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

Financial Performance:

• Third quarter adjusted operating income was $561 million, representing a 10% year-over-year increase, with adjusted earnings per share (EPS) of $3.82.
• Free cash flow for Q3 was $276 million; full-year free cash flow is anticipated between $1.0 billion and $1.25 billion.
• Full-year 2026 guidance narrowed: adjusted operating income range is $2.175 billion to $2.25 billion, and adjusted EPS range is $14.30 to $15.20.
• U.S. Dialysis revenue per treatment grew 1.1% year-over-year, driven by rate increases offset by lower commercial mix and reduced phosphate binder reimbursement.
• Medical care costs per treatment rose 2.4% in Q3 due to higher labor, supply, and liability expenses, partially offset by lower phosphate binder costs.
• International adjusted operating income was $46 million for Q3, a $20 million increase year-over-year, excluding a charge related to China operations.
• Leverage ratio stood at 3.38x consolidated EBITDA at the end of September; debt expense for the quarter was $150 million.
• The company repurchased 600,000 shares in Q3 and an additional 500,000 post-quarter, maintaining Berkshire Hathaway ownership near 45%.

Guidance and Future Outlook:

• IKC (Integrated Kidney Care) business is expected to deliver at least $65 million in adjusted operating income in 2027, an increase of $25 million over prior guidance.
• Volume growth in 2027 is projected to exceed 2026 levels, supported by improving mortality rates and a matured care model.
• IT investment growth is expected to decelerate in 2027 from the >20% rate seen recently, though absolute spend will continue to rise.
• Pharmaceutical costs, particularly phosphate binders, are expected to decline in 2027, providing a cost tailwind.
• The expanded HD dialyzer rollout is expected to have no material net impact on adjusted operating income in 2026 or 2027, with positive volume growth and mortality benefits anticipated in the back half of 2028.
• Long-term goal remains achieving 2% or greater volume growth by 2029 through clinical innovation and mortality improvements.

Business Segments and Product Lines:

• Clinical Innovation: Pilots of expanded HD dialyzers completed in 150 centers involving 10,000+ patients; >90% adoption among clinically eligible patients (75% of total census). National rollout begins in November.
• Fluid Management: Proprietary digital tools and clinical protocols resulted in a 10% improvement in optimal fluid removal treatments, a 5% improvement in inter-treatment weight management, and a nearly 5-pound reduction in average patient weight.
• IKC Expansion: Announced partnership with Humana to expand upstream chronic kidney disease (CKD) care to approximately 10,000 patients; business is performing ahead of original annual guidance.
• Technology: Over $1 billion invested over the past few years to modernize platforms; investments are driving labor productivity, pharmacy cost reductions, and mortality improvements.

Market and Competitive Landscape:

• The ESRD final rule announces a 3.5% rate increase for large dialysis organizations (LDOs), with a net impact estimated at 1.5% to 2.0% for full-year 2027.
• The new rule incorporates phosphate binders into the dialysis bundle permanently; Tdapa add-on payments will be recalculated quarterly, expected to decline from Q1 through 2027.
• Management views the HHS Kidney Care National Plan as generally aligned with their goals but notes the model's reliance on cross-subsidization from the ~10% commercial market, which is eroding.
• Fresenius site closures are perceived to have normalized their volume impact by Q1 2026, showing no significant incremental change in Q2/Q3.
• The American Kidney Fund (AKF) premium assistance program remains a critical mechanism for maintaining commercial coverage for eligible patients, with grant volumes remaining flat over the last eight years.

Risks and Challenges:

• Higher than forecasted technology investment spending in U.S. dialysis is acting as a drag on full-year 2026 financial performance.
• ACA exchange census headwinds continue, expected to result in a $40 million year-over-year revenue impact for 2026.
• Rising interest rates impact debt costs, though the company maintains interest rate caps on 80% of floating-rate debt.
• Policy uncertainty regarding the HHS Kidney Care plan and potential future congressional actions could alter the competitive and reimbursement landscape.
• Clinical adoption of expanded HD dialyzers involves a long timeline (until late 2028) before financial benefits are realized, despite immediate clinical optimism.

Management Commentary and Tone:

• Tone was confident and enthusiastic, particularly regarding clinical outcomes and the upcoming national rollout of expanded HD dialyzers.
• Management emphasized that the company is a "solution, not a problem," highlighting a 25% mortality reduction since 2000 and the value of scale in a 90% government-funded ecosystem.
• Executives expressed strong alignment with the government's goals for early intervention and transplant access, while advocating for necessary policy adjustments to attract new capital.
• Management acknowledged the resilience of the business in the face of RPT headwinds and volume growth below historical norms.

Analyst Questions and Answers:

• ESRD Rule Impact: Confirmed net impact of 1.5% to 2% for 2027; noted the Tdapa add-on payment will drop significantly from Q1 to Q2.
• IKC Growth Strategy: Confirmed readiness to pursue more business due to proven profitability and scalable tech, seeking contracts with active physician partners.
• Q4 Volume: Expect treatments per normalized day to accelerate in Q4 due to mistreatment rates reverting to normal and stronger-than-anticipated census growth.
• Mortality vs. Revenue: Clarified that improved mortality from expanded HD does not solely equate to more Medicare treatments; it extends life for younger patients and earlier in the disease journey.
• Capacity Utilization: No plans to close clinics; goal is to increase utilization by growing census volume.
• AKF Program: Reaffirmed that diluting the program would likely increase government costs and reduce commercial mix, counter to the administration's intent to attract capital.

Other Key Points:

• Expanded HD dialyzers are compatible with existing dialysis machines, facilitating a swift, network-wide transition.
• The company expects mistreatment rates to revert to a normal year-over-year pattern in Q4, correcting the 20 basis point uptick seen in Q3.
• The "trilogy" of volume drivers includes patient census growth (driven by mortality improvements) offset by mistreatments and seasonality.
• Depreciation expenses have trended down for several years and are expected to reach a stable reasonable run rate with no significant further decline in Q4.