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

Explicit Guidance:

• Full-Year 2026: Narrowed Adjusted Operating Income (AOI) range to $2.175B – $2.25B; Adjusted EPS range to $14.30 – $15.20; Full-year Free Cash Flow (FCF) anticipated between $1.0B – $1.25B.
• Full-Year 2026 International AOI: Expected to be approximately $135M (tracking in line with prior expectations).
• 2027 Financial Outlook: Integrated Kidney Care (IKC) business expected to deliver at least $65M in AOI, representing a >$25M increase over prior guidance and a >$25M increase over 2026 actuals.
• 2026 Medicare Rate Impact (ESRD Final Rule): Net impact estimated at 1.5% – 2% for full-year 2027 revenue, an improvement of ~50bps over the prior proposed rule.
• 2026 Technology Investment Drag: IT spend in U.S. dialysis is higher than forecasted, negatively impacting 2026 performance; growth in IT investments expected to decelerate (from >20% YoY growth) in 2027 but continue to increase.
• 2026 Commercial Mix Headwind: Expecting a $40M year-over-year headwind related to ACA exchange census changes.
• Q4 2026 Volume Dynamics: Treatment volume expected to face a ~1% headwind due to year-over-year day mix; however, treatments per normalized day (RPT) expected to accelerate relative to H1/Q3 due to mistreatment rates reverting to normal levels and stronger census growth.

Business-Segment Outlook:

• U.S. Dialysis Volume: Census growth driven by mortality improvements; 2027 volume growth expected to be higher than 2026. RPT growth expected to be offset by commercial mix headwinds (primarily ACA), while pharmaceutical costs (specifically phosphate binders) are expected to decline.
• Integrated Kidney Care (IKC): On track to outperform original 2026 guidance; profitability confidence is "growing" with improved savings rates and clinical outcomes; Humana partnership expected to expand upstream care to ~10,000 CKD patients.
• Clinical Innovation (Expanded HD Dialyzers): National rollout beginning November 2026 (targeting >95% of centers); >75% of patient census is clinically eligible (>90% pilot adoption); Financial net impact on AOI expected to be neutral for 2026–2027, with positive impact on mortality and volume growth beginning back half of 2028.
• Mortality & Clinical Metrics: Anticipated >20% mortality improvement from expanded HD dialyzers; targeting 2% or greater volume growth by 2029.

Market and Competitive Outlook:

• ESRD Rate Adjustments: Large Dialysis Organization (LDO) headline rate increase is 3.5% (up 1.5% from proposal); however, this is subject to downward quarterly adjustments post-Q1 due to the quarterly recalculation of T-DAPA add-on payments.
• Competition & Ecosystem: Management views the current "limited competition" as a result of the high barrier to caring for a 90% government-mix population, not operational inefficiency; welcoming new capital and competition provided the economic ecosystem addresses the "cross-subsidy" dynamic where private payers support the Medicare base.
• Capacity Utilization: No plans to close clinics; focus is on growing census to increase capacity utilization, which remains below pre-COVID levels.
• Modality Shifts: No expectation of significant patient shifts from in-center to home dialysis or vice versa resulting from expanded HD dialyzer adoption, as Peritoneal Dialysis (PD) already offers high middle-molecule clearance.

Macro / Industry Outlook:

• Policy (HHS Kidney Care National Plan): Aligned with administration goals for early intervention, transplant expansion, and improved outcomes; notes that many elements require further policy development or congressional action.
• Policy (AKF Premium Assistance): Management notes that dilution of the American Kidney Fund (AKF) grant program could inadvertently increase government payer mix (reducing the ~10% commercial segment) and reduce capital attraction, counter to administration goals.
• Pharmaceutical Reimbursement: Expectations for lower phosphate binder costs in 2027 as ASPs decline and binders move into the dialysis bundle; T-DAPA add-on payments expected to be recalculated quarterly, leading to a significant drop from Q1 to Q2 and staying low through 2027.
• Interest Rates: Management maintains three-year interest caps on ~80% of floating-rate debt to mitigate rising rate environments.

Strategic Initiatives:

• Technology Modernization: Over $1B invested in the past few years; investments are driving clinical and financial benefits (mortality, labor productivity, pharmacy costs) with IT spend growth expected to decelerate in 2027.
• Expanded HD Dialyzer Deployment: Completed pilots in 150 centers (>10,000 patients); 95% of clinical teammates trained; transition to be swift and network-wide starting November 2026.
• IKC Expansion: Active pursuit of "healthy contracts" leveraging scalable clinical and actuarial capabilities; recent expansion with Humana to serve 10,000 CKD patients.
• Share Repurchases: Repurchased 600,000 shares in Q3 and 500,000 shares since quarter-end; continuing quarterly repurchases from Berkshire Hathaway to maintain ownership at 45%.

Risks and Headwinds to Outlook:

• ESRD Rate Volatility: The 3.5% headline rate includes a T-DAPA component that will decline significantly after Q1, creating quarterly volatility in reimbursement calculations.
• Cost Volatility: Medical supply costs and professional liability expenses were higher than anticipated in Q3 and could revert to typical levels over time, creating uncertainty for future margins.
• Regulatory Scrutiny: Continued examination of the AKF premium assistance program and the HHS Kidney Care plan's economic model regarding government payer reliance.
• Mortality/Volume Uncertainty: The financial impact of increased mortality (from new dialyzers) on Medicare mix profitability remains unquantified; it is not yet determined if extended survival will result in a pure volume add-on or a shift in payer mix.
• ACA Exchange Headwinds: Continued impact from the expiration of enhanced premium tax credits on commercial mix, estimated at $40M for 2026.

Management Tone on the Future:

• Confidence Level: High confidence in the maturity and economic potential of the IKC business; expressed excitement regarding clinical data for expanded HD dialyzers ("most excitement I've ever seen").
• Strategic Posture: Emphasis on "resilience" amidst RPT and volume pressures; confident in the ability to deliver AOI growth in the top half of long-term guidance despite IT headwinds.
• Caveats: Repeatedly noted that specific 2027 guidance (volume, margins, international, IKC scaling) is "too early" to provide, pending the resolution of T-DAPA calculations and IT spend normalization.

Miscellaneous:

• International: Q3 adjusted operating outcome of $46M (up $20M YoY); excluded a charge related to China operations; growth driven by Latin America.
• Capital Structure: Leverage ratio finished September at 3.38x EBITDA; Debt expense for the quarter was $150M.
• Dividends/Buybacks: No mention of new dividend initiatives; focus remains on share repurchases to manage ownership structure.