Jim Gustafson - Vice President-Investor Relations Kent J. Thiry - Chairman & Chief Executive Officer James K. Hilger - Interim CFO and Chief Accounting Officer.

Steve C. Baxter - Bank of America Merrill Lynch Gary Lieberman - Wells Fargo Securities LLC Margaret M. Kaczor - William Blair & Co. LLC Kevin K. Ellich - Piper Jaffray & Co (Broker) Lisa Bedell Clive - Sanford C. Bernstein Ltd..

Welcome and thank you for joining DaVita's Second Quarter Earnings Conference Call. Now, I'll turn the call over to your host, Mr. Jim Gustafson. Thank you. You may now begin..

Thank you, Vince, and welcome everyone to our second 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 Kent Thiry, our CEO; Jim Hilger, our Interim CFO and Chief Accounting Officer; and LeAnne Zumwalt, Group Vice President.

I'd like to start with our forward-looking disclosure statements. 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 SEC filings, included in our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. 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 for any reason.

Additionally, we'd like to remind you that during this call, we will disclose some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website.

I will now turn the call over to Kent Thiry, our Chief Executive Officer..

Thank you, Jim. Solid results in Q4 for both Kidney Care and HCP. We'll start by discussing our clinical outcomes first, as we always do. 176,000 dialysis patients in America, about 35% of the patients in America; 98% with a Kt/V of 1.2 or greater; 73% of patients with fistulas placed for access.

And we'd like to talk a little bit about our VillageHealth metrics, where we're at the cutting-edge of integrated care for these kidney care patients, with numbers like the hospitalization rate 26% better than the U.S. ESRD average; our readmission rate 31% better than the U.S.

ESRD average; and as low as 5% catheter rates; and our special needs plans, less than half are already industry-leading companywide rate and 70% better than the U.S. ESRD average.

These are wonderfully exciting numbers of incredible clinical and economic benefits for society, cannot be scaled until we have a new government program, and we are hopeful in that regard, and then continue to work collaboratively with the government to try to move us there.

On the clinical side with respect to healthcare patients and our 830,000 patients there for whom we provide true population health management care individual-by-individual, but also across the entire population, if you look at 2014 HEDIS clinical metrics, California, our largest legacy market, we once again exceeded the Medicare fee-for-service benchmark on all metrics, and we were four or five star across all MA patients on eight of the nine HEDIS metrics that are directly applicable to providers.

So the clinical outcomes for both Kidney Care and HealthCare Partners compared very favorably to national averages, which means healthier patients, higher patient satisfaction, and savings to taxpayers. But now back to those solid results. In Kidney Care, that translated into $409 million NOI, and HealthCare Partners $72 million.

Jim Hilger will elaborate on the Kidney Care numbers, but I'll just provide a couple of highlights. The biggest good news is that our commercial mix and our rates, both went up a bit. The biggest bad news is that our NAG, our non-acquired growth, went down.

The commercial mix number is particularly significant in that it shows that up to this point at least, exchanges are not hurting us as we continue to hold our commercial prices constant for this commercial segment in our mind.

And one reason we're able to do that is because more and more payers are paying more and more attention to the total value proposition, which is to say our ability to reduce hospital rates, to reduce cost of care in other areas continues to grow as a factor in determining the prices for the core treatment itself.

Now on to HealthCare Partners, solid performance. But there were some one-time favorable and unfavorable items, so you shouldn't actually take the $72 million as the normalized number. Better to think of it as normalized at about $65 million, which is in line with our annual guidance after some of those one-time puts and takes.

On the business development front in HealthCare Partners, we are getting better. We have actually added full-time folks in the last few months, the first time since we did the deal. We are not satisfied yet, but we're getting to be pretty darn competitive.

We're in some high potential conversations, and our status as the leading independent medical group in America is one that puts us in incredibly good position for some of the high-quality conversations we're having.

Separate from thinking about potential transactions, we are sitting at an MA lives numbers that is 8.3% higher than the same time last year. So very nice growth stream underneath those numbers.

Moving on to guidance for the balance of 2015 or for the total of 2015 depending on how you want to look at it, our enterprise guidance is now $1.825 billion to $1.925 billion. What this means is we raised the bottom end of Kidney Care guidance by $25 million.

It's consisting of Kidney Care being $1.6 billion to $1.65 billion and HCP being $225 million to $275 million.

If I were to step back for a moment and just comment on our outlook, we have two strong business positions, both enjoying some steady unit growth, each with reasonably stable economics, although there is always some to-ing and fro-ing, and we are investing significantly for our future in improving our value proposition in ways that others will matter.

And then specifically with request to HealthCare Partners, we're continuing to make very good progress in creating a highly differentiated physician experience, a highly differentiated patient experience, and more of a growth capability outside of the historical markets. I'll now turn it over to Jim Hilger..

number one, higher number of treatment days in the quarter; number two, improved revenue per treatment due to improved commercial mix and commercial rates; and three, lower payroll taxes.

These positive factors were partially offset by higher dialysis pharmaceutical expenses, driven by higher average unit costs in the quarter and increased losses in our strategic initiatives in the international business. Our non-acquired dialysis treatment growth was 3.7% normalized in the quarter. This was the lowest in quite some time.

While there was no single cause for this decline in our NAG, some of the reasons include higher mistreatments during the flu season earlier in the year and efforts to improve the profitability of our acute business.

This has put – we have been putting a tighter screen on our new and existing relationships, and in some cases, exiting some hospital relationships where rates were too low to be sustainable.

As an example, we recently lost a hospital chain acute service contract to a competitor, because we were not willing to accept the low rates the hospitals offered. These efforts have improved acute revenue per treatment and OI, but have had an adverse impact on our growth.

Now moving to G&A, G&A in our dialysis business was down from Q1 by about $2 per treatment, driven by seasonal declines in payroll taxes and the more treatment days in the quarter, and also higher-levels of legal and consulting spend that occurred in the first quarter.

Please note that due to this higher legal spend in the first half of the year, we anticipate dialysis G&A per treatment to be slightly above last year's levels. International losses were $15 million in the quarter, which includes an asset impairment of $4 million.

Including this non-cash charge, we now expect international losses in 2015 to be close to $50 million. Moving now to the overall enterprise, our debt expense was $104 million in the second quarter, which is a good run rate for debt expense in future quarters. Our income attributable to non-controlling interests was $37 million.

Next, the effective tax rate attributable to DaVita HealthCare Partners in the second quarter was 39.2%, after excluding the $8 million tax adjustment related to the finalization of the Vainer settlement. We expect the full-year tax rate for 2015 to be in the range of 39% to 40%, again excluding the impact of the Vainer settlement.

And during the quarter, we repurchased $14 million in stock, but none subsequent to our last earnings announcement. Turning to cash flow, we continue to generate strong cash flows. Our operating cash flow was $335 million in the second quarter, excluding the after-tax impact of payments made in connection with the Vainer settlement.

And we now expect our 2015 operating cash flow to be between $1.6 billion and $1.75 billion, again excluding the Vainer settlement. As always, this guidance range captures the majority of probabilistic outcomes, but we could be above or below the range. And with that, operator, let's go ahead and open it up for Q&A..

Thank you. We will now begin the question-and-answer session. Our first question comes from Mr. Kevin Fischbeck. Your line is now open..

Hi, yes, this is Steve Baxter filling in for Kevin. I wanted to ask about the proposed managed care consolidation. I wanted to – the plans have largely talked about this enabling them to drive a shift towards value-based payment models.

Do you think this could help move markets that are traditionally more fee-for-service kind of down the value chain? And I guess, how do you think about this as impacting HCP down the line?.

Well, we hope what they're saying is true. But directionally, we think this kind of additional consolidation of market share is an unambiguous negative. Hopefully for us, because of where we sit with respect to our value proposition on both sides of the house, we can make some lemons out of – make some lemonade out of the lemon.

But we worry a lot about what that combination or those combinations can mean for network adequacy and access for consumers as well as rates for consumers. So we have a lot of concern and we'll do the best we can. And hopefully there will be some opportunities created, particularly for us..

Okay. That makes sense.

I definitely see how you could perceive it as a negative on the dialysis side, but do you see it that way for HCP as well?.

Absolutely. In general, that kind of increased consolidation just leads to more market pricing power and leveraging rate power, which often then if successful doesn't flow through to the consumer, because of the market pricing power.

So we hope that it will create market-specific opportunities for us, because we think some of those folks do want to move to a more value-based world. But the dominant, the dominant directional effect is one that is scary both from the rate to consumer side and the leverage over provider side..

Okay. Thanks..

Thank you. Our next question comes from Mr. Gary Lieberman. Your line is open..

Good afternoon, and thanks for taking the question. You'd mentioned that I guess the pharmaceutical costs being up in the quarter were one reason that impacted profitability.

I guess going back to the Investor Day, you had made some fairly vocal comments in terms of I guess what your thoughts were in terms of pricing for Epogen as new competition came to the market. Fresenius discussed moving a number of patients to Mircera.

And so I just wanted to get your updated thoughts on where you thought the pricing was headed and if you had any conversations that maybe you could share with us?.

There haven't been any significant developments since the last call, Gary. We still have our hopes for how competitive market forces will unfold in that sphere. But there's been nothing noteworthy that's actually happened yet nor did we expect anything noteworthy to happen within this timeframe.

But I don't know if Jim or LeAnne would want to add anything..

No, I think that's pretty much it, Gary..

Okay.

So I guess the assumption that we should be working under would be that you would need to sort of see perhaps Hospira's drug come to market before there is enough of a dynamic in the market to bring down pricing?.

Well certainly, I think my response would just be pretty generic. The more people that come to market, the better, and we'll do everything we can to encourage it as will other people. And at the same time, of course, we have a lot of respect for the clinical efficacy of what we use right now. But certainly the more the merrier, the sooner the better..

Okay.

And then to follow up on the comments about the lost hospital business and I guess some competition on price, can you give us any more color on that? Was that a large national player that competed on price or a local provider?.

On the spectrum, it was a lot closer to the large size than the small size. And it was a significant account and it went for a price that we would not agree to, and it wasn't that difficult a decision.

So it's just important that shareholders know that there is some of those pressures out there, and so you can worry about them at the same time that we are..

Should we be more worried about them? I mean do you see that increasing or do you sort of see this as an aberration?.

Don't know..

Okay, all right. Thanks very much..

All right. Thanks, Garry..

Thank you. Our next question comes from Margaret Kaczor, your line is open..

Hi, good afternoon, everyone. Couple of questions from me.

First, as we think about the non-acquired dialysis patient growth as we go over the next several quarters, is that 3.7% treatment growth similar to the patient growth? And then in terms of the lower growth, how can we attribute it between two buckets you had mentioned, the higher mistreatments versus the lower increase in the acute business?.

Let me handle the second one first. We're not breaking it out, because it's just a single quarter and there is a fair amount of noise in the data, and so both factors are material. And there's some other stuff that play as well, only we didn't want to break it into four pieces, five pieces, six pieces.

And so I think for the quarter, at least we'll just keep it at letting you know what a couple of the bigger drivers were, and that's as much as we can say now, and in each case, that effect may continue. As to the outlook going forward, we hope we can do better than how we did this quarter, but right now we can't guarantee that..

Okay. And then, you guys had mentioned that the commercial mix had increased.

As we look at your guidance, what do you include in terms of the commercial mix? Are you expecting that to continue to increase as we go on throughout the year or stay pretty stable with where you are today?.

Unfortunately on that one, it's another answer, we don't know. Certainly there has been a nice trend now for a number of months, that's comforting. But we watch each and every month, their earliest minute we can to see what happened to that number. And at this point, we're not willing to predict that it's going to keep going up, but we sure hope so..

Okay.

But you're not assuming that it continues to go up in the guidance that you've got it out right now, your operating income?.

I think in this case, our operating income guidance, we had never specified exactly what we were presuming on commercial mix. And we're not changing whatever we had in there. So there is no change to our guidance driven by what's happened with mix.

And then probably the right way to think about it is the movements we've had on mix to be either consistent with whatever forecast we had or move this up within the range of guidance that we have..

Okay. And I hate to sneak one more in, but if I could, Kent now that you've got HCP, and then you guys have kind of gotten your hands wet in different models. You're increasing the biz dev group, expanding the business.

What have you guys learned in terms of what deals are more or less accretive versus kind of the initial expectations when you had acquired HCP? And is there a model in which you've narrowed in on that's maybe more beneficial for you guys to pursue more aggressively? Thank you..

A very fair question. I think what we like most is investing in growth, in our legacy markets. And that's consistent with what we said we would like a couple of years ago and we continue to like that, that's through organic growth and tuck-in acquisitions and things like that. Second, we really like buying quality medical groups.

We're partnering in some serious capacity with major medical groups, like we did in Colorado Springs, and as we are in a few conversations as we speak. So that's probably our second favorite option for growth. And then, third and finally, we still have a lot of excitement around our payer joint venture in Philadelphia with IBC.

And for those in general, and for our health system partnerships as we have with Centura in Colorado, but we continue to emphasize that, that is R&D, these are new types of arrangements and will take some time to emerge. So we're positive on them.

But at this point, if we had to rank the kind of risk-adjusted, timing-adjusted attractiveness of different segments of growth, we'd put good old legacy markets and partnering with major medical groups at the top..

Thank you..

Thank you. Our next question comes from Kevin Ellich. Your line is open..

Hey, Kent, thanks for taking the question. I jumped on late, so I apologize if I missed some of this. I just wanted to talk ESCOs, If you've covered it already, I can go back and check the transcript. But what's your thought – we've heard ESCOs being delayed.

Is that something that you guys have considered? And I guess, what's your thoughts going forward with that program?.

On ESCOs, a couple of things. Number one, they haven't started yet. Number two, we don't know when they will start. Number three, we're working very collaboratively with CMS to get the design buttoned up. And the good news is, we and a lot of other people in the community and a growing number of people in CMS are quite positive.

But to go any further than that would just be speculating and not a good use of your time..

Okay. Thank you..

Thank you. At this time, we don't have any further questions on queue..

I will go ahead and add one other comment, operator. I'm sorry, I didn't catch your name at the top of the call. But I may have been a little bit off in one of my comments a moment ago.

We're not quite expansive enough that we had provided guidance previously at our total treatment growth would be in the 4.5% to 6% range, and we're still comfortable with that expectation.

Operator, are there other questions?.

Yes sir. We have another question from Mr. Gary Lieberman. Your line is open..

Thanks for taking the follow-up. Didn't want you guys to get off that easy.

Just wanted to maybe go back to some of your comments on HCP and the growth and kind of what you're seeing and what your expectations are for additional deals you might do this year?.

And I'm sorry, I may have been talking over you at the beginning telling you that we're going to get revenge for your provoking the question period, but prolonging it..

I look forward to that..

But on HCP, we were in some high-potential promising conversations. Having said that, none of them are going to close quickly. If we succeed, it will be a very exciting beginning of our next chapter. But it's not going to happen in the next couple of months. And so I think there's nothing dramatic we can say about what will close or not close this year.

All I can say is we are very substantively engaged with some groups that we really like..

Okay. That's helpful..

Thank you. Our next question comes from Lisa Clive. Your line is open..

Hi. Just a question on your VillageHealth program. You started your prepared remarks with some interesting statistics on that. Could you remind us how many patients you have within VillageHealth? And I'm assuming the vast majority or almost all of them are Medicare Advantage.

Could you give us some idea of what proportion of your total Medicare Advantage patient population are currently going through VillageHealth?.

The definition of VillageHealth that we're using now is a broad one, which is to say the number of patients where there's some form of value-based payment. And so using that broad definition, which in its most extreme form is global capitation, and we have a nice chunk of that both in the Kidney Care side and on the HealthCare Partners side.

And then down to having some kind of performance bonuses, shared savings arrangements with individual payers or health systems. And so that total number of patients where we're in some form of value-based payment is about 20,000. So it's significantly higher than what it was a few years ago..

And is that – yeah, because I remember, I mean the last time I looked at the numbers, I thought it was more like 9,000.

Is that largely because you've included those categories where it's not a sort of full capitation model and so could we assume that half of that 20,000, they're sort of less than full capitation?.

Well, more than half. The, I don't know if we've disclosed the amount of globally capitated ESRD patients we have, but it's probably in the neighborhood of 1,800 or so, which is probably significantly more than anyone else, but that gives you a sense of the mix..

Okay. That's very helpful. Thanks..

Thank you..

Thank you, Lisa..

At this time we don't have any questions on the queue..

I'm sorry operator, what did you say?.

At this time, we don't have any further questions on queue, sir..

We'll hold for about 10 seconds or so just to give folks a chance. This is perhaps the most uneventful quarterly call we've had in 16 years. And so we will work hard to hopefully make the next one just as uneventful and hopefully positive for everyone involved. Thank you very much for your interest in DaVita.

Operator, are there any other ones?.

No questions on queue, sir..

Okay. Thank you all very much..

Thank you. So that concludes today's conference call. Thank you all for participating. You may now disconnect..