DaVita HealthCare Partners Stock

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2026 Earnings Call. [Operator Instructions] Mr. Eliason, you may begin your conference, sir.

Thank you, and welcome to our third quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties, please refer to our third quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. Once again, our teammates have delivered excellent care for our patients and solid results for our shareholders. We're seeing meaningful progress across our clinical strategy with investments in innovation translating into better patient outcomes and stronger business performance. Our maturing Integrated Kidney Care business is a prime example as it continues to deliver clinical performance for our patients while starting to demonstrate its economic potential. In the same spirit, our rollout of expanded HD dialyzer marks an exciting new chapter in how we're advancing kidney care.

Today, I'll share more on these priorities, review our third quarter financial performance, provide our outlook for the remaining of the year and briefly discuss policy. But first, as always, let's begin with our clinical highlights. Today, I will highlight our advancements in fluid management. We're often asked about the clinical drivers behind our recent mortality improvement. And fluid overload is one of those critical areas we target. Because kidney failure impairs the body's ability to shed fluid, managing fluid intake between treatment and safely removing excess fluid during dialysis requires constant vigilance for both patients and care teams.

Left unmanaged, excess fluid placed a strain on the cardiovascular and pulmonary systems contributing to high blood pressure, heart failure and respiratory difficulties. By developing specialized clinical protocols, combined with dedicated team and education and proprietary digital tools, we've uniquely empowered our care teams to manage fluid more precisely. Through these integrated efforts, we've seen a 10% improvement in treatment achieving optimal fluid removal, a 5% improvement in how patients manage weight gain between treatments and nearly 5-pound reduction in the average patient's weight. These advancements are critical drivers supporting our continued mortality improvement and enhancing our patient's daily quality of life.

While we're on the topic of clinical, I will transition now to an update on our efforts to deliver enhanced care for our patients through clearance of middle molecules. Last quarter, we highlighted recent clinical evidence for expanded HD dialyzers, including the potential for greater than 20% mortality improvement, along with our plans to deploy this technology broadly across our network. We have completed pilots in 150 centers for more than 10,000 patients to ensure a smooth and successful deployment at scale.

Based on this experience, here's what we've learned. First, the feedback from patients and physicians was overwhelmingly positive. As background, approximately 75% of total patient census is clinically eligible for expanded HD dialyzer. This eligible pool excludes patients receiving dialysis at home or in acute care setting, pediatric patients and patients with acute kidney injury. Adoption amongst those clinically eligible patients in the pilot was greater than 90%, exceeding our expectations.

And within that cohort, patients tell us they feel better after treatment and have more energy compared to their prior therapy. One goal with expanded HD is to enhance patients' quality of life, and it is exciting to hear early feedback to support this effort. Similarly, our physician partners have been overwhelmingly supportive. The buy-in from the medical community is critical to successful innovation and nephrologists have responded to the clinical evidence and are actively engaged to transform the standard of care. We deeply appreciate the collaboration of our physician partners in our continued efforts to innovate.

Second, we are operationally ready. Our teammates, systems, supply chain are well prepared to successfully manage this transition. Over 95% of clinical teammates nationally are now trained on expanding HD to ensure a seamless continuity of care for our patients. As a reminder, the new expanded HD dialyzers are compatible with our existing dialysis machines. As a result, we will begin our national rollout next week and expect a swift network-wide transition, bringing expanded HD to the vast majority of eligible patients in November.

Finally, from the financial perspective, we do not expect any material net impact on adjusted operating income for 2026 or 2027. We anticipate the positive impact of lower mortality and higher volume growth to begin in the back half of 2028 and grow over time. Most importantly, this innovation means more patients living longer, representing a key milestone in our path back to 2% or greater volume growth by 2029.

Transitioning to financial performance. Third quarter adjusted operating income was $561 million and adjusted earnings per share was $3.82. Joel will provide details on the moving pieces underlying those Q3 results. Taking a step back from the quarterly numbers to look at the full year, I want to highlight 2 trends shaping 2026 and our future performance.

Starting with technology. Over the past few years, we've invested more than $1 billion to modernize our technology platform and strengthening our capabilities across our business. These investments are delivering tangible clinical and financial benefits, contributing to improvements in mortality, revenue operations, labor productivity, IKC care management and pharmacy costs. I'm calling this out to highlight that our IT investments in U.S. dialysis is higher than we forecasted heading into the year. So it represents a drag on our full year financial performance. Going forward, we expect the growth in technology investment will decelerate.

The second highlight is our results on Integrated Kidney Care or IKC. We are above plan in the third quarter, and we're on track to outperform our original IKC guidance for the year. We made meaningful progress delivering on the patient impact we began talking about in 2021, both upstream and chronic kidney disease and for existing ESKD dialysis patients. Let me provide some color on the 2 operating levers, which contribute to IKC's financial performance.

First is the medical spend under management. As we have noted in the past quarters, we have been disciplined as we seek opportunities to grow this business. We're making progress heading into the next year, including our recent announcement of Humana partnership, which will expand upstream care to approximately 10,000 chronic kidney disease patients.

Second is our savings rate, which reflects our ability to lower the total cost of care and has steadily improved year-over-year. This is particularly encouraging because it reflects continued gains in clinical performance as our care model matures. Our investment in technology are improving the ability of our care teams to identify where and when to intervene to help our patients be healthier.

Our clinical interventions are driving reductions in avoidable hospital admissions and readmissions while achieving higher rates of planned optimal dialysis transitions. These results improve patient outcomes while generating substantial shared savings for CMS and our Medicare Advantage health plan partners. This gives us growing confidence in 2026 and the long-term economic of the IKC business. We now expect IKC to deliver at least $65 million of adjusted operating income in 2026, an increase of at least $25 million over the prior guidance.

This all leads to an update on our financial outlook for the remaining of the year. With one quarter remaining in the year, we are now narrowing our full year 2026 guidance ranges. We now expect adjusted operating income within a range of $2.175 billion to $2.25 billion and adjusted earnings per share within a range of $14.30 to $15.20. This reflects the increased guidance for IKC, offset by higher U.S. dialysis costs, particularly higher technology investments, as I previously noted.

Before I turn it over to Joel, I want to briefly comment on 2 recent policy updates. First, yesterday, CMS released the ESRD final rule. This confirms the permanent incorporation of phosphate binders into the dialysis bundle, which is a great outcome for patients and has been a successful cost saver for the government. Within the overall rate adjustment, there are more moving pieces than in prior years. The headline rate increase for large dialysis organizations is 3.5%, which is up 1.5% from the proposed rule. Unlike prior years, this will be subject to downward quarterly adjustments after Q1.

And second, a few thoughts on the Kidney Care National Plan released by HHS last week. We shared the administration's goals around the earlier intervention, slowing disease progression, improving the transplant process, expanding patient choice and improving outcomes. We also appreciate the opportunity to work with the government to create a framework to encourage further competition within this complex ecosystem. Many elements of the plan will require policy development and potentially congressional action before translating into specific actions, and we look forward to working with HHS and the relevant agencies as that work progresses.

I will now turn the call over to Joel to discuss our financial performance in more detail.

Thank you, Javier. For the third quarter, adjusted operating income was $561 million. Adjusted earnings per share was $3.82 and free cash flow was $276 million. Today, I'll provide further details on the quarter's results and some thoughts on Q4 and full year guidance.

Starting with U.S. dialysis. Adjusted operating income was in line with our expectations. I'll walk you through the trilogy, starting with volume. Overall treatment volume grew 1.2% over the third quarter of 2025 and treatments per normalized day increased approximately 65 basis points year-over-year. Patient census increases drove the year-over-year growth, primarily as a result of improving mortality. The census gain was offset in the quarter by an uptick in mistreatments. As a reminder, the fourth quarter will have an approximately 1% headwind on treatment volume due to year-over-year day mix.

Revenue per treatment was up approximately 1.1% versus the third quarter of last year and roughly flat sequentially. The year-over-year growth is the result of normal rate increases offset by lower commercial mix and lower phosphate binder reimbursement as expected. Through 3 quarters of the year, the impact on our exchange census from the expiration of enhanced premium tax credits continues to play out as expected.

Patient care cost per treatment were up 2.4% in Q3 compared to last year. Phosphate binder costs declined year-over-year as expected, and partially offset the typical growth in labor expenses. Medical supply costs and professional liability expenses were higher than anticipated in the quarter. We expect these costs to revert to typical levels over time.

U.S. dialysis G&A costs were up less than 2% versus Q3 last year, excluding non-GAAP adjusted cyber expenses in 2025. Technology spend continued to grow at more than 20% year-over-year in the quarter, but the nontech component of G&A was lower in the quarter compared to last year as a result of our ongoing cost control efforts and expense timing.

Turning now to IKC. As Javier noted, the business is performing ahead of our expectations. The outperformance this year is largely driven by a higher shared savings rate in our CKCC business, which is the Medicare fee-for-service demonstration project, as well as the value-based care contracts we have with Medicare Advantage insurers. This is partially offset by higher operating expenses due to higher physician payouts from our shared savings and the launch of a new CKD program with Humana. We now expect this year's IKC adjusted operating income to be at least $65 million, representing a $45 million improvement over last year and a $25 million improvement over our prior guidance.

Turning to International. Third quarter adjusted operating income was $46 million, a $20 million increase year-over-year. This performance is largely the result of growth and improved performance in our Latin America businesses. These results exclude a charge related to our operations in China, which is not included in our adjusted operating income.

The full year continues to track in line with our expectations for approximately $135 million of international adjusted operating income. Transitioning to capital allocation. We repurchased approximately 600,000 shares in Q3, and we've repurchased an additional 500,000 shares since the end of the quarter, including shares from Berkshire Hathaway. As a reminder, we repurchased shares from Berkshire each quarter as needed to bring their ownership back to 45% pursuant to our repurchase agreement.

We finished September with a leverage ratio of 3.38x consolidated EBITDA, about flat to last quarter. Debt expense in the quarter was $150 million. In light of rising interest rates, I will remind you that we maintain 3-year interest rate caps on approximately 80% of our floating rate debt.

For full year 2026, as Javier noted, we are narrowing our guidance ranges for adjusted operating income and adjusted earnings per share. Our new range for adjusted OI is $2.175 billion to $2.25 billion, and our new range for EPS is $14.30 to $15.20. We still anticipate full year free cash flow between $1 billion and $1.25 billion. That concludes my prepared remarks for today.

Operator, please open the call for Q&A.

[Operator Instructions] Our first caller is A.J. Rice with UBS.

I appreciate the comments on the ESRD rule that got finalized over the last 24 hours. I know the industry has sort of felt like the rate in the original proposal for phosphate binders seemed adequate, but the underlying rate for the treatments, ex that, was challenging. With the adjustments made, is there an ability to comment? One of the tricky things is how -- I know you guys had said the phosphate binder reimbursement would drop because ASPs were dropping in the relevant drugs. Can you just comment on whether the drop in what they've included was consistent with what you're thinking? And how adequate is the move up in the rest of the rate?

Yes, A.J., thanks for the question. So as you noted, it's been 24 hours, and we're still unpacking the calculations. I'll start with the big picture, which is our estimate right now, and I'll emphasize that it's an estimate, is that the net impact for us, for the full year '27, will be 1.5% to 2%. Just as a reminder, a 1% change in Medicare for us is worth about $30 million a year. This is an improvement over the prior rule by somewhere north of 50 bps. And the important thing to realize is the rule works differently now than it has in the past because of the change in the way that the TDAPA add-on payments are handled. They're now recalculated every quarter rather than recalculate it once a year.

So the published number is really only the number for Q1, and you really have to break it into 2 components. There's everything other than the TDAPA component, which is fixed for the year. And if you look at what that is for the LDOs, it's 40 basis points, and that will be constant for the year. And then the TDAPA component, which for the LDOs is 3.1%, that only stands for the first quarter. And we expect that number to come down significantly in Q2 and stay down and potentially further decline over the course of the year. So we've got that 40 basis points locked in that 3.5% will come down significantly. And the net impact over the course of the year, we think, is 1.5% to 2% stronger in Q1, a little bit weaker over the rest of the year.

Okay. Okay. And maybe my follow-up, interested about your comments on the IKC. It sounds like -- business sounds like -- you feel it's solidly profitable now, you can start to grow. And obviously, you've got the Humana transaction. It seems like to me there's probably a fair amount of business up for grabs if you wanted to lean into growth in that area. Can you maybe think -- talk about now that you feel like you're at a consistent level of profitability? How much you might think about adding to that business?

Sure. Let me take that one, A.J., it's Javier. We are in agreement with you. Our confidence in our capabilities as both in the clinical and actuarial has now reached a point that we want to pursue more business. But as we emphasize, what you want is healthy contracts, you want your physician partners to be heavily involved. Our model of care is now scalable and you need integrated tech, which we now have. So we've got a lot of the pieces to the tools, and now it's about getting contracts and physicians that are aligned to make sure that we deliver on the care that both avoids hospitalizations and readmissions and brings down the cost.

Our next caller is Andrew Mok with Barclays.

Leaving the full year treatment guide alone implies treatments per normalized day would be up more than 1% in Q4. And an acceleration from the first 3 quarters. Is that the right way to think about the progression? And are you comfortable with that given the uptick in mistreatments you called out?

Yes. So Andrew, first, your math is about right. It would involve an uptick in treatments per normalized day in Q4. I would expect that to come from 2 things. One is mistreatment rate reverting to a normal year-over-year pattern. What we saw in Q3 was mistreatment rates about 20 basis points higher than expected and higher than last year. And what we're assuming for Q4 is that it reverts to a normal pattern. We're assuming it will be consistent with Q4 of last year. So that's one thing.

The second component driving it would be census. Census growth was a little bit stronger in Q3 than we anticipated, and that census growth over the course of the quarter, drives higher treatment growth per normalized day in Q4 rather than Q3. So those 2 things together would drive the uptick in Q4.

Great. And can you update us on the ACA exchange headwind in the quarter and comment on where commercial mix is tracking relative to the about 10.7%, I think you were expecting in the back half?

Yes. Mix is down a little bit relative to the first half of the year, very much in line with our expectations, and we think we're on track for that $40 million year-over-year headwind for '26.

Great. And finally, if I could squeeze one more in. I wanted to follow up on your comments around HHS' Kidney Care plan released last week. What were your initial impressions? And which elements of the plan do you think could translate into policy?

Yes. Thanks, Andrew. As we said in our opening comments, we have a lot of things that we like about the plan. And we are aligned totally, and we share the goals of the administration of fostering innovation, investing in early detection and prevention and increasing access to transplant. When the plant came out, I immediately reached out to the administration and told them we want to be right there at the table and want to be part of the solution.

And on each one of those, of course, you can go into the subcomponent. For the part that was a bit frustrating, it's how dialysis was portrayed in the rule. The fact is, we offer world-class service, and we are great economic value, and this is confirmed as I travel the world. And other countries really want our expertise to enter their countries. That said, there were some positive things around what they said within dialysis, which is they want to solve for innovation in the bundle, which we, of course, want as well. And they want to reduce regulatory burden, which we would welcome.

The part that's a little, let's say, not fleshed out enough, and we need to solve for, is the economic ecosystem. 90% of patients are covered by the government insurance with roughly 1% Medicare increase for the past decade. So there's an assumption in there that the cross subsidy by the private insurance and the 1 in 10 is accepted by the model. And so one of the main things that they want to do is attract new capital. And in order to attract new capital, we have to solve for this dynamic, and one of the things that the government will have to pay more.

If I was going to continue a little -- well, I got a little momentum because you hopefully can feel my passion on it, is that there's an under appreciation for the benefit of scale and expertise. That as I look at our body of work over the last couple of decades, we have developed and adhered to world-class protocols and best demonstrated practices. We have a dramatic reduction in mortality of roughly 25% if you measure it from the year 2000. When there's an emergency or disaster response, we are there. When you look at sophisticated tech, we have it. When you look at access to rural communities, 92% of patients in rural communities are within 10 miles of our centers. And by the way, you need a counterweight to big pharma and big insurance or else costs would go up a whole bunch.

So in summary, I really took a little to heart that we are part of the solution, not the problem. We welcome more competition. But I want to be clear, the linear competition is not due to how we operate, but rather how hard it is to take care of this vulnerable population with high needs at 90% government mix. And so you hopefully see the one part that got me going, but the rest of the plan, totally behind.

[Operator Instructions] Our next call is Pito Chickering with Deutsche Bank.

Can you give us the known puts and takes as we think about modeling next year, including the treatment growth you're seeing with the acceleration of the census in the third quarter? And the thoughts of redefer treatment next year with what you learned about HICS, then the tailwinds from lower IT investments and any additional IKC tailwinds that we should think about as these guys scale up?

Sure. I'll take that one, Pito. It's early to give full guidance on 2027. That said, there's certainly a few things that we can help with. On the volume side, I would say we expect volume growth in 2027 to be higher than volume growth in 2026. On RPT, we expect a headwind from commercial mix with ACA being the big component of that.

And then on the cost side, I'd really call out pharmaceutical costs, which we think will come down in 2027. Binders being the biggest component of that, but not the only component of it. You mentioned IT spend. IT spend will not come down next year. Our expectation is it will decelerate. So the 20-plus percent growth that we've been absorbing for the last 3 or 4 years, we think we can get down from that, but I would expect it will continue to grow. So I'd say that's the known stuff for next year.

Okay. Great. And then on the HD dialyzer. I think you said that all the centers will be doing it by November. And expected to see certain mortality in the back half of '28. But I'm curious for the 10,000 patients that you've been treating so far, have you seen any indication of lower mistreatments that could impact the near-term treatments? And how does this impact people on home hemo? Did they sort of come back in the center if people are having better results?

Thank you. And hopefully, you hear the excitement in our tone, and our physicians and our patients and our caregivers. This is one of the most excitement I've ever seen in the community. And the short answer to your question is, it's too soon to tell. This takes a while, as you can see from the studies in mortality that it takes a while to have the impact on the inflammatory side.

As it relates to people switching modalities, I doubt that, that will be the case. People make modalities on a lot of other matters. And if you look at PD as a modality, it already is quite good at clearing middle molecules as an example. And so I think it will be just one other thing to consider, but I doubt that there will be shifts in modality selection.

Great. And then last question because I'm getting asked this a lot. I mean, again, back to 2027, I know that it's way too soon for sort of guidance here. But is there any commentary around just do you think that your standard growth rates for -- that you've been having the last few years in the business can continue next year? With the headwinds and tailwinds, plus the HICS on top of that, is that the way of thinking about it?

I think you're right, Pito. It is too early to answer that question. Look, as we said, we think we get a better volume tailwind next year than we've had this year on U.S. dialysis margins, I think we called out the headwinds, tailwinds. Headwind on RPT, a tailwind on cost, how those shake out, we'll know more in February. And then I don't think we've really got much to say on either international or IKC yet.

Our next call is Kevin Fischbeck with Bank of America.

Great. Can you talk a little bit about the benefit to volumes that you saw from Fresenius closing sites? I wasn't sure if there was supposed to be any kind of improvement in Q3 versus Q2 from that kind of normalizing. What did you see there?

Yes. No. Kevin, that played out pretty much in Q1. So no change from Q2 to Q3 from that dynamic.

Okay. And how do we think about the profitability? I know it's a 2028 and beyond issue, but of the improvement in mortality from a new dialyzer, I think there's some question about this just kind of extending the life on dialysis and that's more of a Medicare as a percentage of revenue. Would that be as profitable? Should we be thinking about it if it added 1% to treatment? Is it that 1% to revenue and 1% to OI or is the growth algorithm different than that from improved mortality?

Yes. So we're still waiting for better data on this. The natural thing would be to think that just the older patients or patients are adding on a year or 2 when you go from an average of 5 or 6 years to 6 or 7, and those are all Medicare patients. The early results are that is not the pure dynamic that there are younger patients earlier in their journey whose lives are being extended. So it's not purely an addition of Medicare treatments. How that shakes out, whether it's the same mix of 10% or 11% commercial as we see overall are not, too early to tell. But I don't think we're ready to conclude it's 100% additional Medicare treatments as a result of this improved mortality.

Okay. And then last question here. Going back to that release from CMS a week or so ago. Seem like one of the things that they focused on was the AKF exposure. Can you just remind us where that is for you, how you're benefiting from that relationship?

Sure. Charitable Premium Assistance, for those of you that have not been keeping up with discuss very heavily, if you go back maybe 8 or so years. But we haven't discussed it for a while, so it's probably worth refreshing the topic. So it's basically a system that's been in place for many decades that enables patients, many who can no longer work full time due to kidney failure to maintain continuity of health coverage.

One of the things that's not known is that the vast majority of patients receiving CPA use the grants to support government and supplemental coverage. And so that's probably not known. It's assumed that most of them use it for commercial. But the significant majority of commercial patients actually don't use CPA. And for those that use it, most of them use it to retain coverage that they had before their kidney failure. So while there are many reasons to keep your private insurance, the most common is to retain it for family coverage and because there is a 3x more likely odds of getting a transplant if you have commercial insurance.

So I think we can all agree that those are worthy reasons to keep your insurance. Again, just as a contextual thing, the grants are administered by the American Kidney Fund, otherwise referred to as AKF, and they have been under some major heavy examination through investigations, inspections, rule-making and legislative scrutiny, and all have concluded that the grants benefit of vulnerable population and that the program follows the rules. And so now it's been sort of pointed out in the plan. That's something to look at. We, of course, welcome and we will transparently go through the process again.

But one of the things that is interesting about the dynamic is that the irony that if that program is somehow or other diluted, it would actually make more patients be paid by the government. So that 1 in 10 commercial would go down. And the other thing that would happen is that it would attract less capital. And so ironically, this would be contra their intent to bring more competition to the marketplace. That said, I think your question was around sizing it. And what I would just say is, that in looking at it and we disclosed the numbers roughly 8 years ago, the numbers have stayed completely flat. So that range still applies today.

Our next caller comes from Ryan Langston with TD Cowen.

On clinic capacity utilization, I think that's been kind of steady for a few years, but still kind of well below pre-Covid levels. So some of the initiatives you're working on like technology, RPT, and rolling out HD, kind of work themselves through at some point, just pressing on this lever become more of a higher priority. And what types of things can you do to maybe increase that utilization?

Yes. So look, we would absolutely like to get capacity utilization up. The best way to do it is to grow our census count. That, we are doing that, as I mentioned before, our census count is up about 1%, a little bit more than 1% year-over-year. And we plan on continuing that. We do not have any plans right now to close clinics, that would be the other thing to do. So we'd like to get it up with more volume.

Got it. And then depreciation expense has been trending down sequentially for a few quarters here. Is this sort of a good run rate for us to kind of jump off of? Or might we expect that to come down a little bit in the fourth quarter?

I think we're -- it's been coming down for many years now. I think we're getting to the point where we're probably not going to see a lot of continued declines. So I think we're in a reasonable spot where we are now. Next question?

Yes. Justin Lake with Wolfe Research.

Justin, we can't hear you.

This is [ William Westerfield ] asking for Justin Lake. We just want to circle back to the final ESRD rates that came out last night and LDOs were up 3.5%, with much of that coming from phosphate binders and DefenCath moving into the bundle. Could you just go through for us how you view that 3.1% increase in TDAPA payments across those 2 drugs? Like more specifically, how does the $12 loss binder number compared to your current binder rev per treatment for Medicare patients? And then for DefenCath, can you talk about how you will think about that reimbursement develop across 2027 and when you provide guidance for next year?

Yes. Will, thanks for the question. So I treat the 2 very differently. Binders, very much in line with our expectation not much growth -- not much of that 3.1% growth, we think, is from binders. We don't have full visibility on the baseline for 2026, but because it incorporates us as well as others, but we don't think that's really the big story in the 3.1% growth.

We think it's largely about DefenCath. And the important thing to realize on that is because it's a post TDAPA add-on payment, it will get recalculated every quarter based on updated volume and updated ASP. And our current expectation is that number will drop significantly from Q1 to Q2 and stay low or continue to decline through the back half of '27.

Okay. And then on top of that, is there something that you're tracking to understand the utilization and how it might develop across the industry here in the second half in '27 that could help investors get ahead of the potential changes in quarterly reimbursement for '27? For instance, can we track trends?

I think the short answer is no. We don't have a lot of visibility into what's happening with the industry on that through the back half of 2026.

Thank you. And at this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for any closing remarks.

Okay. Thank you, Michelle, and thank you all for joining the call. To wrap up, let me give some perspectives on our year so far. First, our business is resilient in the face of pressure both from RPT due to ACA declines and from treatment volumes growing below our historical norm.

Second is investment in innovation. We have heavily invested to modernize our technology infrastructure, and we're also in a full swing on the rollout of new dialyzer that promised to deliver step change in care with longer and higher quality of life for our patients.

Putting all this together, we're delivering on our financial commitments with adjusted OI growth in the top half of our long-term guidance, and we're working hard to finish the year strongly. It's unusual to say at this time of the year, but we won't talk until a little while. Have a great holiday season, and we'll speak soon. Be well.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time. And please have a good rest of your day. Thank you.

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Second Quarter 2026 Earnings Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Lisin, you may begin your conference. .

Thank you, and welcome to our second quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties, please refer to our second quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we may make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements except as may be required by law.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

Thank you, Nick. Good afternoon, everyone, and thank you for joining the call today. It's been a busy and exciting summer. One exception is that I have to wait another 4 years to root for Mexico to win the World Cup.

Moving on to more important topics. Our strategies coming together, thanks to the amazing work of our teammates and caregivers. Their effort has led to another positive quarter for our patient outcomes and financial results. On today's call, in addition to our second quarter performance, I will focus on recent innovation in the dialysis industry. specifically the clearance of middle molecules and the steps we're taking to elevate the standard of care for our patients. I'll also share our perspective on the recent ESRD proposed rule and close with our guidance for the remaining of the year. But first, as always, I will begin with the clinical highlights.

Today, I'd like to reflect on the successful transition of phosphate binders into the Medicare dialysis bundle. With advanced notice from CMS, this process began more than 2 years ago with the goal of expanding access to a wide range of therapies for a broader group of patients and that goal has been achieved. With DaVita's broad formulary, our physician partners now have greater flexibility to prescribe the therapy that's best suited for each patient's needs. This is reduced by more than 50% the number of patients relying on less effective over-the-counter options such as tons and instead now are benefiting from clinically preferred therapies. That means more patients are receiving treatments that better manage phosphate levels and help reduce the risk of cardiovascular complications in bone fractures. It's a powerful example of how the right policy, combined with strong clinical execution can expand access to better care and improve long-term patient health.

Transition to the second quarter performance. Our results were broadly in line with our expectations. Beneath this headline, I will highlight 2 primary dynamics. First, year-over-year volume growth continued to accelerate slightly faster than expected, driven by continued improvements in mortality. Second, compared to the first quarter, revenue per treatment declined as we expected, reflecting lower commercial mix from declining ACA enrollment and lower sequential revenue contribution from phosphate binders.

Joe will provide more detail on these dynamics and other moving pieces within the quarter. Turning to policy. In late June, as it's customary, released a proposed rule for 2027 prospective payment system for ESRD. The proposal includes an update to Medicare-based rate and the addition of phosphate binders to the bundled dialysis payment beginning next year. Starting with the base rate. The proposed payment update is more complex than in prior years with methodology changes in various TDAPA related dynamics. The net result is a rate increase that once again tracks below the cost trends for the industry. We're providing feedback during the rule-making process and remain hopeful the final role will better reflect the cost of delivering high-quality care.

On phosphate binders, we continue to support CMS's approach to moving these medications into the dialysis bundle. In addition to the clinical benefit, the policy is lowering projected government spending. Since the initial transition of these medications CMS has reduced their estimate for phosphate binder spend by nearly $500 million. We also support concluding the Tadapa period after 2 years. And while the proposed post ADAP rate adjustment is appropriate -- our ultimate financial impact for 2027 will depend on the bundle update within the final rule later this year.

Let me turn to middle molecule clearance and the recent results from the mother clinical trial. As a reminder, the primary objective of dialysis is to remove harmful toxins from the body. Newer therapies can remove a broader range of these toxins known as middle molecules. The goal is to reduce inflammation, cardiovascular complications and mortality while enhancing the patient's quality of life. Achieving these outcomes is a key building block in our expectation of returning the treatment volume growth of at least 2% by 2029. 2 approaches, which have been used for many years internationally, and are now emerging in the United States. Hemodiafiltration, or HDF, which utilizes a specialized dialysis machine and expanded hemodialysis or expanded HD, which has performed with an advanced dialyzer. I'll cover 3 things: what the study showed, why it matters and what it means for DaVita going forward.

First, the mother trial compare these 2 dialysis therapies head-to-head and demonstrated that expanded HD using medium cutoff dialyzer is non-infere to HDF on a composite endpoint of all-cause mortality and major cardiovascular events. Why does this matter? First and foremost, it is a great news for our patient. It gives physicians another evidence-based option for middle molecule clearance, allowing them to tailor treatment to the need of individual patients. Expanded HD also offers meaningful operational advantages because it can be delivered on our existing dialysis machines, making it faster to expand access without significant capital investment. This brings us to our path forward. We continue to support both HDF and expanded HD and believe physicians should have the flexibility to choose the right therapy for each patient. That said, the recent FDA approval of new expanded HD dialyzer from Nipro represents an important milestone that should materially improve both market supply and economics.

To capture this clinical opportunity, we have secured supply to these expanded HD dialyzers which are fully compatible with our existing machines and provide highly effective clearance of middle molecules. As a result, we expect to begin deploying expanded HD broadly across our network in the coming quarters. This will allow us to expand access quickly and deliver this option to our patients and physician partners. As we move forward, we'll continue evaluating how both approaches perform across different care settings in patient populations in the real-world practice. I'll wrap up my prepared remarks with our financial outlook for the remaining of the year.

With the benefit of another quarter, 3 trends are coming into better focus. First, continued momentum in volume growth; second, greater confidence in our estimate of the impact of effectuation rates for exchange plans; and third, our efforts to provide broad access to middle molecule clearance for our patients. With consideration of these factors, we're reconfirming our full year 2026 guidance ranges. This reflects the midpoint of $2.2 billion for adjusted operating income at a midpoint of $14.65 for adjusted earnings per share. We look forward to continuing our clinical, operational and financial momentum in the back half of the year.

I will now turn the call over to Joel to discuss our financial performance in more detail.

Thank you, Javier. I'll begin with the details on our second quarter results and close with some additional color on the remainder of the year. Second quarter adjusted operating income was $579 million. Adjusted earnings per share was $4.02 and free cash flow was $256 million. Beginning with U.S. dialysis. Treatments increased 56 basis points versus Q2 of 2025. Treatments per normalized day also increased 56 basis points as there was no impact from the calendar as compared to the same period last year.

Volume growth was slightly higher than expected as a result of lower-than-expected mortality offset by fewer admits from closed Fresenius clinics and higher-than-expected miss treatments. Our confidence in our treatment volume trajectory for the year continues to grow and we now expect 2026 growth in total treatments near the top end of our previous guidance range of 25 to 50 basis points.

As a reminder, our treatment volume expectations are for nominal treatment growth. This would translate to approximately 50 to 75 basis points of growth when normalizing for year-over-year calendar impacts. The calendar impact in the back half of the year will result in a year-over-year tailwind in Q3 and headwind in Q4.

Revenue per treatment decreased by approximately $2 sequentially, primarily the result of favorable revenue timing in Q1, lower sequential revenue from phosphate binders and a decline in commercial mix related to the expired ACA subsidies in line with our guidance from last quarter. These RPT headwinds were partially offset by the typical sequential increase from higher patient responsibility amounts in the first quarter and higher average rates. Although year-to-date revenue per treatment has been 3.6% higher than the first half of 2025. We continue to expect full year 2020 RPT growth of 1% to 2%. The midpoint of that range implies that RPT growth in the second half of 2026 will be slightly negative as compared to the second half of 2025.

This is a function of declining commercial mix lower phosphate binder revenue and the benefit in Q4 2025 from the timing of aged claim resolutions. Patient care cost per treatment declined approximately $3 sequentially as a result of operating leverage on labor and other fixed costs, driven by increased treatment volume in Q2 and and a decline in phosphate binder costs, offset by higher benefit costs. Year-to-date, PCCs have grown more than 3% versus the first half of 2025. And above our expected range for the full year growth.

Similar to the dynamic in revenue per treatment, we expect year-over-year growth in patient care costs to decelerate in the back half of the year, driven by decreasing phosphate binder expenses and lower year-over-year growth of facility maintenance spend. In other costs, U.S. dialysis G&A increased $11 million versus the first quarter and U.S. dialysis depreciation and amortization decreased by $9 million sequentially. We continue to expect total cost per treatment to grow between 1.25% and and 2.25% for the full year.

Turning to our other segments. International adjusted operating income was $25 million in Q2, in line with expectations. IKC delivered positive $40 million of adjusted operating income, above our expectations for the quarter as a result of timing of revenue earlier in the year than anticipated. We still expect international and IKC growth to contribute approximately $20 million each to full year enterprise adjusted operating income growth. Regarding capital allocation.

In July, we closed on our minority investment in Elara caring, which provides an exciting opportunity to help bring dialysis tailored home health services offerings to our patients. As a reminder, we invested $200 million and expect Elara to provide a small benefit to other income in 2026. And likely mid-single-digit millions. Additionally, we repurchased 2.2 million shares during Q2, an additional 183,000 shares since the end of the quarter.

As a reminder, we buy shares from Berkshire Hathaway each quarter pursuant to our repurchase agreement to maintain their ownership near 45%. Our leverage ratio at the end of the quarter was 3.37x consolidated EBITDA within our target range of 3 to 3.5x EBITDA. We debt expense in the quarter was $152 million. During the quarter, we issued $500 million of incremental debt with proceeds primarily used to repay revolver borrowings. For the full year, we are reiterating our adjusted operating income guidance range with a midpoint of $2.2 billion and our adjusted earnings per share guidance range with a midpoint of $14.65.

To help you model the back half of the year, we anticipate a sequential increase in adjusted operating income of $50 million to $100 million from Q3 to Q4 with timing of IC being the biggest driver. That concludes my prepared remarks for today.

Operator, please open the call for Q&A.

[Operator Instructions] Our first caller is Andrew Mok with Barclays.

Hi, good afternoon, despite the growth in treatment, U.S. dialysis OI was relatively flat year-over-year, while lapping a $45 million cyber headwind.

So can you help us understand why we can see better leverage from the treatment growth and comment on the elevated CPT in the quarter?

Yes, I'll take that, Andrew. So OI for the quarter at the enterprise level was up about 5%. And you're right on the RPT dynamic. I think there are a bunch of other moving pieces on the cost per treatment side. So cost per treatment growth is elevated in the first half of the year, similar to RPT.

So I think there's a bit of an offset there. And G&A growth continues to grow. It was roughly 10% for the quarter. So those would be the big items that I'd point out in the U.S. dialysis side of that.

Got it. Okay. And maybe on the volume side, there's a lot going on that's impacting volume trends you spoke to an acceleration in volumes, continued improvement in mortality and the high end of treatment growth for the full year. But when I look at the 2 LDOs reporting together, it looks like same-store treatment growth was negative in the quarter. Is it your sense that industry volumes were negative? Or did smaller chains take market share?

No. We can't comment on the combined because we obviously don't have visibility to everyone else. But what we can tell you is that our growth is mainly performance clinical clinically that expands life, and therefore, you get the volume treatment. And so I can't speak to what's going on in the rest of the industry, but we are gaining that through clinical outcomes.

Yes. And just to build on that. If you think about our performance for the quarter, as Javier said, it's clinically driven also that's mortality and admits was largely in line with our expectations.

Great. And maybe just last one. On the RPT side, you noted that the decline sequentially due to commercial mix and phosphate binders. Can you give us the sequential change in mix and RPT from phosphate binders? .

Yes. So mix was complicated this quarter because we saw some coverage updates. Remember, in Q1, the impact of the ACA was lower than we expected, although we were waiting to see what happened with effectuation rates and how that would play through with coverage updates, turned out, it played out largely as we expected.

So if you look at the average mix for the first half of the year, it's in the high 10s and really tracking as we expected, in line with the $40 million headwind that we'd expect for the full year.

Our next caller is A.J. Rice with UBS.

Maybe just first question. If you deploy the expanded HD capability, I just want to make sure I understand the way that would impact the economics of the company would be if it results in improved mortality. Is there any other economic implication for you more near term over deploying that?

Thanks, A.J. I think when you think of the deployment of this new technology, we divided into sort of 3 categories. The first is clinical and you know the results of that, and we talked about the studies being encouraging, and you talked about the improvement in mortality. Of course, you also have to put physician preference and what they choose then you have to kind of move on to operational and the experience on this is we've switched dialyzer before.

It's simple, and we can do it quickly and then you have to kind of shift into the supply, and we are now confident that we could get supply. And that leads you to sort of the third one, the financial. And what I would say is that in 2026, it's included in our guidance. When you think of the future for 2020, 7 and beyond, there's several puts and takes. But at the end of the day, it will not be significant.

Okay. All right. And maybe just a follow-up.

Clear on that. The impact is insignificant until the mortality benefit kicks in. And that's when you'd see a positive economic impact. We wouldn't expect the positive mortality impact to start until 2028. There is a delay from when the the new dialyzers are put in place until you see it.

Okay. Interesting. Okay. I think in the prepared remarks, you did mention -- there was a little bit of elevated miss treatments. You also mentioned you didn't pick up as much as you expected from the Fresenius closures I don't know whether there's anything to expand on there is just normal ebb and flow with respect to the this treatments, but I wanted to just give you a chance if there was some more color there.

Yes. Look, we're really parsing some pretty small numbers here in trying to bridge 10 or 15 basis point changes nothing major on the mistreatment rate side. And in terms of the Fresenius closures, it's probably basis points of less positivity than we were expecting on the year.

So again, a pretty small numbers, nothing big that I'd call out. Thank you.

Our next caller is Justin Lake with Wolfe Research.

Thanks, appreciate it. Can you, first, just Joe, I want to make sure I have the numbers right here. You said $75 million or $50 million to $100 million increase in OI from 2Q to 3Q? Is that right?

No, no. That's about the phasing in the back half of the year. So we would expect Q3 to be $50 million to $100 million lower than Q4.

That makes a lot more sense than what it I thought I understood that .

Just to explain that, that's largely driven by ITC. .

Got it. And then you talked about mortality being a little better. Can you run out some of the numbers behind what you're seeing there?

Yes. I don't think we're going to call out quarterly mortality fluctuations. What I can say is that the improvement is sustained. So we've seen it over a number of quarters now. It fluctuates, it was significantly better in Q1, which is what you'd expect because you have the flu dynamic there, but we continue to see improvements in Q2 as well.

Got it. And what you're saying here is that your new patient starts are relatively flat and all the growth is coming from mortality improvement? Is that the way to think about it?

I think what we're saying is the benefit in the quarter relative to expectations was all mortality. It was actually mortality and then some because miss treatment rate came in a little worse than expected and admits was in line with expectations. .

Our next caller is Peter Chickering with Deutsche Bank.

Here. So the first 1 is looking at the revenue per treatment and the commercial mix. You said it was in the high 10s, and now you're seeing the impact of the $40 million that you'd assume. Can you walk us through the process of those patients that are transferring from PIC on the government? Are you seeing new patients come in and going government before they can go into HI? Or are you seeing patients draw coverage? And do you see that mix change throughout the quarter? Did it start the same as ended? Or did it change through the quarter?

So we're seeing both in terms of patients dropping coverage. We think the more sustained dynamic that we're expecting through the rest of the year and into next year would be the new admits coming in at a lower commercial mix because of a lower QHP mix. So hard to predict exactly how it's going to play out, but we would expect that number to sustain itself through some part of next year, and that's what leads to the $40 million impact and then the $70 million impact next year.

The $70 million impact is a combination of the anniversary effect or the annualizing effect of the mix loss in 2026 that happened through the year, plus some additional mix loss in but again, largely the result of the new patient mix coming in lower.

Okay. Can you remind us of the current occupancy of your centers are sort of where it was pre-coated if we think about the pure variable costs in patients showing up kind of what is that? I'm just trying to figure out the sort of fixed cost leverage here of the business if you guys can see, keep on increasing the treatment growth throughout the year.

Yes. So capacity utilization is running in the high 50s now. It's been relatively steady for a number of years. If you went back precoded at its peak it ran about 65%. The question of fixed cost is a hard 1 because some things are fixed in the short term and less fixed in the long term, also the marginal profit of a patient depends on which patient it is.

If it's a Medicare patient that has longer mortality, you'll get less marginal economics than adding a new commercial patient. So it's a hard number to pin down. It really depends on the situation you're trying to model.

Okay. And then last 1 here. Can you refresh us on sort of leverage ratios, kind of what the stock trading at these levels, kind of what do you think the right leverage ratio is for you guys to be running at?

Yes. We have not changed our view on that. And so we've given a range, and we are now at 3.37% for the quarter and we had drawn down $65 million on our revolver.

[Operator Instructions]

Our next caller is Kevin Fischbeck with Bank of America.

Great. I was wondering, the change in the expectation from Fresenius, is that just what you experienced in the quarter? Or have you also changed your expectation for how much you'll pick up from them during the year?

Yes. So that was -- is very specific to the 100 clinics that they called out, I guess, last quarter that they were going to be closing. To the best of our understanding, they are done with that effort. And so the pickup is done. I don't expect that to change at all over the course of the year. this had nothing to do with any of the other volume dynamics that they've been talking about over the last 24 hours. This was purely about the 100 clinics they closed.

Okay. And then as far as the AC dialyzers, so just to be clear because I think you just said you've got a supply of that. So you have secured enough to completely transition all of your facilities over to that next year? Or is it just a portion of the facilities next year? Within the next year?

Got enough to supply the transition as many as the doctors demand. And so we obviously don't think it will happen 1 day or 1 week, it will take a little bit of time as the science gets rolled out, but we do have enough capacity to fulfill all the demand.

Okay. And then can you talk a little bit about the IC business. Obviously, you're talking about $20 million improvement this year. Can you just remind us, I guess, based upon where you think the margins in that business can get to? How many more years of adding, call it, 1% to OI growth? Can that business steadily improves? Can that -- and is it something that could have over the next 2 years, 5 years? How should we think about that?

I don't I don't see any reason it couldn't continue for a while. It's -- again, it isn't purely a margin play. There's also a volume question of increasing the number of lives and the number of dollars under management, and I could see that continuing to grow and that being as important, maybe more important of a driver than margin expansion. So I think we've got a lot of room to run.

I think you should think of it as a maturing business that requires a lot of coordination between nephrologists, clinics and our teams and so as that matures, and we evolve our model of care and our healthy valuations and all that goes into it, we hope that there's improvement that can be sustained over time.

Okay. Then maybe just last question on that. So what has been driving that this year? Is that a function of improved medical expense? Is it growth in G&A leverage? What's driving the growth this year?

Well, right now, it's just timing on revenue recognition. But as we look out, we're getting a bit more confident in our ability to manage the total care cost and so we're getting a little more confidence there, coupled with we want to continue to grow the business, as Joel said, which means more contracts with MA. .

Our next question comes from Ryan Langston with TD Cowen. .

On the share repurchase, I think you've only repurchased about 0.2 million since the end of June. Obviously, I see the stock price move this year, but does the move change your capital allocation priorities such that we might see a little bit less share repo through the rest of the year?

No. I think what you want to think about is more -- our capital allocation and our view on buybacks has been absolutely consistent throughout the year, this particular calendar year, we were heavy on the front end. In Q1, we purchased a fair amount. And so we are in a good spot year-to-date at $785 million. And you saw where our leverage rate was at 3.37. And you have to remember, we knew that AleriCare was going to close in July and that was $200 million of cash.

So it's very consistent, and there is no change in our view of buyback.

Okay. And then any updates on what you're seeing on the M&A side? Is that still primarily focused on international? Or are there more domestic-based assets like maybe IKC that you'd consider taking to market .

There's still onesies and twosies out there, small clinics, but the reality is that the United States is pretty consolidated now. The growth will come more through de novos as the industry starts to grow. And this year, we've had a couple of acquisitions, and we will continue to look at them, but there's not that many out there. Thank you. .

At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments.

Okay. Thank you, Michelle, and thanks, everyone, for joining the call today. As we wrap up, I'll leave you with 3 final thoughts. First, the year is tracking in line with our expectations. Second, I hope you heard in our voice, our clinical strategy is gaining traction. This means improved mortality and extending life for more of our patients. And because our clinical and financial objectives are so aligned, this progress directly supports our volume growth.

Finally, by delivering new middle molecule technology to our patients and physicians, we're advancing the standard of care to sustain our clinical and financial momentum into the future. Thank you for joining the call today, and we look forward to speaking to you next time.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

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.

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2026 Earnings Call. [Operator Instructions]

Mr. Eliason, you may begin your conference.

Thank you, and welcome to our first quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO.

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our first quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. DaVita Foundation is clinical excellence, driven by operating rigor that produces durable results. We have consistently delivered exceptional clinical outcomes and strong financial performance, and this quarter is no exception. To ensure we sustain and build upon this foundation, we're actively investing in our future capabilities. In a rapidly evolving landscape, we're taking a pragmatic approach to expanding our IT systems and digital infrastructure. These targeted technology investments are designed to empower our clinical teams and serve as a backbone for our next chapter of clinical and operational excellence.

Today, I'll walk through our first quarter performance, share how technology is enhancing our operations, provide an update on ACA plans and finish with our outlook for the remaining of the year. But first, I'll start as we always do with a clinical highlight.

This quarter, we're highlighting the continued momentum of Integrated Kidney Care, or IKC, our value-based care business. In the latest results from CMS' comprehensive kidney care contracting program, or CKCC, we delivered year-over-year improvements across all 3 key measurements, which are gross savings rates, total quality score and high-performing status. Clinically, this means our IKC care model, together with our physician partners is improving the health and well-being of our patients. Economically, we generated the highest total aggregate savings of any participant driven by our 4.5% improvement in gross saving rate since the beginning of the program. This is a clear example of how IKC clinical rigor paired with data-driven insights is delivering better outcomes for our patients and more sustainable model for the future of Kidney Care.

Turning to the first quarter. We delivered a strong financial results ahead of our expectations with outperformance from each element of our U.S. dialysis trilogy; treatment volume, revenue per treatment and cost per treatment. This balanced outperformance reflects the strength of our team and our focus on consistent execution. I'll touch on a couple of key metrics that contributed to the quarter and will help shape the remainder of the year. Starting with volume. In the first quarter, our treatment volume was slightly ahead of forecast. Quarter-end census was ahead of plan as a result of better-than-forecasted mortality, partially offset by lower than forecasted admits.

Census also benefited from patient transfers in related to ongoing clinic closures by Fresenius. Although negligible in the first quarter volume, we anticipate that these transfers will contribute to positive treatment growth over the remainder of the year. As a result, we're raising our volume growth expectations for the full year from flat to a range of 25 to 50 basis point increase. Approximately half of the increase is from better underlying performance and half is related to transfer in from Fresenius.

Switching to labor. Q1 was ahead of plan, primarily from better productivity, which we expect to sustain over the balance of the year.

Let me turn to our technology strategy and the investments we're making to strengthen our operations and ultimately, our clinical outcomes. We're taking a disciplined approach to AI that we've been building towards for years, and we're seeing the groundwork translate into real impact. Our strategy has 2 parts. First, we've modernized our data infrastructure. This means standardizing and integrating high-quality data across the enterprise through systems like our proprietary EMR platform. That work gives us a differentiated foundation to power AI applications at scale.

Second, we're actively deploying AI solutions across clinical, operational and business use cases with a focus on supporting our caregivers, improving how we operate and drive measurable impact. One example of Schedule hub, a new tool that dynamically processes changes in each center's patient census, capacity and teammate availability to recommend optimal patient and staffing schedules in real time.

Given the complexity of the center scheduling, we expect this will reduce administrative burden for our facility administrators and enhance team and experience while supporting patient care. This is one of many examples where our sustained IT investments translate into tangible scale benefits across the enterprise. We're still early in our AI journey, but given the strength of our data foundation, in the pace of our deployment, we are well positioned to outperform both clinically and operationally as technology evolves.

Next, on ACA plan enrollment. Based on what we know today, ACA open enrollment is trending towards a slightly favorable outcome relative to our prior expectations of an approximately $40 million headwind in 2026. This favorability will be partially offset by more patients selecting lower-level bronze plans, which translates to higher out-of-pocket costs and modest RPT headwind. We will gain greater clarity on the enrollment outcome and mix impact as we get deeper into the year.

I will conclude my remarks with our financial outlook for the remainder of the year. With our first quarter results, we're off to a strong start for the year. As a result, we're raising and narrowing our guidance for adjusted operating income to a range of $2.15 billion to $2.25 billion. Similarly, we're raising our adjusted EPS guidance to a range of $14.10 to $15.20 per share. The increased guidance is primarily the result of our higher volume forecast for the year and lower patient care costs.

I will now turn the call over to Joel to discuss our financial performance in more detail.

Thank you, Javier. Today, I'll provide details on our first quarter results, then give you some more context on the update to 2026 guidance that Javier shared.

First quarter adjusted operating income was $482 million. Adjusted earnings per share from continuing operations was $2.87 and free cash flow was $140 million. Adjusted operating income came in about $50 million ahead of our forecast. Approximately half was the result of performance ahead of plan and the other half the result of timing.

Starting with detail on the U.S. dialysis segment. Treatments declined about 20 basis points versus the first quarter of 2025 and treatments per normalized day increased 40 basis points versus Q1 of 2025, approximately 20 basis points ahead of our expectations. As Javier mentioned, we are increasing our full year volume forecast to 25 to 50 basis points. As a reminder, this represents our forecast for treatment growth. This translates to a 50 to 75 basis points of growth in treatments per normalized day because of the year-over-year treatment per normalized day headwind in 2026 compared to 2025.

Revenue per treatment declined approximately $5 sequentially, primarily as a result of the typical first quarter headwind from patient pay responsibility. Year-over-year RPT growth was approximately 4% in the quarter. We still expect full year RPT growth in the range of 1% to 2%. Patient care cost per treatment were about flat to the fourth quarter. This was primarily the result of a seasonal decline from high health benefit costs in the fourth quarter, offset by typical increases in wages and other cost growth. Patient care costs were lower than expected, largely as a result of better-than-expected productivity improvements.

U.S. dialysis G&A costs declined $16 million from the seasonally high fourth quarter, although growth versus the first quarter of 2025 was about $37 million or 13%. This growth is the result of continued investment in technology.

Turning to our other segments. In the first quarter, international adjusted operating income was $30 million, and IKC had an adjusted operating loss of $19 million, both in line with our expectations. Regarding capital allocation, we repurchased 3 million shares during the first quarter, and we repurchased an additional 2 million shares since the end of the quarter, which includes the shares bought from Berkshire Hathaway pursuant to our repurchase agreement. At the end of the first quarter, our leverage ratio was 3.34x consolidated EBITDA, well within our target leverage range of 3 to 3.5x.

Below the operating income line, other income was $4 million, a sequential increase primarily as the result of no longer recognizing losses from our investment in Mosarc. Debt expense in the first quarter was $145 million.

As an update to our guidance, we now expect quarterly debt expense for the remainder of the year to be similar to Q1 due to higher share repurchases and higher interest rate expectations resulting in full year debt expense about flat to last year.

For 2026 guidance, as Javier described, we are raising our adjusted operating income guidance range by $40 million at the midpoint. The largest driver of the increase is our expectations for higher treatment volume. The second factor is an expectation for continued labor efficiencies within patient care costs. Regarding the phasing of our guidance through the balance of the year, we currently expect adjusted operating income to be about evenly split across each of the 3 remaining quarters, which assumes Q4 weighted IKC operating income. Our expectations are that the seasonal pattern we saw in 2025 are not typical, and we expect to see phasing more in line with 2024.

Moving to EPS. We are also increasing our adjusted EPS guidance consistent with our updated guidance range for adjusted operating income.

That concludes my prepared remarks for today. Operator, please open the call for Q&A.

[Operator Instructions] Our first caller is Kevin Fischbeck with Bank of America.

I wanted to dig in a little bit to the volume commentary. I guess, is there any way that you can kind of break out whether weather had an impact, how much that was? And then the improved mortality? Is there a way to kind of break that into what was maybe just a light flu season year-over-year versus underlying trends you're trying to think about how durable the better mortality at the rest of this year?

Yes. Thanks for the question, Kevin, on weather, weather came in exactly as we expected. As you would imagine, we build weather into our forecast. It can range from year-to-year. It was, as I said, in line with forecast, I'd call it, about 10 bps better than last year. In terms of flu overall, again, came in line with our forecast. What we had said at the beginning of the year was we were building in a flu season that looked like 2 years ago. And while the pattern was a little different quarter-over-quarter, the impact for us was about what we expected. As we think about flu, we focus on cumulative hospitalizations, which you can find on the CDC website as the main driver of volume impact for us, and this year is in line with what we saw 2 years ago.

In terms of splitting out the mortality coming in a little better than expected, it was probably not about the flu because flu came in as expected. It was more around the underlying mortality.

Okay. Great. And then can you just give a little more color on the rate update? Why was the rate so strong in Q1 relative to your guidance for the year?

Yes. So rate -- RPT was up a little more than 4%, so call it $17.50. I would say 2/3 of that was normal stuff in terms of rate increases and mix shifts, about, call it, $6 I would attribute to timing. Part of that was negative timing in Q1 of '25 and part of it was positive timing this year. We see timing -- we call it out frequently around RPT. And for the year, we're sticking with our 1% to 2% guide.

Okay. So nothing unusual there around like drugs or binders or anything like that kind of skewed the number?

No, nothing unusual.

Okay. And then maybe just the last question. Can you talk a little bit more about the ACA impact and how you're thinking about it. It sounds like you're saying it was coming in better, but it sounds like the guidance hasn't changed yet for the year to get that right. And then how are you thinking about the timing? Is it that Q1 came in better? Now you're assuming it's going to ramp? Or did you always assume Q1 was going to be a little bit lighter relative to the year, thoughts there?

Yes, Kevin, it's a great question. And the reality is that it is very early. So just to repeat, Q1 was pretty flattish to Q4. So it has performed better than we expected. That said, the reality is that we haven't seen the effectuation rate and the affordability play out. And so it's too early. We have to see payments and we have to see enrollment over time. And that's why we're thinking it's a little premature to change our numbers. But the reality is that we will need -- the real data point that we want to see is the mix of our future incidents. And that is, of course, too early to tell. So we're holding to that [ 40 ] number. Although right now, we would be trending [ $40 million number ], we're trending a little better than that.

Our next caller is Andrew Mok with Barclays.

Hoping you could provide more color on what you're doing to position yourself to capture market share and the visibility you have into those share gains at this point to raise guidance, specifically within to the clinic closures?

Look, at the end of the day, we, of course, are in a very competitive market. The centers that are being closed, you can assume our small centers, and you can also assume that Fresenius and anyone that closes the center would work hard to try to keep those patients in their own network and with their same physicians, et cetera. And so we are, of course, making sure that the market is aware of our share availability and our physician access and all the things that one would do. And then, of course, the patients and the physicians will make their choice.

Great. And then I just wanted to follow up on the mortality comment. I appreciate that flu wasn't necessarily the driver. But any color on the underlying mortality performance would be helpful considering that's an important metric for building consensus and volumes for the balance of the year?

Yes. It is an important metric. You're absolutely right about that, Andrew. I would say the changes are rather small, and we're not ready to call out any significant underlying trend. That said, we did up the volume guidance, and it's captured in there.

I guess how are you able to isolate that it was mortality versus some of the other dynamics in the market with flu and clinic closures?

Clinic closures are a separate issue because they are about admissions, and we've got a lot of visibility on patients coming in and patients leaving. In terms of mortality, as we've said before, it can be a hard variable to know in real time, but we feel pretty good about what we saw from Q1 now that we're sitting here in May.

Andrew, I think let me try and be helpful with this because you're asking the right question. And there are several inputs that go into treatment. As you can imagine, you've got seasonality, you've got mortality, you've got admissions, you've got missed treatments, you've got transfers, but they're all pretty small. And so what we're trying to do is instead of going into a world of small numbers, give you a range that handicaps all of those variables.

Our next caller is Pito Chickering with Deutsche Bank.

Just a follow-up on the treatment of commentary. Can you just talk about the new starts to dialysis in first quarter. And as you think about Fresenius scaling in from their closures, is this an immediate ramp in sort of 1Q, 2Q and then normalize in the back half of the year? Just want to make sure that as you're increasing your treatment growth guidance here that we're also modeling where you guys go from 2Q and then where you guys finished the year in fourth quarter?

Yes. So on the admit side, I don't think we've got a lot of color to go in. We're talking about basis points of change and then to go to the next level and bifurcate that among all the inputs that Javier mentioned, I think, gets us to a point of false precision.

In terms of timing on the new starts, we saw, what I would guess is about half the new starts from Fresenius that we would see by the end of the first quarter, we would guess the other half will come in Q2. So if you're thinking about how to model them, I would say we'll get probably 2/3 of a year worth of those new starts.

So does -- when we pull together with the new starts, in the mortality and the Fresenius, kind of where should we be ending the fourth quarter from a treatment -- organic treatment growth perspective?

Yes. I think the way we're thinking about it is treatments per normalized day, which we think takes out the quarter-to-quarter and year-to-year noise associated with the different number of days in a quarter and a different mix of Monday, Wednesday, Friday, Tuesday, Thursday, Saturday. So what we would expect is the normalized treatment per day count to grow over the course of the year. It's sitting today at about 40 bps positive, and we would expect that to grow over the course of the year.

Just to make sure everyone's following how we're thinking about this, our new guide for treatment volume is plus 25 to 50 bps. Because there's a 25-day headwind in the year on normalized treatment phase, our guide for the year would be plus 50 to 75 bps of normalized treatments per day. So that's 40 now getting to that average of 50 to 75 for the year ending somewhere higher than that.

Okay. Great. And then a follow-up here on the revenue per treatment. If you flow out the $6 you're talking about from a timing perspective, I guess is to $4.11, $4.12, typically, 2Q ramps, $4 or $5 as you bring through the deductibles and then we see continued ramp in the third quarter and then obviously, fourth quarter, we get the update with the new Medicare rates. I guess, I'm trying to figure out how we're still getting to your 1% to 2% revenue between guidance growth, even pulling up at $6 in the fourth quarter -- from the first quarter because of normal seasonality gets [indiscernible]?

Yes. So I think there are 2 dynamics. One is normal variability. So the quarter was a little higher, and you take that out. The second dynamic is around mix and the enhanced premium tax credits. What we would expect is commercial mix to decline over the course of the year, and that will put pressure on RPT, which would help you bridge from a higher number in Q1 to the 1% to 2% for the year.

Okay. But at this point, through April, you haven't seen that negative hicks that you're guiding to, you're just sort of just assuming it comes until the later on the year?

That's correct.

Great. And then last question. Your G&A for treatment, you talked about was up 13% due to tech investments. Where does it end the year? And kind of -- should we think about this declining linear throughout the year as those investments were made or just any color around how we should be modeling G&A treatments for -- G&A cost per treatment throughout the year as the tech investments begin to decline?

Yes. I appreciate the question on G&A. And I want to reassure you that we are looking at this incredibly diligently. And if one looks at G&A independently, that line is growing at a faster rate than revenue. And so I think it's worthwhile to let you know our philosophy on it, which is we look at G&A as a piece of the total cost. In other words, we're not trying to optimize G&A, but rather not worry about the geography of the expense as long as a sum of the parts add up to a good number. So if you look at the last 5 years CAGR on our total cost, which includes patient care costs, depreciation and amortization and G&A, that CAGR is 2.6%.

And so we spend a lot of time trying to make sure that we optimize the cost, and we worry less about the geography on the P&L. So I think that our guide will stand on our cost, which is that 1.25% to 2.25% we gave at the beginning of the year.

Great quarter, guys. Appreciate it.

[Operator Instructions] Our next caller is Justin Lake with Wolfe Research.

This is Dylan on for Justin. Just a couple of quick questions. What did commercial mix do in the quarter? And then also curious on the Medicare Advantage side, can you speak a little bit about what the growth in share was as well?

Yes. Thanks, Dylan, for the question. The answer is pretty much the same on both. They were pretty flat relative to last quarter.

Next question is from A.J. Rice from UBS.

Maybe just to ask on a couple of items that are mentioned in the press release, whether there's anything significant to call out. You talk about a decrease year-to-year and health benefit expense, pharmaceutical cost, and then on the G&A line, professional fees, was the -- was that sort of as expected? Or was there anything unusually positive that happened there? Just asking.

Yes, A.J., it was as expected, we'll often see the decline sequentially from Q4 to Q1, especially in health benefits. So nothing unusual there.

Okay. And then I appreciate the comments about the technology investments and some of the use cases you're looking at. Is there any way realizing even if you get savings, you may choose to reinvest it in other ways. But is there any way to sort of size some of the opportunities you see? And are those being reflected now in operating results? Or what is your thought about how long it may take for the sum of this to impact operating performance?

Yes. I appreciate the question. I think the way we look at it is the long-term view that we, again, are trying to ensure that we are putting our clinicians in the best position and that we're making the trade-off on efficiency for the long term to make sure that we sustain our 3% to 7% OI growth over time.

And so as you know, right now, technology is moving at a very quick pace. And some of these will be a lot of user experience, i.e., we're just enhancing the experience. And some of these will be helpful toward the bottom line. And it's a little early, and I don't think we want to get into the timing of it, but rather the sustainability and the outperformance of it.

Our next caller is Ryan Langston with TD Cowen.

Nice to see the operating income guide up, EPS guide up as well. I noticed the free cash flow guide did not change. I think this was a similar dynamic last year. Just wanted to confirm that's normal course and nothing specific to read into?

Yes. Ryan, you're thinking about it the right way. There's just more variability in a wider range with free cash flow, so we didn't move the number despite the increase in OI.

Okay. And then this administration is really focused on fraud waste abuse. It seems to dialysis might be a little better insulated versus other types of providers. Just any general thoughts on this administration is focused on that FWA and what this could mean potentially for DaVita or maybe not mean for DaVita? Are you going to start broadly for dialysis in general?

Yes. Thanks for the question. It's tough for us to comment on the broader environment. But what I can say is we take compliance incredibly seriously. And number two, what we do have a little help in is that dialysis is not a controversial diagnosis. So there's not like, oh, should I go get this treatment or not controversy, so that makes it easier. And then the fact that it is a bundle in a single DRG, in essence, simplifies some of the compliance issues. But again, we are internally focused on making sure we do right by the government.

At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments.

Okay. Thank you, Michelle, and thank you all for joining the call today. I would wrap up with 3 takeaways. First, our most recent clinical initiatives are beginning to gain traction, and we're seeing early signs of the benefits for our patients. Second, our business is performing well as we continue to achieve our clinical goals, this drives our strong financial results. And finally, we maintain a long-term view on our business, and we'll continue to invest in our future.

Thank you all for joining this quarter. Be well, and we look forward to seeing you next time. Happy Cinco de Mayo, everyone.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

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.

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Fourth Quarter 2025 Earnings Call. [Operator Instructions].

Thank you, Mr. Eliason, you may begin your conference.

Thank you, and welcome to our fourth quarter conference call. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO.

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our fourth quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC.

Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. As we evaluate 2025, the year represents the latest evidence of our differentiated capabilities, strategy and platform. We executed with discipline, met challenges head on and delivered on our commitments we set at the beginning of the year. At the same time, we continue to invest to enhance patient care and fuel growth in the years ahead. As a result, we're well positioned for 2026 and beyond with opportunities to deliver clinical and financial results consistent with our long-standing track record and guidance.

Today, I'll review our fourth quarter results share insights on our clinical strategy and wrap up with guidance for 2026. But first, as always, I will start with a clinical highlight. This quarter, I want to spotlight the clinical results achieved in our Integrated Kidney Care or IKC programs. Patients managed under our IKC models consistently achieved better outcomes than the broader dialysis population. Our IKC patients are 35% more likely to start dialysis with a permanent vascular access, resulting in a better patient experience and costs that are 3x lower during the first 180 days of dialysis.

IKC patients also experienced fewer blood stream infections, achieve higher vaccination rates and are more likely to choose home dialysis. We also see more than 10% improvement in treatment adherence with fewer missed treatments. Most importantly, these outcomes lead to what matters most, a better quality of life with fewer hospitalizations.

Transitioning to our fourth quarter performance. We delivered results in line with our expectations. As anticipated, revenue per treatment accelerated in the quarter alongside strength in IKC. This was partially offset by higher-than-expected health benefit costs. For the full year, we achieved adjusted operating income and adjusted earnings per share in the top half of our guidance range the impact of cyber incident on our U.S. dialysis business.

Let me elaborate briefly on our IKC performance. As we've noted previously, we analyze IKC results on a full year basis, given quarterly volatility driven by timing of revenue recognition. As we look back to our Capital Markets Day in 2021, a we outlined a 5-year path to IKC profitability by 2026. Our strategy is centered on sustainable contract, physician partnership and a scalable care model supported by technology with full year 2025 results, we're reporting our first profitable year in IKC, which is slightly ahead of schedule.

This milestone reinforces 2 key learnings. First, our hands-on clinical models work. As reflected in the outcomes I highlighted earlier, our dedicated IKC caregivers are delivering on the promise of value-based care by keeping patients healthier and out of the hospital. Second, we've proven there's a viable business model that is good for our patients, good for the health care system and can generate value for DaVita and our partners. The business will continue to evolve over time alongside changes in government policy, competitive dynamics and innovation. Building from this 2025 benchmark, we expect to deliver an incremental $20 million of IKC operating income growth in 2026.

Looking more broadly at our business, we see significant opportunities ahead and believe DaVita is uniquely positioned to deliver on them. Before turning to those opportunities, let me provide some context on our journey to date. Over the past 5 years, we've navigated wide-range challenges from macro events like global pandemic and inflation to supply chain disruption and cyber incident. And through it all, we delivered on our multiyear commitment. We provided high-quality care for our patients, build a solid foundation for the future and generated compound annual growth in line with our long-term target for adjusted operating income and adjusted EPS.

This performance reflects the determination of our teammates and the resilience of our operating model. This experience also gives us the confidence as we look at the opportunities and challenges ahead of us. We're managing 2 near-term financial headwinds, continued pressure on treatment growth driven by elevated mortality and the revenue per treatment impact from the expiration of enhanced premium tax credits. Even with these headwinds and the reality of unknown challenges, we remain confident in our ability to sustain our track record of profit growth. That confidence starts with the most important driver of our long-term success and unwavering focus on clinical excellence.

We're executing a set of targeted initiatives designed to enhance patient care, reduce mortality and mistreatment rates and ultimately support higher treatment volume growth. I will highlight 4 specific examples. First is vaccination. For many years, we achieved flu vaccination rates above 90% for our patients and clinical teammates. And we're working hard to return to that benchmark. Our patients who received a vaccination early in this flu season have shown a 9% lower risk of hospitalization and a 27% lower risk of mortality compared to their unvaccinated peers, protecting our vulnerable patients from the flu, COVID and pneumonia is a clinical imperative.

Second is GLP-1 adoption and adherence A growing body of evidence confirms that GLP-1s can reduce major adverse cardiac events and mortality for many dialysis patients. We're actively working with physicians to help our patients navigate the clinical operational and financial complexities of these drugs.

Third is advancing dialysis technologies to remove middle molecules. Innovations such as medium cutoff dialyzers and hemodiafiltration enable the clearance of a broader range of toxins from the body during the treatment. These technologies help the patients recover more quickly after dialysis and show promise of reducing mortality by as much as 20% or more.

Finally, today, we announced a strategic clinical partnership with Elara caring a leading home care provider to establish an ESKD focused offering. This model spans Alaris skilled home health, personal care and hospice service lines and is designed to lower hospitalizations and miss treatment rates while improving the overall patient experience. Joe will provide more details about the investment we're making alongside this strategic partnership.

Together, these clinical initiatives demonstrate how our patient center strategy directly supports our business objectives by improving quality of life, reducing hospitalization and advancing clinical outcomes, we continue to believe we're on a path back to at least 2% volume growth. In parallel, we maintain a diligent focus on costs and innovation to improve efficiency, continued sustainable U.S. dialysis margins and deliver durable financial performance. With that backdrop, we remain confident in our ability to deliver adjusted operating income growth over the next 3 years that is consistent with our long-term growth target of 3% to 7%.

On adjusted EPS, with our current capital allocation program and removing the headwinds from our investment in Mozarc, we see an opportunity to exceed our long-term adjusted EPS guidance of 8% to 14%. Taken together, these priorities reinforce our ability to generate sustainable shareholder value and continued leadership in Kidney Care.

I'll wrap up my comments with our guidance for 2026. We expect adjusted operating income within a range of $2.085 billion to $2.235 billion, which represents 3.2% growth at the midpoint. Our guidance for adjusted earnings per share is $13.60 to $15 even, reflecting a 33% growth at the midpoint. This guidance exceeds our long-term EPS targets, reflecting our expectation for another year of strong operating performance and the cumulative benefits of our capital allocation strategy. Finally, we expect to generate free cash flow between $1 billion and $1.25 billion.

I will now turn it over to Joe to discuss our financial performance and outlook in more detail.

Thank you, Javier. First, I'll provide some detail on our fourth quarter and full year 2025 results and then share a detailed breakdown of our 2026 guidance. Fourth quarter adjusted operating income was $586 million, bringing full year adjusted operating income to $2.094 billion. Adjusted earnings per share from continuing operations for the fourth quarter was $3.40 and with full year adjusted EPS from continuing operations of $10.78. Free cash flow was $309 million in the fourth quarter, which brings full year free cash flow to just over $1 billion. .

Starting with U.S. dialysis. Treatments declined about 20 basis points versus the fourth quarter of 2024. Although our total patient census growth during the quarter was as we expected, the timing of the census gain was back-end loaded in the quarter. For the full year, U.S. treatments declined by 1.1% versus 2024, in line with our expectations from the Q3 earnings call.

Next, Revenue per treatment growth accelerated in the fourth quarter as anticipated, up approximately $12 sequentially. Fourth quarter growth was the result of 4 primary factors: First, the resolution of aged receivables, consistent with what we forecasted on the Q3 call. Second, normal rate increases and improved yield. Third, private pay mix improved slightly after a dip in the third quarter. And finally, RPT benefited from the typical seasonal impact of flu vaccines.

Full year RPT was approximately $410, up 4.7% for the year. As you think about RPT for the first quarter of 2026, keep in mind that Q1 bears a typical $5 or more RPT headwind due to patient responsibility amounts early in the year. Patient care cost per treatment increased by approximately $6 sequentially. The increase was primarily the result of seasonal increases, including health benefit costs, and higher supply costs.

PCCs per treatment finished the year 5.9% higher than 2024, near the top end of our revised range of expectations but lower than our original guidance for the year. As a reminder, approximately half the year-over-year increase in PCCs was from binders in the bundle.

Turning to our other segments. International adjusted OI was $21 million, resulting in full year adjusted operating income of $114 million. This reflects strong operating performance for our international business as we delivered positive organic growth and integrated the recent acquisitions in Latin America.

In IKC, as Javier noted, we delivered our first profitable fiscal year. Q4 adjusted OI was $46 million and full year adjusted OI was $22 million. We saw strength across all 3 of the businesses within IKC and final reconciliations of our 2024 performance resulted in higher-than-expected shared savings revenue.

Switching to capital allocation. During the fourth quarter, we repurchased 2.7 million shares, and we repurchased an additional 1.7 million shares since the end of the quarter. As is typical, a portion of these shares were repurchased from Berkshire Hathaway pursuant to the terms of our publicly filed repurchase agreement which formulaically results in Berkshire's ownership remaining at or below 45%. For the full year 2025 we repurchased nearly 13 million shares for approximately $1.8 billion. At year-end, our leverage ratio was 3.26x consolidated EBITDA, down from the third quarter and at the midpoint of our target leverage range of 3 to 3.5x.

With that, let me turn to 2026. As Javier said, we are guiding to an adjusted operating income range with a midpoint of $2.16 billion. At this midpoint, we have built in the following assumptions for U.S. dialysis. Treatment volume will be approximately flat to 2025. This assumes a flu impact consistent with what we saw in the 2023, 2024 season. We are not assuming any improvement in non-flu mortality though as Javier outlined, we are working on a number of initiatives to actively drive down mortality among our patients.

Last, on admissions, we are assuming 2026 looks similar to 2025, excluding the impact of the cyber incident. To help with modeling our treatments by quarter, we have added a table to the press release showing normalized treatment days by quarter. This number adjusts for the mix of treatment days and holiday shifts making it the most helpful number to model quarterly treatments. For example, you'll notice a year-over-year normalized treatment day headwind in Q1 2026, which drives our expectation for negative year-over-year U.S. dialysis treatment volume growth in the first quarter of this year.

Moving on to RPT. For 2026, we are forecasting growth of 1% to 2%. The primary driver of this is typical rate increases. We also expect an estimated $40 million headwind from the expiration of enhanced premium tax credits for exchange plans, which is largely offset by the elimination of the $45 million headwind in 2025 from the cyber incident. We expect total U.S. dialysis costs to grow 1.25% to 2.25%, mostly driven by typical wage rate increases and G&A investments, partially offset by a decline in depreciation and amortization.

The net impact of all this at the midpoint of our guidance is an increase in adjusted operating income for the U.S. dialysis business of approximately 1.5%. Also baked into the midpoint of our adjusted OI guidance range is an expectation for each of IKC and international to contribute approximately 1% on to enterprise adjusted OI growth. Altogether, these results reflect our expectation for 3.2% adjusted operating income growth at the midpoint of our range versus 2025.

For seasonality, we expect first quarter adjusted operating income will represent approximately 20% of our full year guidance. In other words, about $430 million at the midpoint. Below the operating income line, we expect positive other income of approximately $10 million for the year. This represents significant year-over-year improvement in this line item, resulting from no further losses from our investment in Mozarc since we have now recognized cumulative losses equal to our investment.

We expect debt expense to decline by $20 million to $40 million versus 2025. This is driven by lower interest rates year-over-year both from the decline in rates and from our repricing and refinancing transactions, which lowered spreads. We expect noncontrolling interest to be approximately 16% of of U.S. dialysis OI, and we expect effective tax rate to be in the range of 24.5% to 26.5%.

Regarding capital allocation. Related to Javier's comments, we announced the signing of an approximately $200 million minority investment alongside a majority investment from Ares private equity funds to acquire Elara caring. After the transaction closes, which we expect to happen midyear -- we expect this to contribute positively to our other income line. In addition, we will continue to repurchase shares in line with our typical framework keeping in consideration our liquidity, leverage and the price of our stock relative to our view of intrinsic value.

As a reminder, a significant portion of our repurchases will continue to come via direct purchases from Berkshire Hathaway as part of our ongoing repurchase agreement.

At the midpoint of the range, we are guiding to adjusted EPS in 2026 of $14.30. This does not contain any unusual or nonrecurring items and is a good starting point from which to model future EPS. Our 2026 guidance represents a 33% increase over last year. which is the result of 2 familiar drivers, increased operating income and lower share count, plus the elimination of the headwind from our share of the losses at Mozarc as I previously noted.

Finally, on free cash flow, the midpoint of our guidance for 2026 is $1.125 billion reflecting a resilient business with discipline in the deployment of our capital resources. That concludes my prepared remarks for today.

Operator, please open the call for Q&A.

Thank you, sir. [Operator Instructions] We have Fischbeck with Bank of America. .

Great. I wanted to get a little more color on the commentary around, I guess, the confidence in getting back to the 2%-plus volume number. Obviously, I guess, this number you're looking for in the guidance for 26 is a little bit better than 25%, but it's still well below that 2%. So is it all about executing on mortality? Or is there something else that you're kind of pointing to go you that confidence? .

Yes, Kevin, this is Javier. I appreciate the question. The reality is, it is a clinical story. And if you go back and you look at the time when the industry was at its peak of growth. Many people thought it was the incident, but the reality is that it was also a clinical story throughout, meaning mortality was improving year after year. And so to get to that 2%, you have to assume that the things that we outlined in our prepared remarks come to fruition. And we think, of course, there's a lag between all of the implementation clinically and the full effect. And so we think that you will start to see some benefits in approximately 2 years, and you probably see the full effect by '29 or so.

Okay. That's helpful to get that timing. Africa, you gave some kind of multiyear guidance range. Was it 3 years, you said? Or was it 5 years that you were giving those OI and EPS comments?

We did say a year, but we think of it in a 3-year or so time frame. .

Okay. And just last one on the free cash flow number. So I guess, the way to think about it is that number, the $1.125 billion, that's before the $200 million investment. So like if we thought about share or so we should take $200 million out of that to think about additional deployable capital? Or is there some other adjustment?

Yes, Kevin, that's the right way to think about it, then I'd say the starting place would be with leverage level where we came out right in the middle of the range, obviously, with EBITDA growth if we didn't increase leverage, we'd wind up in the lower half of the range. So that would be the other thing to consider when trying to figure out what's the right number to put in for share repurchases. .

Okay. But there's no other like obvious use of capital that's kind of like the most likely use of capital after that $200 million?

That's right. .

And our next caller is Andrew Mok with Barclays.

I appreciate all the color on 2026 guidance. Can you help us understand how Mist treatments and mortality trended throughout the fourth quarter? And is there any connection or causality that you've been able to draw between those 2 items as you've dug into this issue further? .

Yes. So nothing really to highlight on mortality during the quarter. Mistreatments were up, but typically, you'd see mistreatments up in Q4. And if you looked at 425 is treatments, you wouldn't see much difference with Q4 24 miss treatment. So year-over-year, not much of a change. I would say our clinical folks would say they're absolutely is a correlation between mistreatment rate and mortality but with some lag between those 2 metrics.

Great. And can you provide more detail on how you expect the ACA headwind to play out this year? And maybe comment on how open enrollment performed against your expectations and what level of attrition you're expecting from here?

I'm sorry, Andrew, I missed the first part of the question. .

Can you give us more detail on how you expect the ACA headwind to play out this year from a cadence perspective? And maybe comment on open enrollment, how that played out relative to expectations? And whether -- what level of attrition you're expecting on that ACA enrollment throughout the year?

Thank you, Andrew. So the number that we gave, we said approximately $40 million this year, $70 million next year and $10 million the year after that. The reality is that we're seeing -- what you're seeing in the broader market, which is open enrollment performed better than forecasted by CBO or ourselves. And we're all waiting to see the real number, which is, right now, we are measuring selection of a plan or enrollment of a plan. And then, of course, people are trying to see what the payment of the plan will be to see what the yield will be.

We don't have any additional color than what you or the marketplace has on what that will be since it's the first time that these enhanced premium tax credits have gone away. But so far, it has been more resilient than people expected, and we will see once the bills start to come if people pay. We will say that our patients during the pandemic and at other time periods because they are so ill and meeting of the health care system are really sophisticated understanding their insurance needs. So on average, they will go out of their way to stay insured.

And that's why last call, we said that there is basically 2 populations, our current patient population, which we think will be more resilient. And then you have the incoming population, which is, in essence, right now a CKD population that might not value insurance as much as someone that's already had their kidneys fail, and that's why the number grows over time. But we will obviously be watching it during the quarter, and we will see once the payments go into effect.

Great. If I could -- can I just ask a follow-up on that. Do you have a sense for how many of your ACA patients receive premium assistance?

I do not because that obviously has a lot of categories from the enhanced premium tax credits to the normal ones and you get into the income levels and other things. So I do not break it down into more detail. .

Our next caller is Justin Lake with Wolfe Research.

A couple of things. First, on the ability to offset the exchange headwind with the tailwind or the kind of the nonrecurrence of that cyber headwind from last -- from 2025. My recollection was the last time you guys talked about this that the cyber headwind this year, while it hurt the second quarter was offset by some better collections and therefore, wouldn't be as big a tailwind as it might have been in 2026. Did I remember that correctly? Or have you found other initiatives on the reimbursement side?

Yes. So let me try and lay out all the pieces for you, Justin here. So we called out a $70 million headwind from cyber, $20 million of that is volume, and most of that recurs because it's just census that was lost, and we're not going to get back in 2026. The balance was $45 million, and that was an RPT headwind. We think that RPT headwind is offset in 2026 basically by the enhanced premium tax credit headwind. So you don't see a year-over-year growth problem in RPT because both years have a $40 million to $45 million negative.

In terms of some of the other stuff we called out, in particular, around Q4 and the resolution of some older claims, there's really nothing in the year from that to call out. We have resolution of older claims every year. Looking back now, the 2025 number is roughly the same as what we saw in 2024. and the 2026 number, we would expect to be similar in 2025. So I wouldn't call that out as unusual in any year. What was unusual was the concentration in Q4 of '25 which is why we called it out last quarter.

Got it. And then going back to IKC. Can you give us a little more color in terms of what drove the outperformance in 2024 versus what you had previously booked and the level of confidence you have that, that can continue and grow from there? .

Sure, let me grab that one, Justin. It's Javier. A couple of things that we've talked about as it relates to IKC. So just a quick housekeeping reminder. I have to look at it on an annualized view because it moves pretty dramatically quarter-to-quarter. We think of it in 3 categories. The first one is dollars under management. You can think of it as volume, and that's been relatively flat we talked about it last time. Secondly, the model of care cost and the G&A costs, which we've done a nice job of remaining flat there. And then the third category, which is the shared savings and in that, of course, there is contracting and performance to what you're doing to add value to the system. As it relates to that 2024 reconciliation, we did better in that shared savings part that I just talked about.

Does that help you?

Yes. Just how did you do that? What was it the inpatient admissions, outpatients? Just curious for a little more color there and what gives you confidence that, that number is going to continue at that level, given how much...

I mean, look, there is a lot of little things, medication management, transitions of care, segmentation of patient population having more access to patients earlier. We have new interventions and protocols. One of the difficulties of this business is, of course, understanding exactly what moved the needle, but rather the cumulative portfolio is working. And that's why we felt comfortable giving a plus $20 million for 2026.

[Operator Instructions] A.J. Rice with UBS.

First, there's been a lot of discussion and even talk about what you're doing with the IKC business about either people managing patients with CKD better and more effectively. And then obviously, there's drugs -- discussion about some of the drugs that could have an impact. And I wondered, what are you seeing about disease progression with someone that has kidney disease, time to get to dialysis? And then are they -- are you seeing them stay longer yet on dialysis? Or when do you think any of that would have an impact? .

Yes. Thanks for the question. The reality is we have not seen anything shift, but you would think that, that would take some time, as we've talked about -- when you talk about these drugs, they're not magic drug, but rather it takes some time of being on them to have the effect that you're talking about. So right now, it's too early to tell. And again, we've only been managing these population the CKD population for 5 years or so. So that will take longer to play out.

Okay. And Jim, maybe a follow-up on the Elara caring investment. So how should we think about that? Is it just a financial investment from your side? Are you going to do things operationally that might make a difference for you? Can you describe a little more of what's going on with that?

Sure. Our investment thesis has 2 pieces to it. One is, of course, we have to have a good capital return on that $200 million. We want to be disciplined. We think it's a good-sized investment, and we wanted to have good capital returns. The second one is to help our patient population, roughly 1/4 of our population uses home health and by having a specialized kidney protocol, we think we can reduce hospitalization and readmissions and then, of course, try to reduce missed treatments. So it is connecting back to this whole loop of trying to do more for our patients while we have them in our clinic and now outside of the clinic. .

Our next caller is Pito Chickering with Deutsche Bank. .

Can you talk about the international business for a little bit, how we should think about the top line growth whether it's M&A and -- versus organic and how we should think about margins within that segment?

Yes. I think on international, generally, I would think about the growth, both top line and bottom line as half M&A and half organic. We would expect the margins to continue to improve as they leverage the kind of the fixed overhead, both at the international level as well as in the existing markets. So international has proven to be a good business for us, a relatively consistent performer and a contributor of about 1 point to OI growth over the last few years, and we're expecting more of the same in 2026. .

Okay. And then I'm going to ask Justin's question on IKC a little bit differently. But looking at the losses you guys had in '22 and '23 and '24, and just refresh us on those, if you could. I guess, why should we think about the rate of improvement of '26 or slowing dramatically. It just seems as though the losses have compressed quite significantly as you've gotten scale. And so I'm curious why we wouldn't see the benefits grow sort of levels that you've seen in the last couple of years?

Yes. So look, your math is right. I think if you go back over the last 3 years, the average OI improvement has been somewhere in the $40 million to $50 million per year, and now we're seeing -- we're calling out a slowing of that. I think it's just a natural occurrence as the business matures and gets bigger. There's just less opportunity to continue to drive the margins up. We're not expecting a high-margin business here. And so I think $20 million a year is a comfortable landing spot for us right now in terms of contribution to OI growth.

Okay. And then last question here, just about new starts. I think you talked about new starts in the fourth quarter and were back-end loaded. But as you think about new starts for 2026, how do you model that? And specifically, how do you break out the payer mix? -- of those new starts versus the previous years as it relates to commercial or HICS or government patients.

Yes. So we're not calling out any dramatic change in new starts for next year. similar to mortality and to some extent, mistreatment rates when we see those things improve, we'll start calling them out. But until then, we're comfortable with flattish. In terms of mix, look, new patients have always had a higher commercial mix in the average patient. It's just the natural evolution of a patient as they get older, they tend to migrate towards Medicare. I don't see any change to that pattern going forward. .

Okay. So just to be super clear, the new starts that we're seeing coming in are the same commercial mix we've seen sort of for the last several years.

Yes. With the one call out around HICs and that changing, but other than that, I don't see any other new dynamic. .

Our next caller is Ryan Langston with TD Cowen.

On the flu vaccine commentary in the prepared remarks, did you say that there was an actual change in the vaccination rates this fourth quarter versus other fourth quarters? Or was that just more related to seasonal sequential -- or seasonal -- seasonality sequentially.

I believe what we said in the opening remarks is that in our high, we were in the 90 percentile, and we aspire to get back to that. And just to give you a bit of sense right now, we're at 80%, which is from a national perspective, quite healthy, but we could do better. .

Got it. And I know the dialysis...

And the other thing I'd just point out is flu vaccines do go up in Q4 over Q3, and that does drive a little bit of RPT and a little bit of cost. So that's part of the Q4 over Q3 RPT dynamic as well.

Yes. That makes sense. And then just last thing. I know the dialysis population is a bit different from individual MA population. But it's the kind of flat advanced notice holds for 2027 in the final notice, I guess, is there any maybe just directional change in what we could assume for outlook in terms of growth for '27?

Yes. Thanks for the question, Ryan. One of the things that is worthy of highlighting is that the ESRD population has its own funding pool and MA and that CMS has actually realized that there was an underfunding. So there was a catch-up. So the dialysis or the SKD population will receive a 6% increase in 2027, which from our perspective, reflects the reality and would put an MA plan in a position to want to add these patients to the risk pool.

And Ryan, the 1 thing I'd add to that is not only is the reimbursement different, but the whole coding regime is different. So the questions around V28 and rebasing and the higher coding intensity in a given year, those are not part of -- they are a much smaller part of the math for ESRD MA rates. And if you look at the notice from last week, you'd see it in there all as well. So it's all spelled out. .

At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for any closing comments.

Thank you, Michelle, and thank you all for joining. I hope it is 100% clear. that our energy and excitement around clinical opportunities are absolutely off the chart to expand the lives of our patients. We have a powerful alignment between our clinical ambitions and our financial goals. By fulfilling our mission to deliver the best care for our patients, we can also deliver returns for our shareholders. Thank you for your interest, and thank you for joining the call today. Have a good day.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

All right. Good morning. My name is Justin Lake. I cover health care services here at Wolfe Research. I appreciate you all being here, especially DaVita. We've got Joel Ackerman, the company's CFO. Joel, thanks for being with us today.

Thank you so much.

Before I get into my list of questions here, I thought, Joel, I'd give you a minute to kind of give us your latest thoughts on the year for DaVita, what's gone right, what could have gone better? And maybe you can talk a little bit about your positioning for 2026.

Sure. So it's been an eventful year in 2025, a couple of notable challenges, which were a really tough flu season in Q1 combined with cyber incident that was quite the challenge for us in Q2. I'm proud of the way DaVita handled those, especially the cyber incident. DaVita is at its core an operating company, and it was amazing to see how we managed through that.

That said, they were real challenges. They were challenges primarily on volume, which, as most of you know, is probably the single biggest metric that we keep an eye on and investors keep an eye on. There are also other challenges on revenue per treatment as well. And despite that -- despite those 2 challenges, I'm feeling proud that we have maintained our guidance and are working through those challenges and doing what we need to do to continue delivering operating results for the business.

Looking forward to 2026, I would say the biggest eye is clearly on volume, as you would expect, both internally and externally. Mortality continues to be the primary headwind, and we've got a lot of activity in play to try and drive mortality for I think a lot of people don't understand that the history of the industry volume growth is really a mortality improvement story. If you look at the years 2000 to 2015, when industry volume grew 3% to 4% higher than what we anticipate getting back to, it was not the result of admissions growth growing. It was the result of mortality coming down. And that was through just better clinical practice across the industry.

And what we are looking to do going forward is get back on that mortality reduction trajectory through better clinical operations, longer time on therapy, better use of pharmaceuticals, potentially these new middle molecule technologies, whether that's HDF or better dialyzers and really drive mortality down, which we think could be the solution to the volume challenges we're having.

That's a great segue because volumes where I kind of wanted to start off. So first of all, just to kind of give everybody a baseline, negative -- down 1%, give or take, this year, correct. That includes some modest growth in the fourth quarter, and that's all really just kind of seasonality, right? 50 to 75 basis points of headwinds from stuff like flu and cyber that you don't -- you think of as noncore. So maybe think of the core growth as 25 to 50 basis points negative?

Correct.

On a year-over-year basis is kind of your run rate. So you talked about mortality. I know you talked about missed treatments. Can you give us a little color in terms of just update us on numbers? Like what kind of a headwind has mortality been this year? Or has it just been a neutral instead of a tailwind?

It's been a headwind because of the flu. I think there are a lot of ways to calculate mortality. I know it sounds counterintuitive, but how you calculate mortality can be very complicated and can vary from one company to the next. But leaving that complexity aside, the mortality headwind this year relative to '24 was about the flu. That said, it still remains elevated even without the flu relative to pre-COVID. So that's the mortality story for the year.

Missed treatment rate also remains elevated relative to pre-COVID levels. Our expectation going into the year was that hopefully, this would be the year where we could start to see it coming down, and that's not what happened. Missed treatment rate was impacted by flu as well, as well as by the cyber incident. So it was not the tailwind we were hoping for in the year.

Just to put some numbers around it, like what is typical -- I know the way I always think about mortality is average lifespan on dialysis. How is that -- what does that look like now versus history?

Well, it depends what data point you use for history. If you chose 2017, you'd get a very different answer than if you choose 2018 or if you choose 2019. So there's a fair bit of -- there's a fair bit -- those are all pre-COVID years, and there's a fair bit of variability from 1 year to the next, 50-plus basis points. So we remain elevated more than 1 point of elevated mortality relative to pre-COVID. So that's kind of how I'd start to quantify that.

Got it. And then same thing on missed treatments. What are missed treatments typically? And where do you think you can get back to versus where they are today?

Yes. So missed treatments historically ran, let's call it, roughly 6%. It's an easier number to quantify than mortality, and they're running about 100 basis points higher. We do see an opportunity to bring it down. The question that we and I think others are grappling with is -- which of the changes that happened during COVID were temporary and which are permanent. There appears to be just in the population, some changes related to missing scheduled treatments in health care and not showing up for school that appears to be potentially permanent. And the question is, can we overcome all of that going forward?

Got it. And then new starts, how do we think about that kind of year-over-year change? What's kind of the tempo there?

Yes. So it's a pretty volatile number. And for anyone who wants to understand that themselves, I'd recommend going to historical USRDS data and just looking from 1 year to the next, and this is not for DaVita, this is for the full industry, how much volatility there can be from 1 year to the next. So when you have small numbers that are very volatile, it's hard to figure out to pick out the signal to noise. We appreciate investors' interest in this, particularly around the question of is GLP-1 -- is the advent of GLP-1 having an impact on the upstream CKD population. So we've been -- we've tried to be as transparent as we can about this.

And I think that really -- we put a point on that on the February earnings call when we called out negative admit growth in Q4 of 2024. We debated how to communicate that. We don't want to whipsaw investors on the one hand, but we also don't want to get behind in our transparency. We called it out as what we thought was noise, and we're now a few quarters later, and we now feel quite confident that, that one negative data point was noise.

So in general, we're not seeing the impact of GLP-1s on admits. It continues to oscillate within the range we saw pre-COVID. So in terms of the question of is declining admits an important part of the story on volume, we continue to believe the answer is no.

Got it. So that's the number that's similar to pre-COVID. And that kind of leads me into my next question, which is kind of thinking about the breadcrumbs that we would all look for, for a return to growth. It sounds like it's more around mortality and missed treatments than it's going to be about new starts? New starts have been pretty consistent.

I think that is correct. And I would put mortality as a much bigger issue than missed treatment rate. The reality is this treatment rate, say it's running about 7% now. If it stayed at 7% and never gotten any better, it's no longer a headwind on volume growth. It could be a tailwind if it comes down. The mortality improvement, if we bring mortality down by 100 basis points, that's a 100 basis point improvement to growth year after year after year.

Right. That makes sense. So when we think about the long-term growth of the company, kind of the LRP of -- I think in dialysis, it's 3%, right, is kind of your current target. for growth. How do we think about that in terms of -- I went back to your first Investor Day. I can't believe it's been 8 years now. It's 2017, you started as CFO. I think there were 200 million shares outstanding. Now there's 75 million shares outstanding, right? You've done a great job deploying capital. Like you said, volume is the big swing factor, right? I remember at that Investor Day, you talked about typical 4% to 5% volume growth total, right, not same store, you're acquiring some. But now right now, we're kind of struggling to get back to 0.

But within that 3%, if you had to think about volume, price, cost, how would you want us to kind of frame that? What would be a typical year?

Yes. So look, there aren't many typical years, which is why that question is so hard to answer. You look at last year where volume growth was about 0 and RPT growth was about 3%. That would be one way to drive 3% top line. I wouldn't call that typical. I would -- our expectation is we get back to a point where volume is a positive contributor to revenue growth, and we don't need 3% RPT growth to get to a 3% top line. So I would say typical would probably look more like a balance between RPT and volume to get you to 3% top line growth and a steady margin. and that gets you to 3% OI growth.

Obviously, there's upside if we can improve margins. These things are not unconnected because volume growth also drives margin expansion. Obviously, higher RPT growth can drive margin expansion. I'm not talking a lot about the cost side. That's probably been the most consistent component of our story over the last couple of decades is DaVita's ability to manage the costs effectively. And I don't see any reason that shouldn't continue.

Right. And that makes a lot of sense to me, and I think people have covered the company for a long time. The -- so you sit down and I know kind of rule of thumb, I think you've said 1% volume is typically like a $50 million to $60 million swing. So effectively, when volume has, let's just say, been flat to down, you've been starting with a, let's call it, 2%, 3%, 4% headwind every year. And you've been able to overcome it, some of it with stuff like binders, but most of it with just improved core operations, right, whether it's revenue collections, which were a big part of the '23, '24 story.

I know you've done some interesting stuff on the cost side as well. The -- if we were to look out and say, we think volumes are going to be flat for the next couple of years. We think price, right, will put the enhanced APTCs to the side for a second and say volume is going to be flat, pricing is going to be in that 1.5% range. Do you still feel like you have visibility towards being able to overcome that, let's say, $50 million, $60 million, $70 million headwind a year and get to 3% growth? Or do you feel like -- I say -- I think I've said kind of what inning are you in, in terms of revenue collections, cost cutting, all that?

So look, every year is different. And you're right, this year, binders was a big help, and there's a question what's going to help next year? I don't love the innings analogy because it implies that the game ends at some point. And the reality is that there are always new opportunities coming about. I think you pointed out the right stuff in terms of what's helped us over the last few years. That said, it's also been a tough labor environment. So if that turns around, that could be -- go from a headwind to at least a neutral, maybe a tailwind in figuring out this equation.

G&A has been a headwind as well in terms of growing faster than revenue and putting pressure on margins. That's something we're going to look at carefully. So there are -- there continue to be opportunities to look at. And I don't think we're sort of -- we don't have a fixed list of opportunities and we're running out. There are always new opportunities coming on.

Got it. Got it. So maybe the way to think about it is the -- it sounded like, especially on the revenue side, for instance, this year, you've talked about in the third quarter, you're going to pick up some better collections. I think you said something in the neighborhood of a little more than half of the $50 million tailwind in RPT. So call it, $30 million, $35 million there. Is that something that we should think about as a headwind to next year? Like -- or is that like -- I guess, is that like a onetime benefit? Or is that like a bigger-than-average benefit? Or is that just like, hey, we're catching up from 2Q and 3Q, so it's all kind of intra-year. Don't think about that as a headwind next year?

Yes. So look, these types of resolutions we have every year. Some year are bigger, some year are smaller, some year are lumpier, some are spread out throughout the year. This year will be a little bit bigger than normal, but not crazy. And this isn't the only dispute we've had resolved this year. That said, we've had the headwind on RPT from the cyber outage. So if you put those 2 things together, I think reported RPT for the year is a good baseline off of which to build RPT for next year. So there's nothing to back out.

That said, I think you mentioned the enhanced premium tax credits. You have to take that into the equation as you're thinking about RPT for next year. We've had a nice tailwind on mix over the last few years, which has certainly been one of the ways we've overcome volume and driven the RPT up. For next year with the enhanced premium tax credits, assuming they go away, that will be a real headwind, which we've called out at about $40 million for next year.

Right. And again, you led me right into my next question, which is, I want to go through this a little bit. You're one of the few companies to kind of give that kind of transparency and say, here's what we think will happen if the premium subsidies go away. So maybe we could just start with what percentage of patients, remind me were on exchanges pre-COVID versus today?

So the number went from about 2% to about 3%. And our assumption is that the vast majority of that growth was the result of enhanced premium tax credits. Obviously, we have a lot of visibility on the insurance our patients have because we have to bill their insurers. We have less visibility on what sort of tax credits they're getting, and we have even less visibility on some of their motivation and what's behind their financial decisions. So a lot of our -- a lot of the $40 million is based on our assumptions about patient behavior.

Got it. So you've talked about $120 million is the total impact over 3 years. The way to think about that is exchanges/commercial mix go backwards 1% go to Medicare. The delta in the revenue there from that 1% mix shift would be from exchanges to Medicare would be that $120 million. Is that the simplistic way to think about it?

Yes, with one caveat. We're not assuming that the full 1% goes to Medicare. Our assumption is some of that 1% will retain commercial coverage, either they'll stay on the exchanges and take advantage of just premium tax credits. They'll get other help with their commercial premiums, they'll go back to EGHP, something like that.

Got it. So of that 1%, what do you think kind of sticks on exchanges or commercial versus goes to Medicare? Is it like 1/3, 2/3 or...

It's in that range, 2/3 retaining it. They're guiding ranges on top of ranges is always complicated. But yes, something like that.

Sorry, 2/3?

2/3 retaining -- no, I'm sorry, 2/3 losing 1/3 retaining commercial coverage.

That makes sense. And the typical discount the exchanges relative to employer, I think we usually use like a 20% ballpark for providers, like giving some -- not as good as commercial risk for commercial employer, but certainly much better than Medicare. Is that 20% discount kind of in the right ballpark?

We haven't disclosed the number. But I think if you think of commercial up here and Medicare down here, it's safe to say exchanges are here and MA is here, that there remains a huge gap -- and the move from -- in the context we're talking about, the move from commercial to exchanges or exchanges to traditional EGHP is not the story. The story is the move off of commercial to either Medicare or Medicare Advantage.

Got it. And you did mention Medicare Advantage as a potential swing factor on the third quarter call. Nobody knows better than the rest of health care investors have been following managed care, how much disruption there's been in the Medicare Advantage space, right? People lost their plan last year, another 2 million will lose it this year. Tell me how that affected you for '25 and how you think we should look at this from a swing factor perspective in '26?

Yes. So I'll step back a second and look at the longer arc here and how we've dealt with the volume challenges. And I mean, not just this year of negative 1% and last year of flat, but years where we were losing 3% a year. And MA was a good part of that story. When the CARES Act came about, you think of '21 and '22, we really saw big growth and that mix really mattered.

We're now at a point where the growth in MA mix that we saw in '25 is now leveling off, and it's a small tailwind, but not significant. The concern for us is less around the churn of patients from one MA player to another. It's more does somehow MA turn backwards and MA start shrinking. And then you're not talking about what's the size of the tailwind, you're talking about a tailwind becoming a headwind. That would be the concern. If you think MA will continue to grow, but at a much smaller rate going forward, then it's not a material issue for us.

Got it. So even if it's flat year-over-year from an MA perspective, like enrollment perspective, you don't see an issue there. And is there anything -- like you guys, I know, do a great job of sitting down with your patients going into each and every year and looking at all their insurance options and helping them. So some portion are losing their plan, just like everybody is or at least some portion of the overall enrollment is. Is there anything that's jumping out to you that's idiosyncratic to dialysis patients? -- that, hey, I'm losing my plan, but I don't see another plan that looks interesting. And so I'm going back to fee-for-service. Or do you think it's -- I just have to -- we as your investor base, just have to track your -- track the overall MA baseline, should be good.

Look, it's a very fair question, and I think it applies to the exchanges as well. Our patients are not the average American health care consumer. They spend -- they cost on average $100,000 a year. They are very high utilizers. And if high utilizers make different insurance decisions than the typical utilizer, our patients are likely to fall into that category. So I think it's reasonable to think that our patients on average may behave differently than the average patient who's thinking about the change in their coverage, but it's hard to predict what that magnitude might be and which way it swings.

Changing topics, IKC. You talked about the potential in the fourth quarter for a true-up on 2024. I think right now, your guidance is for -- to lose $20 million here, which implies a slight gain in the fourth quarter, maybe a slight loss. I can't remember which way it goes, but I think it's like $4 million either way. Does that include the '24 true-up happening? Or does that include?

That assumes it would happen, yes. And remember, the '24 true-up is not a binary outcome. It happens or it doesn't, but then the question is what's the magnitude as well.

Got it. So you're assuming it happens. Is that a big -- I guess, is that a big swing factor? Is that like a $20 million swing factor or a $5 million?

Yes. I would say stepping back to our last Capital Markets Day in 2021, I am pleasantly surprised with how IKC has played out relative to our expectations, meaning it's right on top of what we said we would do. And I'm surprised there's less annual variability relative to what we laid out. That said, there remains a lot of timing variability. And we saw it when Q2 revenue came in a lot higher than expected, and that came out of Q3. That same dynamic could play out in Q4, and it could be a net positive, it could be a net negative.

And the good news for us is IKC is a distinct segment. We report it out every quarter. Every investor can see exactly what the performance is. I think we've been transparent about the dynamics. And if something gets pulled in, if something gets pushed out, we'll call it out. I don't think it's an important dynamic for the economics of the business or for IKC, but IKC timing remains a swing factor.

Just thinking about 2026 then, it sounds like that '25 to '26 bridge doesn't have that many moving parts outside of the enhanced premium tax subsidies.

Yes.

I think you said breakeven by -- in IKC, is that breakeven by '26?

Yes.

So if we are losing $20 million this year, that will be a tailwind for next year.

Which is in line with the kind of the continual progress of $20-ish million of improvement a year.

And then international, I know you've had some timing. You've been making some pretty significant acquisitions for the year. Should that be kind of the same typical benefit?

Yes. I wouldn't call out anything unusual at this point for IKC next year. I mean it gets back to the model we've called out, 5% OI growth, 3% from U.S. dialysis, which we talked about before, another point from IKC, another point from international. And that's how you get to that 3% to 7% OI growth.

I'll reiterate what I said before. There is no typical year. This was not a typical year. We got a lot more from international, a lot less from IKC. There's no typical, but if you needed a simple model to start with that 3 plus 1 plus 1 equals 5 is a reasonable way to start.

Got it. And then on the dialysis business, outside of the $40 million headwind potential, if we don't see that extension, effectively, it comes down to the swing factor being volume growth. And if it doesn't show up again, are you able to pull enough levers to offset flattish growth, slight down, slight up?

Exactly. Yes.

And that's [indiscernible].

Yes, other than enhanced premium tax credits, there's nothing distinctive to call out there.

Got it. Maybe to wrap up, we'll talk a little bit about capital, right? Like I said, the -- since you become CFO, I feel like both the capital dynamics of this company have changed dramatically to the positive. I know the level of, let's call it, M&A that may or may not have contributed a lot in terms of returns on investment has gone down dramatically, right? You've kind of stuck to your knitting.

CapEx number has gone down pretty dramatically, right? You've -- with no volume growth, you don't need to build as many facilities. And you've been buying back a ton of stock. Like I said, 190 million shares in 2017, down to 75 million. You bought $1 billion year-to-date. I think you've got another $500 million or so of free cash flow coming in the fourth quarter. That's still kind of ballpark.

Look, Logan (sic) [ Justin ]. I think so. I mean -- our guidance hasn't changed.

I was looking at the third quarter number correctly. So leverage is at a little over 3.25x, right? So that's right in the middle, slightly above, I think...

Yes, 3.37x.

Right, 3.37x. So should we just simply think about share repurchase equals free cash flow, give or take, unless you find some interesting M&A opportunities?

In general, yes, nothing has changed about our philosophy. The other thing that has driven buybacks and people ask about this is the comment of, oh, you're taking on debt to do buybacks. And I would clarify that's not how we think about it. We talk about a target leverage range of 3 to 3.5x. And as EBITDA grows, you need more debt to stay in that range. So we raise debt to maintain that because we have a view about how to fund our business and think about debt-to-equity ratio. And so you raise debt to stay in that 3 to 3.5x, you get cash and then you have to decide what to do about that cash.

As you pointed out, we're pretty disciplined about M&A. I would love to do more M&A. I would love to find great uses for that capital to grow, but we're not going to compromise our risk-adjusted return threshold for that. So you have extra cash sitting around, so we buy back stock. So nothing there has changed. And what it means is if EBITDA is growing, there's a leverage on that EBITDA growth for share buybacks because you don't buy back that EBITDA, you basically buy back 3x of that EBITDA to maintain the leverage. Yes.

Makes total sense. Joel, thanks for your time today. Appreciate it. Thank you for joining.

Thank you. Thanks, everyone. Thank you, sir.

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2025 Earnings Call. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference, sir.

Thank you, and welcome to our third quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO.

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our third quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC.

Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law.

Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. We are accustomed to operating in a dynamic health care environment and today is no different. The government shutdown is on its 29th day and key health care policy decisions remain in flux. And while these developments have real implications, we remain focused on what matters most, providing excellent care. This focus is not only in the best interest of our patients, but continues to generate consistent financial results.

Our third quarter performance was in line with our expectations and keeps us on track to achieve our full year guidance. These results also enable continued investment to improve the lives of our patients and enhance the experience of our teammates and physicians. Today, I will share the highlights of our third quarter performance, update our guidance for the full year and walk through a few swing factors for 2026. But first, as always, we will begin with our clinical highlights.

Today, I will feature our research team, known as DaVita Clinical Research, or DCR, powered by a dedicated team of medical directors and data scientists, in fact, by one of the largest patient data sources in the country, DCR has been instrumental in advancing kidney care research.

A few metrics that puts this team's contributions in perspective. DCR maintains more than 250 research sites in the United States and has conducted more than 500 clinical trials. This team of researchers has helped achieve FDA approval for dozens of ESKD drugs and DCR research and data has fueled more than 700 clinical publications.

With a drive toward innovation and patient safety, DCR has helped to develop new therapies, improve outcomes and generate benefit to patients and physicians across the kidney care community. This long-standing commitment underscores our position as a leader in clinical research.

Most recently, DCR is evaluating outcomes of middle molecule clearance using middle cutoff dialyzers, which will provide critical U.S. specific data and has the potential to represent a significant step in advancing patient outcomes. This is just the latest example of how DaVita is advancing the development of new therapies and actively shaping the future of kidney care.

Transitioning now to our financial performance. We delivered the third quarter adjusted operating income of $517 million and adjusted earnings per share of $2.51. These results were consistent with our internal expectations. Joel will provide detail on the quarter, but at the highest level, we continue to manage patient care costs effectively while the U.S. treatment volume was down approximately 1.5% year-over-year.

Before I cover full year guidance, let me provide a bit of detail on one of the ongoing strategic priorities: investing in technology infrastructure. As a reminder, last year, we completed the rollout of our next-generation clinical platform. We continue to enhance that system and are making other long-term investments to replace our scheduling system and further upgrade our revenue operations technology.

Simultaneously, we're adopting AI solutions across our platform. This includes internally developed use cases, opportunities with commercially viable applications and working with external providers. While these projects result in higher G&A growth, we believe that these investments are critical to advancing clinical care, improving the experience of our patients and teammates and driving long-term cost efficiencies.

Let me now transition to our full year outlook. We're reaffirming the midpoint of our guidance ranges for adjusted operating income and adjusted earnings per share, while narrowing each range. We now anticipate full year adjusted operating income between $2.035 billion and $2.135 billion and adjusted earnings per share of $10.35 to $11.15.

I recognize that many of you are already looking ahead to 2026. While it's too early to provide formal guidance, let me walk through several key variables that will influence our perspective on next year. First is volume. We faced several headwinds in 2025 that we don't expect to recur, including Hurricane Helene, the severe flu season and the cyber incident. Beyond those discrete events, and as I talked about last quarter, we will continue our efforts to drive clinical progress to improve mortality and support treatment growth.

Second is payer mix, where there's active policy debate right now. We're among the many who are closely monitoring the impact of enhanced premium tax credits on commercial mix. We'll also be assessing the ongoing recalibration of Medicare Advantage landscape, as evolving market dynamics from government policy and payer behavior affect Medicare Advantage enrollment and insurance mix.

Third is Integrated Kidney Care or IKC. We're awaiting the release of final 2024 performance year results from the government CKCC program. The timing of the release and the recognition of the associated operating income could shift between 2025 versus 2026. We feel good about our progress in 2025 and it's an important reminder that timing of operating income remains difficult to predict. In short, there remains a range of potential outcomes for 2026 and and we expect to learn more about each of these factors over the coming months. And as customary, we'll provide formal guidance during our fourth quarter earnings call in February.

To wrap up my comments, we remain on track to achieve our full year goals. Meanwhile, our long-term investment in IT and clinical innovation, strengthen our ability to deliver superior patient care and create sustainable value. As we look to 2026, we're monitoring a number of variables that will shape the coming year, and we remain confident in our ability to navigate them effectively.

I will now turn it over to Joel to discuss our financial performance in more detail.

Thank you, Javier. Third quarter adjusted operating income was $517 million, adjusted earnings per share was $2.51 and free cash flow was $604 million. I'll provide detail on the individual components of our results, beginning with U.S. dialysis.

First, on treatment volume. U.S. treatments per day declined 1.5% versus the third quarter of 2024, in line with our expectations. The decline is primarily the result of 2 factors: First, the mix of days as this quarter was slightly skewed towards Tuesdays, Thursdays and Saturdays as compared to Q3 last year; second was the negative impact of the census trends from higher mortality from a severe flu season and lost admissions opportunities as the result of Hurricane Helene and the cyber incident.

Next, revenue per treatment increased approximately $6 versus the second quarter. This was primarily driven by rate increases, higher revenue from phosphate binders and the negative impact of the cyber incident on Q2 RPT. These improvements were offset by a slight decline in payer mix and normal variability. We continue to expect full year RPT growth will be at the low end of our original 4.5% to 5.5% guidance. Achieving this will require some acceleration of RPT in Q4, which we expect from vaccines, normal rate increases and higher than typical impact from the resolution of aged claim balances.

Now moving to patient care costs. PCCs per treatment increased by approximately $5 sequentially. The majority of the change was the result of typical increases in wages and higher pharmaceutical expense due to higher dispensing volumes of phosphate binders relative to the second quarter. Excluding the impact of phosphate binders, patient care costs continue to outperform our expectations from the beginning of the year. We continue to expect full year PCCs per treatment to increase between 5% and 6% versus 2024.

International adjusted operating income was $27 million. This was down $9 million versus the second quarter, primarily due to the onetime benefit that we called out last quarter.

In IKC, our value-based care business, our Q3 adjusted operating loss was $21 million. As I have mentioned in the past, the quarterly phasing of IKC is hard to forecast. That said, we feel good about achieving flat or better IKC adjusted operating results in 2025 as compared to last year consistent with our guidance from the beginning of the year.

In aggregate, third quarter operating results were in line with our expectations. At the midpoint of our tightened adjusted operating income range, the implied guidance for the fourth quarter represents an approximately $60 million sequential increase. We expect this fourth quarter improvement to be primarily driven by higher treatment volume due to better treatment day mix, sequentially higher revenue per treatment and timing of IKC revenue, offset by typical seasonal increases in patient care costs and G&A.

Switching to capital allocation. During the third quarter, we repurchased 3.3 million shares, and we have repurchased an additional 400,000 shares since the end of the quarter. Year-to-date, through today's earnings call, we have repurchased approximately 10 million shares representing approximately $1.5 billion.

As a reminder, the 400,000 shares we repurchased in October were pursuant to our publicly filed repurchase agreement with Berkshire Hathaway. According to that agreement, just prior to each DaVita earnings call, we buy from Berkshire the number of shares necessary to return its ownership to 45%. This transaction is contractual and formulaic.

We finished the quarter with leverage at 3.37x consolidated EBITDA within our target leverage ratio of 3 to 3.5x. As we look to the remainder of 2025, as Javier mentioned, we are reaffirming our guidance for full year adjusted operating income with a midpoint of $2.85 billion and adjusted earnings per share with a midpoint of $10.75 while narrowing the band of each range. We look forward to sharing full year results and providing 2026 guidance when we speak again in February.

That concludes my prepared remarks for today. Operator, please open the call for Q&A.

[Operator Instructions] Our first caller is Kevin Fischbeck with Bank of America.

Great. I guess a couple of things came out from your prepared remarks. I guess the first thing, you talked about the volume number for next year. I guess I understand the the onetime items that you highlighted this year. How do you think volumes would have played out this year ex those 3 -- I guess it was 4 items that you -- or 3 items that you mentioned, the hurricane, cyber and flu. What would that number look like this year?

Yes, Kevin, I'll take that. I think the number is probably about a 75 to 100 basis point headwind on 25 volume from those 3 things combined, and that's a combination of census and missed treatment rate.

Okay. And the other thing that jumped out on our volumes was that you just mentioned working to improve mortality. Is there anything that you can provide color on there? I assume that's not something that necessarily shows up in a given quarter, but maybe there's optimism that, that can improve next year? Or is that a slow steady improvement over time?

Yes, Kevin, as you called it out, it's a steady over time. We are looking at all our clinical protocols, looking at time on therapy, fluid, other protocols, GLP-1s and other medications to try and see what the best way to go after this because we really have to lower our mortality. Of course, over time, we will talk about the mid molecule clearance, and -- but back to your point, that will take time.

Yes. Okay. And then last question for me. On the MA enrollment point about that being, it sounds like it's a bigger swing factor than I might have thought it would have been for 2026. I understand that it is influx. Are you -- when you say a swing factor, does it -- are you talking about just shifts in membership between payers that, that could have a meaningful impact as your rate with different payers are significant enough to move the needle? Or are you worried about declines in MA enrollment, broadly speaking, back into traditional Medicare or Medicare plus supplemental?

At the end of the day, you highlighted 2 variables, which is mix. And within that mix, there's a different revenue within each payer. We're agnostic on that because we don't know which way it's going to go. On the other hand, you do have different enrollment and you're seeing a lot of payers talk about their volatility in their enrollment. So we're just highlighting that we don't have any particular insight but rather, it feels like the marketplace is more dynamic at this juncture.

Okay. But that is a potentially big enough swing factor that you felt necessary to call out? Is it -- I guess in my mind, I don't think about it as being that big of a variable, but it is.

Well, significance, obviously, is in the eyes of the beholder. But at the end of the day, there's enough dynamics and enough membership in there that you could see a scenario where you could swing in one direction or another. So we wanted to call it out. I mean if you were going to talk about revenue per treatment next year, you have that dynamic. And then, of course, you have open enrollment, which has the dynamic of the tax premium credits that's being discussed right now with the federal government. And so those 2 are just a little more in the air as we speak than in normal years. That's said Kevin, I think I agree with Javier we're trying to highlight where there might be variability. That said, I think it is safe to say that commercial mix is a more significant financial swing factor than MA mix.

Our next caller is Andrew Mok with Barclays.

I appreciate all the color on 2026. Maybe just back on the volume side. You called out the 75 to 100 basis points of discrete items that are not going to recur next year. So I guess, is it fair to think of that as a reasonable starting point as we contemplate potential growth for next year?

And Javier, I think you noted investments in technology, infrastructure, schedule and systems. Are any of those items expected to have a meaningful impact on treatment growth? Or is there anything else that you can do in your control to influence the volume environment?

Yes, Andrew, I'll take the first one. So if you were to translate that 75 to 100 bps from 24 to 25, I think 26 over 25, again, if you're comparing year-over-year growth rates, you're probably looking at a 50 to 75 basis point structural improvement in '26 growth relative to '25 growth. And that comes largely from the flu and the cyber incident. The hurricane is kind of annualizing out and is offset the kind of -- the benefits of that is offset by the fact that there's a small headwind in '26 over '25 from day mix. Just as a reminder, '25 over '24 had a 20 basis point day mix headwind. And then '26 over '25 has an additional 10 basis point headwind. '27 will be a tailwind.

And when you do all that math and you net it all out, if you start with 2025, where we've guided to 75 to 100 basis point decline in volume, and I would say from where I'm sitting now, that probably looks like it's going to be closer to 100 basis points. This treatment rate is really the culprit around that. So let me use negative 100 basis points as the math for 2025 growth, you would say structurally, you would adjust that to say before all the other dynamics. So I'm not giving guidance here, I'm just trying to bridge how to think about the starting point for building '26, you'd improve that negative 100 basis points in '25 by 50 to 75. So you'd start with kind of an adjusted growth in '25 of negative 25 to negative 50 off of which to build the '26 number.

Got it. And do you want to comment on...

And for your second question, we are investing in a lot of things. U.S. specifically, will impact volume. The short answer is we don't know specifically volume, but if you were to expand that question to the P&L, I would say that we are optimistic, and we're working hard. Some of the models that we're working on could impact volume. For example, we are working on something that would risk stratify hospitalization. And if we can make an intervention, it changes hospitalization that would, of course, impact volume.

On the other side, we're doing models to affect the cost structure things like administrative things in the call centers and revenue operations that can do authorizations in a much more rapid way and more reliable way that would likely get you a higher collection. So those are a couple of the examples of the things that I highlighted in the opening.

Great. And on the premium tax credits, I think the last estimate of the headwind you gave was $120 million over 3 years. Is that still a good number to think about? And can you comment on your growth in the exchanges and how that's played out throughout the year?

Sure. I think that number is still a good number. The reality is, as you know, you have to think about what happens with these extended premium tax credit. And the way that we have it thought out is that if they go away, we would lose that $120 million roughly over a 3-year period, but it's not evenly spread out. We would have something -- our estimates are somewhere like $40 million in year 1, $70 million in year 2 and $10 million in year 3.

And the reason why it's a little lumpy is because our models divide the population. And so we assume that our existing patients because they are in high need of insurance and understand the need for coverage would be more likely to retain that coverage. And also, in many cases, it is the most affordable option.

That math changes when you grab the second group, which is those patients that yet don't know that their kidneys are going to fail, so they're CKD patients, and they might let their insurance lapse. And in that case, when their kidneys fail, they would become Medicare patients.

And of course, there's a spectrum in there because some of these people in CKD 4 are already pretty ill. And so they might opt up for an exchange. So when you do all that math, and as you can see, it's full of assumptions, you get into that sort of lumpy 26, 27 and 28. And then, of course, we're watching with Congress because there's a lot of conversations going on, conversations about some kind of off ramp, meaning that they change the enhanced tax credits over time. There's also talk about lowering the poverty level to different levels. And then, of course, there's conversations about doing nothing. And so all these assumptions will change depending on what happens.

And Andrew, just on your question on private pay mix, mix is down about 15 basis points in the quarter, which I would call normal variability and year-over-year, it's flat.

[Operator Instructions] Our next caller is A.J. Rice with UBS.

Maybe there's an obvious answer to this, but the headline number looks like your operating income for the quarter was about $50 million below the consensus. I know you're saying it was in line with your expectation, and you've not changed the midpoint for the year as to where you think. Is it just a matter of people were mismodeling given the day counts you're referencing for the third and fourth quarter relative to what you were internally thinking? Or what is going on there if you have any view?

Yes. So we don't give quarterly guidance, and we appreciate this can lead to a little bit of a mismatch with the Street. Let me -- I think the best way to explain it is how we're thinking about it, which is if you look at Q4 over Q3 to hit the midpoint of our guide, we need about a $60 million uplift in OI.

And the way we think we get there, and these numbers are all approximate, First, there's the typical headwind from seasonal costs, and we see that both in patient care costs and G&A. I'll call that out as roughly a $30 million headwind. That's offset by 3 things. First is volume, which is really about a day mix issue. Q3 had a 60 basis point headwind on day mix year-over-year. Q4 has a 60 basis point tailwind on on day mix, and that's worth about $15 million.

Second is IKC, which is, call it, plus $25 million from Q3 to Q4 to hit the IKC guide we gave at the beginning of the year. And the last would be revenue per treatment of, call it, a $50 million pickup. There's some seasonality in that from vaccines and normal rate increases. There's also, I'd say, more than typical variability from resolution of older claims with payers. These happen virtually every quarter. They're hard to predict, both in terms of size and timing. They, I'd say, more often than not are weighted towards Q4, although not every year. And for Q4 of '25, we just expect these to be more favorable than usual.

Okay. Well, that's helpful to explain it, I think. On the cyber attack and you're taking this charge for the Mozarc relationship, do they have impact on the adjusted earnings? Maybe cyber attack, what was the earnings and volume impact in the quarter that you estimate specifically to that event? And then the Mozarc charge, it looks like there's some -- you are expecting it to be a drag somewhat for next year or 2, and now you're taking the charge, does that eliminate the drag? And is that meaningful in operating earnings?

Yes. So let me take these one at a time. So first on Mozarc, the answer is the charge will largely eliminate the Mozarc drag on the P&L next year. It doesn't hit the operating income line. It hits the other income line. So it's not in our adjusted operating income, but it is in our pretax. And that's been a significant drag, both last year and this year, and it will get pretty close to 0 for next year.

In terms of cyber, the big impact was last quarter through both RPT and volume. As we play it forward in Q3 and Q4, the impact goes way down, and it's primarily volume. The cost side of it has been non-GAAP, both last quarter and this quarter.

Our next caller is Pito Chickering with Deutsche Bank.

So one more question on treatment growth. I feel a little bit like a broken record here, so I apologize. But can you talk specifically about new patient starts in 3Q and how that changed year-over-year? And also on mortality, how is mortality trending in the third quarter versus the first half of the year? And then finally, any impact from iota on treatment -- or on new patient starts or treatment growth?

Pito, the last part of your question, any impact from what was -- I missed that?

It's iota, the new bundled system for kidney transplants.

Okay. Yes. No impact from that. Going back to the original part of your question, I'd say volume for the quarter came in largely as expected with a little bit more pressure on missed treatments than we expected. Remember, we called missed treatment rate out as elevated in Q2 as a result of the cyber attack, they came down off that peak, but still running higher than in Q3 of 2025.

In terms of both admissions and mortality, there's really not a lot new to call out there. Admissions continues to run within the normal band that we've seen post COVID and mortality, again, down versus Q1, but that's largely a flu phenomenon. There's really no pattern or trend to call out about mortality either quarter-over-quarter or year-over-year?

Okay. And then can you talk about the timing of the IKC funds? I mean typically, they closed at the end of the third quarter for the previous calendar year. Is there any change in the timing of those contracts? And have you already settled some of those funds in October for calendar '24?

Yes. So the big change on IKC timing for the year was moving some of the revenue from plan year '24 from what we would have thought would have been the back half of the year and some of which would have hit in Q3 into Q2. And that's why IKC was so strong in Q2, and we called it out as timing. So that's really the big thing I would call out.

Look, I think timing on IKC will continue to be difficult to predict. A lot of it is a function of when we get information from payers as well as the federal government and our ability to recognize revenue is really subject to the timing of that, which we don't have control over.

Okay. And then last one for me. The implied fourth quarter guidance range is pretty wide and it's like $0.80. What would have to happen in order for you to be at the low end versus the high end of the guidance? And if you think about the midpoint, I know you talked about treatment growth and the tailwind coming from the day mix. But what treatment growth should we be modeling to get to the midpoint of the guidance?

So in terms of what's driving the range, I would point to both RPT and IKC as the things that probably have the most potential mix there. In terms of treatment volume growth, what you should expect for Q4 is year-over-year volume growth that is positive. Nothing to write home about 20, 30 bps somewhere in that range, but positive -- for the same reason it was so negative this quarter, which is the day mix being a headwind; next quarter, it's a tailwind, which is why it will drive it positive.

Okay. And then last one here, does market share -- what do you think the market share has done in '25 if we exclude this cyber incidents?

Yes. Look, it's a really tough question. The best way to answer that question is USRDS data. But the latest USRDS data is for Q1 of '25. It just came out both Q4 of '24 and Q1 of '25. And the reality with the quarterly USRDS data, is we think the incidence data is more reliable. The prevalence data is less reliable. So you put that all together, there is no -- there's almost no USRDS data to use to really try and predict what's going on with market share.

But if you grab that data as imperfect as it is, and you grab the intelligence that we have in the field and you make the adjustments for roughly the 1,600 patients that are both impacted by the PD in the cyber outage, we have no reason to see any meaningful shift in market share.

Our next caller is Justin Lake with Wolfe Research.

[indiscernible] growth sounds like it's got to be about $10 sequentially of improvement. Is that the right ballpark?

I think it's more like 8.

Okay. And how much of that do you think is this collection that we would think of as maybe nonrecurring in the same magnitude?

I would -- it is -- I called out $50 million of RPT improvement, and that's about $7 of RPT. It is the biggest component of that. So I don't want to give an exact size there. This is ranges upon ranges, but it would be more than half, I'd say, is probably a reasonable estimate.

Perfect. And then the fourth quarter volume assumption, I apologize if I missed it, but did you give a number there in terms of what you're assuming for volume?

Look, you can back into it more or less. And on treatment volume, it would be growth of somewhere around 20 or 30 bps. And remember, that's treatment volume, it's not treatments per day, it's not NAG. That it would be an absolute year-over-year growth of about 20 or 30 bps.

Our next caller is Ryan Langston with TD Cowen.

You mentioned changes in payer mix driving RPT down a bit. Can you give us what the commercial treatment mix was in the quarter or at least a proportion from -- or the change from second quarter? And Joel, I heard you mentioned the sequential components in RPT, appreciate that, but does the 4Q guide assume any sort of positive move in that payer mix?

I don't think it will be a significant component of it. In terms of where mix is today, it's right around 11%. It was down 11% -- I'm sorry, it was down 15 bps from Q2 to Q3. It went from just above 11% to just below 11%.

Okay. And last thing, I guess, over the past year or 2, we've seen nice growth in RPT, the binders, of course, but focus on the revenue cycle improvements. I guess where are we at in the life cycle of those are seeing at least some outsize benefit from those. Javier, I heard you mentioned some initiatives in your prepared remarks. But just anything on revenue cycle initiatives and improvements would be helpful.

Yes. I would say people would ask what inning of the game we're in. I think that's the wrong metaphor. This is a continuous process that I don't think we -- kind of we finish and then we move on. I think there'll be a continuous process for years and years to continue to get better at it. Remember, a 1% improvement in in ROPs collections is equal to about $120 million of OI. So even if we can just get 10 or 20 basis points year in, year out, there's real value there.

The cyber incident definitely slowed things down there, and -- but we're continuing to invest there. As Javier said, AI is an opportunity, just old-fashioned automation is an opportunity there as well. So I would say we're not -- there's more to be had there. It's not going to feel like it did in '23 and '24, where it's really moving the needle in a big way, but I think there will be -- continue to be opportunity there year in and year out.

At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments.

Okay. Thank you, Michelle, and thank you for all of your questions. As we wrap up today, I will leave you with 4 thoughts. First, early in the year, we faced 2 unexpected challenges with a meaningful economic impact. We navigated through those issues, delivered clinical excellence for our patients and remain on track to achieve our annual guidance. All the while, we continue to invest creating long-term capabilities.

Second, we will continue our disciplined capital allocation strategy, including share repurchases. Third, we provided a few forward-looking thoughts on next year. Although the current dialogue is focused on enhanced premium tax credits, more broadly, we'll be monitoring open enrollment which is perhaps the biggest variable heading into 2026.

And finally, the clinical and operational processes behind middle molecule clearance will take approximately 3 years to see results, yet the potential to enhance patient live is meaningful and exciting. Thank you all for joining the call and be well.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.