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Edited Transcript of DVA earnings conference call or presentation 10-Feb-20 10:00pm GMT

Q4 2019 DaVita Inc Earnings Call

DENVER Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of DaVita Inc earnings conference call or presentation Monday, February 10, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Javier J. Rodriguez

DaVita Inc. - CEO & Director

* Jim Gustafson

DaVita Inc. - VP of IR

* Joel Ackerman

DaVita Inc. - CFO & Treasurer

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Conference Call Participants

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* Andrew Mok

Barclays Bank PLC, Research Division - Research Analyst

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Maggie Jiang

Bank of China New York Branch - SVP

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good evening. My name is Debbie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Fourth Quarter 2019 Earnings Call. (Operator Instructions) Thank you. Mr. Gustafson, you may begin your conference.

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Jim Gustafson, DaVita Inc. - VP of IR [2]

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Thank you, and welcome, everyone, to our fourth quarter conference call. We appreciate your continued interest in our company.

I'm Jim Gustafson, Vice President of Investor Relations. And with me today are Javier Rodriguez, our CEO; Joel Ackerman, our CFO; LeAnne Zumwalt, Group Vice President; and Jim Hilger, our Chief Accounting Officer.

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 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 and subsequent quarterly reports on Form 10-Q. Our forward-looking statements are based upon information currently available to us, and we do not intend and undertake no duty to update these statements.

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 submitted to the SEC and available on our website.

I will now turn the call over to Javier Rodriguez.

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [3]

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Thank you, Jim, and good afternoon, everyone. We appreciate your interest in DaVita and look forward to your questions and comments.

I'll start with clinical highlights as a reminder of life sustaining care that we provide to more than 235,000 people. While we discuss clinical outcomes and lowering the total cost of care, our goal is to improve our patients' quality of life. One specific example has been to focus on reducing infections in our patients. Dialysis patients are prone to infection, which can often lead to lengthy hospitalization stays and increase in mortality.

I'm excited to report that our efforts have paid off. In 2019, we reduced the rate of bloodstream infection by 13% and improved the rate of peritonitis by 20% versus the prior year. This is a meaningful improvement that kept many of our patients out of the hospital.

Now let me transition to our results and outlook for 2020. We had a strong performance in 2019 and met the earnings per share and free cash flow growth targets we set for the year. We're committed to achieving our 2020 financial guidance. In fact, we're raising our earnings per share target range by $0.50. Joel will provide the financial details on both the quarter and our 2020 guidance.

Now let me pull up for a few minutes to share our high-level view on clinical and on policy. We are in an exciting time for kidney care. We're bridging the transition of care from the nephrologist's office to different types of care. We're working with our payers to use predictive analytics to identify CKD patients with the highest risk of transition to ESRD. Once we support these patients, we will work on avoiding or delaying the onset of kidney failure.

We remain excited about nephrology care lines, the new physician-led entity with nearly 1,100 nephrologists that will be the vehicle to connect DaVita to the nephrologist practice. The goal is simple: provide world-class analytics and education to help physicians best deploy their time to care for the right person at the right time.

For those patients who do transition to ESRD, we built a leading education platform to empower patients to choose to start on the right treatment modality for them. For patients who choose home modality, we continue to invest in our leading home platform, where we serve the most home patients of any provider. In 2019, we saw our highest growth ever in PD modality. We're working to maintain our leadership in the home dialysis with a 2020 goal of achieving double-digit growth in the PD modality.

Moving on to policy. We continue our multiyear journey towards integrated care. We're encouraged by the quality improvements that are evident in our demonstration such as the ESCO. We're hopeful that there will be additional models and opportunities to scale integrated care for ESRD patients at national levels.

We remain optimistic about the administration's view for value-based care model. We believe that the capabilities that we've built will support our collective goal to improve clinical outcomes while managing total cost.

There's been a lot of recent conversation about Medicare Advantage and the 21st Century Cures Act. We would remind everyone that Congress passed this legislation with the intent of making additional insurance options available to Medicare-eligible patient -- ESRD patients.

With respect to expectations of adoption, no one really knows what choices will be made by the patient. We continue to believe that the selection into MA will be more gradual. We look forward to working with plan partners to manage the care and the cost of these patients.

In parallel, our advocacy efforts are focused on ensuring adequate funding in both Medicare fee-for-service and MA. And as we've said before, we remain ready and eager to advance integrated care for Medicare fee-for-service population.

Shifting to state policy. We will keep advocating for our patients in California and other states where some labor unions are pursuing policies that are not good for patients, cost or the care delivery system.

Now let me transfer it on to Joel, so he will provide additional details on the quarter and specifics on 2020 guidance.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [4]

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Thanks, Javier. Before I begin, I'd like to point out that we have adjusted the first section of the press release this quarter. We hope this format will give investors easier access to some of the most important results that have historically appeared later in the release.

Now I'll start with Q4 results and then move to 2020 guidance. We generated $2.9 billion of revenue in the quarter, an increase of 2.75% over Q4 2018. Our operating income was $463 million, which included approximately $67 million in profit related to calcimimetics, resulting in an operating margin of 16%. Earnings per share from continuing operations was $1.86.

Now let me take you through some of the underlying drivers, starting with the components of the U.S. dialysis and lab segment. Non-acquired growth for the quarter was 2.1%, relatively flat with the prior 2 quarters. Revenue per treatment was down sequentially by $1.10, which includes $1.68 per treatment decrease in revenue attributable to calcimimetics. Excluding calcimimetics, RPT was up by $0.58.

To recap performance for the full year 2019 versus guidance, which excludes the impact of calcimimetics, we finished at the high end of our RPT guidance range of 0 to 1%. We fell outside of the very narrow range that we provided on commercial mix and ended 2019 with a year-over-year decrease of approximately 20 basis points, although this decline did not have a meaningful impact on our revenue per treatment. Combined patient care costs and dialysis and lab segment G&A expense was down approximately $2 per treatment quarter-over-quarter, driven primarily by lower compensation and benefits costs.

Turning to calcimimetics. We generated operating income of approximately $67 million in the fourth quarter on revenue treatment and cost per treatment of $12.86 and $4.19, respectively. For the full year, we generated approximately $220 million in operating income as we negotiated significant cost decreases on oral calcimimetics. For 2020, we now expect approximately $40 million to $70 million of operating income from calcimimetics, with approximately half of this to be realized in the first quarter as we expect ASP reimbursement to decline in subsequent quarters. With that said, there is still significant uncertainty around this outlook given the complexity in the ASP methodology.

Now turning to international. For the quarter, operating income was approximately $2 million, including an FX loss of $4 million. For the full year, we generated positive adjusted operating income of $2 million, excluding goodwill impairment and including an FX loss of $2 million.

Our effective tax rate on adjusted income attributable to DaVita from continuing operations for the quarter was 25.2% and was 27.5% for the full year. Our effective tax rate for the fourth quarter and the full year benefited from a decrease in our estimated state tax rate.

Now on to cash flow. For the full year 2019, operating cash flow from continuing operations was $2 billion, and our free cash flow was $1.1 billion. Both operating cash flow and free cash flow were positively impacted by significant improvements in our DSOs and unusually low cash taxes in 2019. These 2 factors combined to improve cash flow during the year by approximately $300 million. We do not expect these to recur in 2020.

CapEx for the year was $728 million, slightly below the revised guidance range of $740 million to $780 million and well below our initial guidance from the year of $800 million to $840 million. The better result in Q4 was due to the timing of certain projects that were pushed into 2020.

Since October 1, 2019, we purchased almost 8.7 million shares at an average amount of $64.80 per share. As a result of our recent repurchases, we reduced our share count by approximately 41.3 million shares or 24.8% since the close of the DMG transaction in June 2019.

This week, we expect to complete a repricing of our $2.7 billion Term Loan B that will reduce the interest rate on this tranche of debt by 50 basis points. We now expect our debt expense to be approximately $90 million in Q1 2020 and then approximately $85 million per quarter in the subsequent quarters.

I'll conclude with some comments on our guidance ranges for 2020. We are updating our 2020 adjusted earnings per share guidance by $0.50 per share to $5.75 to $6.25. As a reminder, this includes the expected benefits from calcimimetics as well as the expected cost of ballot initiatives in California. Due to the timing of calcimimetics that I mentioned and the expected timing of ballot-related costs in the second half of the year, we expect some fluctuations in earnings per share between quarters this year.

Our revenue guidance for the year is $11.5 billion to $11.7 billion, and our operating income margin guidance is consistent with the target range of 13% to 14% that we talked about at our Capital Markets Day. We expect to generate approximately $600 million to $800 million of free cash flow this year.

I will point out that cash flow is inherently subject to greater swings than its operating income due to the time of working capital and other items such as the timing of payroll cycle, tax payments and intra-period changes in the collections of AR. This worked in our favor in 2019 and could swing the other way at some point in the future.

Operator, let's now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Justin Lake with Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [2]

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Wanted to go through a couple of moving parts here. First, in terms of the higher EPS range year-over-year, is it fair to think about it as 2/3 coming from calcimimetics benefit that wasn't in the numbers before, maybe the rest coming from lower debt costs? And maybe you could tell us any kind of moving -- other moving parts including California, kind of delaying implementation of the legislation out there on the ACAS.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [3]

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Sure. So Justin, you've got the basics right. Calcimimetics is the biggest component of this, and a decrease in the -- in our expected cost for AB 290 plays into this as well. Those are 2 big things I'd call out. There are a lot of other moving pieces in here. Our share count moves around as the stock price goes up, and a whole bunch of other things related to core OI. But I would say calcimimetics and the AB 290 are the 2 big things to call out.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [4]

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Great. Maybe you could just give us an update on -- is there any change in terms of the sustainability of calcimimetics in your mind beyond 2020? Or do you still expect that to migrate down to kind of neutral? And then do you have a new AB 290 number for us? I think the old one was 25 to 40.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [5]

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Sure. So on calcimimetics, we still expect under the current TDAPA that it will migrate down to 0 over the course of 2020. We have -- we've been -- we -- as you can see, we've not been able to predict how ASP would come down. The positive numbers for 2020 is the result of ASP not coming down the way we expected it would 3 months ago. I don't know that our visibility on how the rest of the industry has behaved, combined with some of the black box nature of ASP, have improved. But we do think this has to get down pretty close to 0 by the end of the year.

In terms of AB 290, we don't have a new number. Clearly, the number will be smaller. That said, there will be some legal costs associated with AB 290, and there certainly is the possibility that it gets implemented towards the end of the year. So the numbers are getting to a size where I don't think it's worth calling out a specific number, but clearly below the 25 to 40.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [6]

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Okay. And just one last follow-up before I jump back in the queue. The calcimimetics, is it fair to say here that you think costs have come down to a kind of normal range, and we just need to track the ASP and see how close it is to that $4 number...

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [7]

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Yes, yes. I'm not saying cost couldn't continue to drift down a little bit, but the real action for 2020 is on the trajectory of ASP.

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Operator [8]

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Next question will come from Kevin Fischbeck with Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [9]

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Great. I wanted to ask a little bit about this year's guidance kind of in the context of your 2022 guidance because it looks like you're kind of there in a lot of your metrics. I guess at the midpoint, [the midpoint you're guiding for] 2% revenue growth per year. So I guess just want to understand that jumping point off. Is that still the right point? Or are there things in here that now maybe there's a different way to think about the long-term trajectory? And I guess trying to think about this year's guidance versus the '22 number, I guess, the '22 number is going to have a headwind of calcimimetics coming out. And then I guess your guidance still assumes that AB 290 goes into place. Just want to make sure that that's one thing we'd have to figure out if we're trying to...

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [10]

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Yes. So you're spot on, on both those factors of calcimimetics coming out of here and AB 290 going into place. In terms of some of the other things I'd call out, on the cash flow number, 2019 was surprisingly high. And we called out in the script 2 of the factors, which are the DSOs having come down as well as cash taxes. I'd also note, cash flow was helped by calcimimetics as well and the impact that had on OI. So that happened faster than expected.

We also benefited, to some extent, in the year by some of the CapEx we were expecting late in the year getting pushed into 2020. So the 2020 number might get impacted by that to the negative. There is certainly the possibility that at the end of 2020, we'll see some pushed into 2021, and that could flip either way.

The one other thing I'd call out is the margins. We spoke about margins of 13% to 14%. We're not changing that view of the world. And so as you think about what the margins could be in 2022, I'd stick that number.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [11]

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Okay. That's helpful. And then appreciate the preliminary comments on MA. But I guess it sounds like some of the managed care companies are starting to worry this is going to be an issue for them into 2021. I was wondering if you could talk about your conversations that you're having with MA companies. Is there a pushback on rates or anything that you would kind of highlight there that could impact the -- or change the impact it's going to have on you over the next few years?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [12]

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Thanks, Kevin. This is Javier. We've gotten a fair amount of questions on MA. And so I think it's useful to just pull up a little and revisit the origin of it. Number one, this is the only patient population, the ESRD population that was excluded from having the right to pick MA. And so it was fixing a deficiency in the system.

Number two, what is our role going forward? And our role is to just make sure that our patients are well informed so they can make the best decision individually.

Point number three is everybody is trying to size it. And when you try to size something like this, there's 2 variables. Of course, one is rate and the other one is volume. And so what we said is that our rate is above Medicare but substantially below commercial. We're not going to give any more on that variable. The one that's most sort of undecided at this juncture is the pickup of the volume. And all of you know the same as we do, which is there's a lot of variables at play. When an individual has a primary insurance, a secondary insurance, do they have Medigap coverage, et cetera. So we continue to think that it's reasonable to think that penetration will reflect the overall market.

In addition, many people believe that our patients will have sort of a quick trigger to pick an insurance when there are so many complicated variables. And they have -- many of them been in Medicare for quite some time, status quo might just keep going. So we're literally asking how will our patients interpret their benefit and so we don't know. And so many people are continuing to size that it's going to be some kind of an aggressive movement, and we continue to think that it will be more gradual.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [13]

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I guess -- that's definitely helpful. I guess 2 follow-ups on that. Is there anything that you would think of as you think about that rate differential that you currently get that makes you think that, for whatever reason, it wouldn't be sustainable? I guess obviously, [by any standard measure], you just want to bring that delta down over time, but is there any reason why you think that could be the case? Or maybe you could keep those economics or maybe change the way that you actually contract with managed care, take more risk, things like that?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [14]

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Yes. I would think it as an opportunity for us to expand the way we talk to our contracts and to our payer providers. It's an exciting time where we're all aligned in trying to make sure that we have integrated care for our patients, and so we're leaning in and trying to see how we can best serve them and be a partner. And if they think that the MA volume is going to be higher than us, that might also be an opportunity to contract in that way.

So we're excited. Obviously, they want lower rates. We would like higher rates. And that dance is never going to change. And then the question is can we all get creative on coming up on a win-win situation.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [15]

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Okay. And then I guess to your point about the shift into MA, point well taken that inertia tends to be the way people act when it comes to health insurance because it's kind of daunting to shift for that. But I would assume that the fact that you're able to meet with these people 3 times a week and explain what the options are would potentially change that dynamic. And when we do our analysis in the 20 states where MedSup isn't available for people under 65 in an affordable way, then I would think the adoption would be quite large. The question ends up being about where in those states where it is available, is there a rationale for those patients to switch from a MedSup plan into an MA plan? And then similarly, in a -- for a dual-eligible population, which is 40% of your Medicare book, is there an incentive for those patients to move? And why wouldn't either of those classes see the benefit of an MA plan?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [16]

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Yes. The first premise that you discussed, which is access to the patient, is worth exploring because you might be more talented than us, but when you talk to people about their insurance, it's not usually like Netflix or anything. They don't want to keep watching the next episode. People usually start to glaze over a bit, and say, when you talk about deductibles, when you talk about coinsurance, when you talk about those kind of things, it is not normal vernacular for most of these folks.

And they've been on Medicare for some time, and it works for them. And so then you got to start to explain that maybe it's more restrictive, maybe they can't see their doctor, but it's got other benefits. And you get into it. And then you can see that some people just tune out. And so the question is, is it our obligation to go back at them? And the answer, I think, is no. If you're satisfied with your insurance, we just have to make sure that you know that you have a new option.

And so on all these, on the duals, sometimes that could actually have very little out of pocket. And so you might not want to switch that situation. So it is very specific to each individual. But again, the net of it is that we think we're not going to look very different than the overall population, but there is the range that we're all playing with.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [17]

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And then just last question. Is there a time period when you feel like you will know how that shift is going? Will you know during the open enrollment period in Q4? Or do you actually have to wait until January for the patient claims to actually start coming in under the new payers?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [18]

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Well, I think we're going to have to wait until January. We will have some preliminary stuff, but unlikely that we're going to want to predict how that will play out until we see it since it's the first time we're experiencing it.

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Operator [19]

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The next question will come from Pito Chickering with Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [20]

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A few ones here. On the 2020 revenue guidance, what are you guys assuming in terms of organic treatment growth and revenue per treatment? And how does the commercial reimbursement look for 2020?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [21]

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Sure. So Pito, on NAV, we've -- we're guiding to 1.5% to 2.5%. In terms of revenue per treatment, we're not going to guide to RPT anymore in the level of specificity we have in the past. That said, I think it's safe to say going forward that it will look similar to what it looked like in the recent past. The same dynamic in terms of commercial RPT, Medicare RPT and mix should play out next year the way they have in the recent few years. The one big change, obviously, is on Medicare fee-for-service reimbursement. We got that in '19 and we see that continuing forward.

So again, as we think about the -- how we want to guide, and this is consistent with what we raised at Capital Markets Day, more of a focus on margin than on any of the individual inputs. That said, if you think about the inputs of RPT and the subcomponents there as well as cost per treatment and the other things, we don't see anything particularly different next year to call out than what we've seen in the recent past.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [22]

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Great. And then on the 2020 margin guidance, let me ask this in a different way. If we exclude calcimimetics for 2019, the operating income margin is about 12.5%. If you exclude $40 million to $70 million of calcimimetics for 2020, it looks as though you're guiding to about 50 basis point improvement in 2020 versus 2019. First quarter '19 was a very easy comp. So if you exclude calcimimetics for 2019 and 2020 and easy comp of first quarter '19, how should we think about core operating income margin in 2020 versus 2019?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [23]

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Okay. Pito, you lost me there on your math, but I'll tell you the way I think about my math. And I apologize if this doesn't tick and tie to what you asked, but you can follow-up with Jim afterwards. So for adjusted normalized number, so this excludes calcimimetics, we came in just north of 14% in 2019. We expect that -- and again, we're not guiding to OI. So again, we said that at Capital Markets Day, we're sticking with that.

That said, either through a top-down analysis using revenue and our margin guidance or bottoms-up through EPS, you can all do the math and come up with a range. So I'm going to give some high-level thoughts relative to what's the -- probably the middle of the range of what you should be thinking about, which should show you a little bit of margin compression in 2020 versus 2019, although still very much in that 13% to 14% range we talked about at Capital Markets Day.

And if I had to point out what is driving that, you've got a little bit of AB 290 in there. You've got the continued pressure on labor costs associated with the strong environment we're in. And we are also looking at making some investments in the form of operating cost, investing in our future around things like home, things like integrated kidney care, things like data and analytics. So if you put those -- all those things together, you'd come up with a little bit of margin pressure in 2020 over 2019 but still very much in the range of what we talked about at Capital Markets. Is that helpful?

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [24]

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Yes, very much so, which is actually sort of the last question. At the Analyst Day, you talked about capital growth with CapEx coming down to $650 million in 2022 and you sort of -- you just mentioned sort of kidney start home-based programs. Can you quantify how many of your centers have separate home treatment options today and how many are freestanding home centers as well?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [25]

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I don't know the answer to that.

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Jim Gustafson, DaVita Inc. - VP of IR [26]

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We'll follow up on it.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [27]

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We can follow up with you on that, Pito.

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Operator [28]

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The next question will come from Andrew Mok with Barclays.

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [29]

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I just wanted to follow up on the 2020 guidance components given all the moving parts. You raised EPS guidance by $0.50. It sounds like that increase is largely accounted for by the benefit from calcimimetics and the reversal of AB 290. So is it fair to say that the underlying assumptions on share repurchase remain the same? Given the $2.4 billion of share repurchase you did in 2019 combined with the nice run in the stock price the last few months, how should we think about the size and cadence of share repurchase in 2020?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [30]

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Sure. So the fundamentals of our share repurchase philosophy haven't changed in terms of focusing on intrinsic value and ensuring we're not buying at what we believe -- above what we believe intrinsic value is, also with the general expectation to stay most of the time, although not all of the time, within our leverage guidance of 3 to 3.5x.

I will take a second here to note that you'll see the leverage number in the press release is around 3.1, which would bring it in at the low end of our range. If you think about that, excluding calcimimetics, which I think is a better way to think about it, it would put it at the higher end of our range.

But with all that said, our philosophy on buybacks has not changed. I think what has changed since we spoke to you in November is the stock is up from the high 50s, low 60s to now in the 80s. And that does impact our share buyback thinking really in 2 fundamental ways. One is that the dollars we would apply to share buybacks will just buy that many fewer shares because the stock price is up. And second, as we think about intrinsic value and comparing that to where the stock is, where the stock is will fundamentally impact how we think about buybacks.

So we're not going to give you any foresight in what we plan to do. We've always shied away from that. But I wanted to give you kind of an update there on how we're thinking about things.

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [31]

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Great. I appreciate the color. And then second question on the home dialysis front. The mandatory model from the executive order was supposed to go into effect last month, and now that's delayed. Are you hearing anything out of D.C. on why that model got delayed? And does the temporary or even permanent delay of the model impact your strategy to increase home penetration?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [32]

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No. In general, I think the executive order had a lot in it. And they asked for comments, and the community was very united on its views. And so we are glad that the administration has taken its time because we want a good outcome rather than meeting a deadline.

And no to the other question, which is while policy, of course, impacts at the end of the day, the patient and the physician pick the modality. And that's what's driving the movement to home, people picking it or not picking it as opposed to any policy changes at this juncture.

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Operator [33]

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The next question will come from Steve Tanal with Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Just wanted to go back to the 2021 rule change. I guess where I'm struggling with the idea that penetration of ESRD patients should reach the overall market is just this notion that today, I mean, penetration of ESRD patients is already 25% for the market at large despite the fact that they can't freely enroll in the plan. So wouldn't that tell us that this patient panel probably prefers MA and that penetration could exceed 35% over time? And I guess I know we're still anchoring to that, but it looks like CMS last week with the changes in the advanced notice for MA rates, their forecast up to 33 and 21 and then going to 42 -- 41 by 2024 then 42 thereafter. So obviously, a much more optimistic outlook than you guys have. So any thoughts on those pieces there?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [35]

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Yes. Steve, I think that all of the opinions are quite reasonable, and we don't proclaim to be right. We are all staring at the same data as to economics deductibles, out-of-pocket max, sort of coordination of care networks, narrow networks or broader network. And so when we put all the variables in place, we just think that in general, we think that it will take a little bit longer for people to settle in to the choice than others that think that it will be, what I'd call, a very efficient and effective market. And we, of course, could be wrong.

And so there is that range that is, let's call it, the low -- the base case and the high case. And we don't have any additional insights that you or CMS doesn't. There's no detailed information that we're relying on.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Helpful. Okay. And then I just heard you correctly, Joel, in terms of making sure your patients are aware of their options. I imagine that applies to all states regardless of whether there's a guaranteed issue for MedSup or not. Is that correct?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [37]

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Yes.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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Okay. And then I guess I wanted to also ask about another part of that proposed rule to the extent you guys have had the time to go through all this, but the network adequacy proposals, there's a few things in there. I won't go through all of them here, but some could be presumably right as maybe mitigating some of the market power in dialysis. How do you guys think about that dynamic in general? I guess I'd leave it open-ended there. I don't want to dissuade any -- or share, maybe, I guess...

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [39]

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I appreciate it, Steve. Obviously, network adequacy is critical in any disease state. When you are signing up for a product, you want to make sure that it's got coverage so that if you end up signing up and then you have ESRD, that you don't end up having some kind of restricted network. And of course, it matters whether it's in there or not. The plans have been quite vocal. And from our perspective, we want to do is, going back to our conversation earlier, is we want to change the dynamics with our payer partners so that they see what we're doing and how we're adding value so that they do want to contract with us in a way that it's a win-win.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

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Perfect. Helpful. And maybe one more on this and then I'll yield. Just going back to the treatment deltas, the MA versus fee-for-service. I guess -- I appreciate that you guys don't want to give a certain difference, but maybe you can comment on how much variability there is in that spread and what factors dictate DaVita's willingness to contract for lower versus higher spreads of the different MA plans?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [41]

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Well, I appreciate the question, Steve. But I think you probably know, it had low odds of being answered. Every plan is steering right now as to how they want to contract with us. And actually, even if I try to answer it and be helpful, the contract is very specific to each plan and their ability to take risk and our ability to take risk. And so it's very specific. So unfortunately, I can't give you more detail on that.

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Operator [42]

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The next question will come from Whit Mayo with UBS.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [43]

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Just a couple here on calcimimetics. You're guiding to $40 million to $70 million of OI this year. 50% of that is falling in the first quarter, which implies about 25% of today's run rate of $220 million in the first quarter. So I'm just curious what you're basing that on. Is that based off of ASP for the quarter today? How much visibility do you have into the first quarter contribution at this point, I guess, is what I'm asking.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [44]

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We've got pretty good visibility with the -- the ASP number came out, I think, in December, not perfect visibility, but -- so in Q1, we've got that. The trajectory of what that looks like going forward, though is where we don't have perfect visibility, and we won't know ASP for Q2 for a little bit of while now.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [45]

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Okay. So that looks like that's about a 60% sequential decline off the fourth quarter for ASP. Is that right?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [46]

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Hold on with -- we're -- there are other factors that go into that in terms of the cost decline, the changing mix between Sensipar and Parsabiv and Parsabiv cost differential. So I'm not sure you can get as clean a number as you'd like from that.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [47]

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But is it -- I mean presumably, the ASP number is available. So can you disclose what it is for the quarter?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [48]

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Yes. It's down, a little bit more than 40%.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [49]

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Okay. Okay. So some other factor would be driving your cost up to lower the OI by 60%?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [50]

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Well, there's -- there are other factors besides cost because there's a mix issue between the oral and the IV as well.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [51]

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Yes, yes, yes. Got it. Got it. Got it. Okay. That's -- I'm thinking about the remaining $50 million or -- not $50 million, but the remaining earnings. How do you -- I mean how are we -- how should we think about the progression of that earnings? Does it fall ratably throughout the year? I don't know. Just any help. I mean I know you have about as much visibility into this as we do.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [52]

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Yes. If you think about it, getting cut in half each quarter going forward, that's a reasonable algorithm to use. And then it goes to 0 by the end of the year. Again, that's not a prediction. That's just to help you all with your modeling.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [53]

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Yes. Is there a scenario where, by the time the industry sort of sees the benefit of calcimimetics 0 out, that you are still carrying some level of earnings from calcimimetics given that you've presumably been buying below the market for some time?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [54]

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Unlikely just because the numbers get so small in terms of the cost. I think the more interesting question about calcimimetics is ultimately how it gets bundled.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [55]

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Bundled, yes.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [56]

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The TDAPA stuff will play out relatively quickly.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [57]

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Okay. Just a couple of other quick ones here. Just back to the NAG guidance of 1.5 to 2.5, that does imply some level of deceleration. Just, Joel, maybe any factors influencing your decision to bring the range down?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [58]

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Let me grab that. This is Javier. We continue to look at the macro ranges, and we just think that, that is the right place to land. We are continuing to invest in our admissions and our IT and all our operations to simplify patient placement. But at the end of the day, what we're focusing is ensuring that we have the discipline in capital so that we have profitable growth. And so we're not going to chase volume. It's just not the right thing for us. And so we're comfortable with that range of 1.5 to 2.5.

And just as an FYI, if my memory has me right, that is not a change from Capital Markets. We had it at 1.5 to 2.5. But I could be wrong, so let's check that.

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Operator [59]

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And the next question comes from Gary Taylor with JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [60]

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Just a couple of questions left for me. The first, just going back to the question about the ETC, the mandatory demonstration that's been delayed. Do you have any visibility on when that would start? Are you incurring any costs to prepare for it? And I presume since that model had some dialysis center reimbursement cuts, which you could potentially earn back since this is delayed, any potential financial impact is not contemplated in the 2020 guidance?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [61]

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The short answer is we do not have any more information than any of you. We were given an opportunity, just like all providers, to give our opinions and insights, and we did. And they're processing that, and we have not heard back. We are not incurring any costs right now associated with it, and it was not embedded in our guidance. So right now, you're even-steven, if you will. There's no change.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [62]

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My last one to Joel. I just wondered if you would perhaps just review and clarify for us either on an EPS basis or a dollar basis what actually is in 2020 for advocacy costs because I know in the third quarter, you bumped that up $0.50 or, call it, $87 million pretax. But that, I think, was on top of what you view as your recurring sort of normal advocacy. But then with the AB 290 delay, maybe some of that costs came back in your direction. So maybe just some help on when we think about the 2020 guide, how much above sort of your -- what you'd call your normal advocacy spend is built into 2020.

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [63]

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Sure. So nothing's really changed in that, Gary. There hasn't been any interplay between 2020 ballot initiative spend and AB 290. They're pretty independent. So the $0.50 per share is the right number, and that's over and above the $30 million baseline that we plan to spend year in, year out. The one correction I would make to your numbers is this ballot initiative cost is not tax deductible. So your $87 million pretax is overstated because I -- my guess is you got to that calculation assuming this was tax deductible.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [64]

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Yes, I recall you told us that, somewhere like $60 million, $65 million range, probably. So...

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [65]

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We're sticking with $0.50 a share. So...

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Operator [66]

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The next question is from Justin Lake with Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [67]

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Just figured I'd run through what's left of my question list here, if that's all right with you guys. So first, on the cash available for deployment at year-end. I think if recollection is correct, you guys typically want to run around $500 million at the parent at quarter end. So you -- is it fair to think about you guys having another $500 million, give or take?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [68]

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I think it's...

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [69]

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Of deployable cash kind of at year-end. Is that right?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [70]

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Yes, that's about right. $500 million is typically what we want to have in the system. So yes, the $600 million is the number above that.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [71]

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Okay. That's helpful. And then, Joel, you spent time talking about the intrinsic value kind of coming into repo. And given that you did a tremendous amount of repo at a really attractive price for the benefit of shareholders, now that the stock is in the 80s, it looks like you bought a little bit less back at those levels. Is there anything we should read into your view of the intrinsic value here at the current price and how you expect to buy back stock? Could you give us a kind of at-the-moment update?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [72]

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Yes. We've never really been willing to talk about what our views of intrinsic value are at any moment in time, and I don't expect to deviate from that here. I think the one thing I would point out is intrinsic value is a moving target. It's not something that stays static, and it's impacted by our results, and it can be impacted by our buybacks and everything else. So I think what our views of intrinsic value were 6 months ago aren't necessarily the same as our views of intrinsic value today.

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [73]

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One dynamic, Justin, that is rarely talked about publicly also is that we have big blackout periods. And then you have plans and you have restrictions and whatnot. And so what you want to do is not look at 1 quarter or 2 quarters but overall, what is our track record. And I think you see our track record, over time, is quite fluid, consistent with what Joel said.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [74]

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That absolutely makes sense. And then just quickly on your commercial mix. Joel, you said it was down 20 basis points year-over-year but not really a material impact on revenue per treatment. Can you just give us some more color on that given how key that metric is?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [75]

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Yes. Look, not every commercial payer is created equal. And if the mix comes from payers with lower rates, it has much less impact on our RPT than a payer who is at an average rate.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [76]

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And so would you say this is -- instead of it being just kind of normal aging of the population type of thing, did you proactively kind of walk away from some contracts that were lower priced? Or was that just kind of the way things fell?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [77]

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Yes. I would say that what Joel started off with an early question still holds, which is there's no new dynamic and sort of the ecosystem/negotiation is relatively stable. There was no big decision one way or another, and the world played out the way it did.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [78]

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Okay. Just a few couple others here. One, Joel, just to make sure we understand, you're not giving OI guidance, but you -- back to Pito's question on margins, core margins ex kind of moving parts are down a little bit year-over-year. Revenues up a little bit. So kind of core OI, [call it], ex calcimimetics changes, things like that, are -- is effectively flat year-over-year and within your guidance. Is that a reasonable way to think about it?

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [79]

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I'm reluctant to get drawn into the OI guidance question because we're not guiding on OI. That said, I think, again, you can look at the ranges top down or bottoms up. I would say it's fair to say that at the middle of the ranges, you should expect some OI growth year-over-year.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [80]

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At core, like ex moving parts...

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Joel Ackerman, DaVita Inc. - CFO & Treasurer [81]

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But with margin compression, which would say it's not going to grow at the rate of revenue. And that's just -- yes, that's core, excluding calcimimetics and other noise.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [82]

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Got it. And then maybe a quick commentary. I think the industry was going to run its own ballot initiative in California and then decided to back off that. Is there some reason why you decided to back off? Or do I have that wrong?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [83]

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No, you have it right. And I think the right way to think about it, Justin, is very early on, you have to explore all your options. And so there's some filing restrictions, et cetera. So we were exploring our option, making sure that we had everything at our disposal. After evaluating it, we did not think that, that was something that we should pursue, that it's not in the best interest of our strategy and that it's cleaner to go right after it literally straight at it as opposed to doing a countermeasure.

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Operator [84]

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The next question will come from Maggie Jiang with Bank of China, New York branch.

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Maggie Jiang, Bank of China New York Branch - SVP [85]

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My question here is, what is your priority in terms of the international expansion? I see that there are about 241 centers in the international as of 2018. I'm not sure if that number goes up in 2019.

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [86]

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Sure. So our priorities for international are similar to our priorities in the U.S., which is capital-efficient growth. We continue to see it as a growth business. We've continued to deploy capital there in the markets that we see as having the best opportunities. And those are opportunities where we can either acquire things at attractive rates or build de novos at attractive rates and where we have an opportunity to add value. So growth in '19 was relatively in line with our expectations. We see 2020 continuing along that path.

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Maggie Jiang, Bank of China New York Branch - SVP [87]

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Okay. And in terms of the long-term goal for the international business, do you expect the -- just because different regions will have different type of reimbursement system, affordability and customers, clientele, so do you -- what do you expect in international profitability versus your core in U.S.?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [88]

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I think that will vary very much country by country. As you noted, some countries have better reimbursement, others less so. So I think it will be a bit of a mix. And where it winds up relative to the U.S. will depend a lot on the different mix in the different countries and where we choose to prioritize our investments. So it's hard to predict now what the ultimate margin will be relative to the U.S. margin.

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Maggie Jiang, Bank of China New York Branch - SVP [89]

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Okay. And it seems that the revenue coming from the international is roughly about 4.5% higher, but the growth, if I just purely look at Q4 2018 versus Q4 2019, the growth from the international revenue is 6.45%. So that seems to be a brighter spot than the aggregate revenue growth around 2.7%. So do you think that you'll continue to approach international, particularly in China? However, on the other hand, we do see profit -- net operating loss from international.

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [90]

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So yes, I do think we're going to continue to invest in international. Whether it grows faster than the U.S., we're not giving specific guidance on that, although I think looking at the past is a reasonable guide to the future there. So yes.

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Maggie Jiang, Bank of China New York Branch - SVP [91]

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I see. And then in terms of your Asia -- footprint in Asia, I see there are a few branches, a few centers in Taiwan and China. And you're also working with your APAC JV. Can you just give me a sense in terms of what's your business model and how do you approach China -- Greater China?

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [92]

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So we generally don't get into too much detail on any individual countries, so I'm going to pass on that one.

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Operator [93]

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Speakers, there are no questions in queue at this time.

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Javier J. Rodriguez, DaVita Inc. - CEO & Director [94]

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Well, I want to thank you all for investing the time. We look forward to talking to you again, and we're going to do our hardest to deliver on all that we committed. Thank you and talk again soon.

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Operator [95]

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And that concludes today's conference. Thank you for your participation. You may now disconnect.