mix (ACA); Pharmaceutical costs (including binders) expected to decline in 2027.

Business-Segment Outlook:

• U.S. Dialysis Volume: Treatment per normalized day (RPTD) expected to accelerate in Q4 2026 (implied >1% growth) as mistreatment rates revert to normal patterns and census growth continues.
• IKC (Integrated Kidney Care): Business deemed scalable and profitable; targeting growth via new contracts and physician partnerships. Humana partnership expected to expand upstream care to approx. 10,000 CKD patients.
• Pharmaceutical Costs: Phosphate binder costs expected to decrease in 2027 due to ASP declines; medical supply and professional liability costs from 2026 expected to revert to typical levels.
• International: Latin America businesses driving growth; China operations remain a separate charge excluded from adjusted operating income.
• Capacity: No plans to close clinics; capacity utilization targets driven by census growth rather than supply reduction.

Market and Competitive Outlook:

• Mortality/Census: Continued mortality improvements (driven by fluid management and expanded HD) expected to drive patient census growth.
• Commercial Mix: ACA exchange headwinds persist, with an estimated $40 million year-over-year impact for 2026; commercial mix expected to remain below first-half 2026 levels.
• Competitive Landscape: Expecting industry-wide rate adjustments due to CMS ESRD Final Rule; noting that 90% of patients are government-insured (Medicare/Supplemental), limiting private capital influx unless reimbursement economics improve.
• Volume Trends: Volume growth in 2027 anticipated to outpace 2026.

Macro / Industry Outlook:

• CMS ESRD Final Rule: Permanent incorporation of phosphate binders into the bundle confirmed; Large Dialysis Organization (LDO) rate increase of 3.5% for Q1 2027 (up from 2.0% proposed).
• Quarterly Rate Mechanics: The 3.5% headline rate is subject to downward quarterly adjustments post-Q1 due to recalculated TDAPA add-on payments; net annual impact estimated at 1.5%–2%.
• HHS Kidney Care National Plan: Supportive of administration goals (early intervention, transplant expansion); advocates for competition but warns that current model relies on private cross-subsidies for the ~10% non-government patient mix.
• Regulatory Scrutiny: Potential review of American Kidney Fund (AKF) grants; DaVita notes that diluting such programs could inadvertently increase government payer mix and reduce private investment.

Strategic Initiatives:

• Expanded HD Dialyzer Rollout:
  • Timeline: National rollout begins next week (November 2026) for majority of eligible patients.
  • Status: 150 centers piloted (>10,000 patients); 95%+ of clinical staff trained; >90% adoption among eligible patients.
  • Financial Impact: No material net impact on adjusted operating income for 2026 or 2027.
  • Long-term Impact: Positive financial impact (lower mortality/higher volume) expected to begin in H2 2028 and grow over time.
• Technology Investment:
  • Trend: IT spend growth expected to decelerate in 2027 (from >20% YoY growth) but will not decline; full-year 2026 spend exceeds prior forecasts.
  • Focus: Investments in digital tools and care management protocols targeting fluid management and mortality reduction.
• Capital Allocation: Share repurchases ongoing (600k shares in Q3; 500k subsequent); maintaining 3.38x leverage ratio; maintaining 3-year interest rate caps on ~80% of floating debt.

Risks and Headwinds to Outlook:

• IT Costs: Elevated technology spending in 2026 acting as a drag on full-year financial performance.
• Regulatory Uncertainty: The ESRD Final Rule's quarterly recalculation of TDAPA payments creates revenue volatility in H2 2027; HHS National Plan elements require further congressional/policy action.
• Commercial Mix: Ongoing erosion of commercial patient mix due to ACA exchange premium credit expirations.
• Mistreatment Rates: Q3 2026 saw higher-than-expected mistreatment rates (offsetting census gains), with uncertainty if this trend persists.
• Mortality/Viability Risk: While expanded HD aims to improve mortality, extended patient lifespans could alter the payer mix (longer Medicare tenure), the net financial impact of which is not yet fully modeled for 2028+.
• Cost Volatility: Unanticipated increases in medical supply costs and professional liability expenses in 2026.

Management Tone on the Future:

• Confidence: High confidence in the economic viability of the IKC model ("growing confidence," "solidly profitable") and the scalability of the expanded HD technology.
• Optimism: Enthusiastic about the expanded HD rollout ("most exciting" in community) and expected mortality improvements.
• Caution: Acknowledges 2026 is a transition year with "drag" from IT spend; emphasizes that 2027 guidance remains fluid ("too early to answer") regarding full-year volume and margin targets.
• Strategic Shift: Moving from a "cost-saving" phase in IKC to a "growth" phase, seeking new contracts now that actuarial and clinical models are proven.

Miscellaneous:

• Berkshire Hathaway: Continuing quarterly share repurchases from Berkshire to maintain ownership at 45%.
• Share Count: Repurchased 600k shares in Q3 2026; 500k repurchased post-quarter end.
• Clinical Metrics: Achieved 10% improvement in optimal fluid removal treatments and nearly 5-pound average patient weight reduction in pilots.