Jim Gustafson - Vice President-Investor Relations Kent J. Thiry - Chairman & Chief Executive Officer James K. Hilger - Interim CFO and Chief Accounting Officer LeAnne M. Zumwalt - Group Vice President-Purchasing and Public Affairs.

Kevin K. Ellich - Piper Jaffray & Co (Broker) Matthew Richard Borsch - Goldman Sachs & Co. Kevin Mark Fischbeck - Bank of America Merrill Lynch Gary Lieberman - Wells Fargo Securities LLC Margaret M. Kaczor - William Blair & Co. LLC Gary P. Taylor - JPMorgan Securities LLC.

Welcome and thank you for standing by. At this time all participants are in a listen-only mode until the question-and-answer session. And now, I will turn the call over to Mr. Jim Gustafson. Sir, you may begin..

Thank you, Cindy, and welcome everyone to the DaVita HealthCare Partners' Third Quarter Earnings 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'll start with our forward-looking disclosure statement. 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, including 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 discuss 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..

point number one, in the quarter, we did significant capital deployment with substantial acquisitions in both U.S.

Kidney care and HealthCare Partners, and we also did significant share repurchases as our earnings press release reflected; The second point is, we still have a healthy cash balance and continue to generate strong cash flows; and the third and final point is that we look forward continuing to deploy that cash over the next several quarters in the same way that we deployed that capital in this past quarter, evaluating the relative opportunities on an ongoing basis.

Now, I hand it over to Jim Hilger, our Chief Financial Officer, who will walk through some more details and some of the numbers..

Q4 is typically the weakest OI quarter of the year for HCP, and dialysis G&A tends to increase in the fourth quarter. Both of these are factored into our full 2015 operating income guidance. Now, turning to cash flow, we continue to generate strong cash flows. Operating cash flow was $679 million in the quarter.

We now expect 2015 operating cash flow to be between $1.675 billion and $1.775 billion. This range excludes the approximately $300 million after-tax impact of the Vainer settlement.

Please note that the strong cash flows in 2015 are borrowing a bit from the 2016 operating cash flows due to the timing of cash tax payments and other working capital items. As always, this guidance range captures a majority of probabilistic outcomes, but we could be above or below this range.

And with that, operator, let's go ahead and open it up for Q&A.

Operator?.

Yes. I'm sorry. I was on mute. Thank you. We will now begin the question-and-answer session. Our first question is coming from Mr. Kevin Ellich. You may begin..

Hey. Thanks for taking my questions. Hey Kent, just wanted to start off, could you talk a little bit about – you named a bunch of headwinds? And also, the $22 million of risk sharing settlement for HCP.

Just wondering if you'd give us a bit more color on that, how we should think about that if that is (0:15:35) kind of a one-time item?.

Okay.

When you – you're referring to the $22 million positive pickup?.

Yes. That's right..

Yeah.

Jim, why don't you go ahead and cover that?.

Yeah, Kevin that amount is – did occur – let me start over. That amount covers multiple periods, not just all in this quarter and it was out of trend. That's why we call it out. I wouldn't expect the same level of impact in future periods..

It was a positive development in large part, after a whole lot of back and forth between us and their payer, where the payer agreed that we actually deserved additional revenues and settled up in one fell swoop..

Great. And then, I know you guys have the non-acquired treatment growth has been a little bit lower and you called out a number of things, Kent. How long do you think this will persist and when do you think we'll see normalized growth kind of back in the 4% to 4.5% range? Thanks..

Yeah. It's the right question, Kevin, and I'm unfortunately going to disappoint you in the answer, which is, it's not clear. We know, as we've continued to prune our hospital portfolio, that we'll put that behind us and then the year-over-year comparisons will start to be different than the way they look right now.

But the certification and regulatory delays are very hard to predict and particularly in places like California where we have a lot of centers and a lot of centers waiting to be built and/or certified and/or occupied, where we're really getting hurt.

And if we were more adept in this area in terms of predicting, we would have told you ahead of time that it was going to happen, and clearly, we didn't tell you ahead of time. And then on the mortality front, we've done so well over the last four years, five years, six years in a row, and this plateauing was not something we expected.

And so, we, at the same time or in the same way, are not good at saying what's going to happen over the next year to that trajectory.

So in two out of the three that I mentioned and then there's a few other drivers that just aren't worth going into, but as you can see, in two out of the three that I did mention, we just don't have the ability to predict, unfortunately..

Great. Thank you..

All right. Thanks a lot. Next question please, operator..

Yes. Our next question is coming from Mr. Matt Borsch. Your line is open..

Yeah. Just directionally, it seems that you would still be pointing to the Kidney Care side having positive operating income growth for 2016.

Can you comment on that?.

We actually are not commenting on that and we only wanted to comment on HCP because we felt there might be a growing gap in the perception what was likely to happen because you couldn't have insight into how aggressive we intend to be in terms of infrastructure investments and next-generation investment, reflecting a real bullishness on how differentiated we could be a few years downstream.

And so because of that, we said, gee, there is no reason to wait because we know we're going to do it. It's not dependent on any intervening development. And we know we're going to have to do a lot of explaining and we're eager to do that explaining. But absent that, we just felt it's not appropriate to go into further quantify guidance at this time..

Let me back off if I could and just ask a high-level question. As we think about the HCP model and certainly I think there's a very compelling case that the physician-led delegated model is – has historically and will continue to outperform the hospital-centric model.

But if you look at the markets where, in essence, you're competing with the hospitals for the hearts and minds of physicians, do you think what the hospitals are doing, I'm sure it varies by system, but is it real here or in most cases, we really haven't gotten into real risk taking in a lot of these markets? It's upside-only bonuses and window dressing and bells and whistles around HCOs.

I just want to get your sense of your assessment of the hospital systems and what they're really doing on integration..

Well, let me grope around here for a minute and then we can see where you want to take it, Matt. First of all, not surprisingly, the answer differs a lot by institution, that some are far more committed, far more adept, have been working on it for far longer, allocate more talent and capital.

And those entities are doing some real stuff, real population health management, really bending the cost curve. That is a small minority of the overall pool. A lot of other folks are acquiring practices and recruiting doctors, where – with 85% of the motivation being to just secure their referral flow.

And they are not making the tough decisions and tough investments associated with actually getting very good at that. And so for us, however, in either case, we look at it with a fresh set of eyes. Some hospitals and health systems are becoming great partners to us.

And we will work with them to succeed in both population health management and fee-for-service at the same time. In other cases, we are in fact competing with hospitals as they speak to move down the path or just try to gain control of their referral flows.

So for us, whether health system is really committed and getting good at it or actually not committed is independent of our decision of who is friend or foe, and sometimes it's kind of in the middle..

Okay. No, that's great. I'll get out of the queue..

All right. You're welcome back as always..

Thank you..

Thank you. Next question is coming from Mr. Kevin Fischbeck. Your line is open..

Okay. Great. Thanks.

Can you just explain a little more what the pharmacy item was?.

It's just a case where we had built for some items and we got paid for them. And as part of our normal compliance reviews, we uncovered that. We should not have been paid for them or paid the wrong amount, I'm not going to know all the details.

And so, we went back in time, identified all those instances, and in some cases, I think going back four years, five years and maybe payments to the government.

But because we did it in one fell swoop across three different issues going back in time, it added up to a pretty significant number, and so we felt we better carve that out and let you know..

Okay. And I guess when you gave the guidance on HCP, you didn't mention there is a tailwind to deal – that you guys have been pretty active on the deal time to – you've obviously been ramping up some de novo starts. And I guess there was some thought that Arizona and New Mexico would start to look better next year.

So just wanted to see directionally, are those things not going to be contributing into next year or how do we think about that?.

Yeah. Very fair question.

And the problem with the business model is A), right now, some of these assets are expensive, because so many people would like to have them as their partner; and B), in many instances, they one – step one is actually to add expense to start building the capability and start negotiating the contracts that are going to lead to the incremental value and the incremental profit.

But it means you're adding expense before you're adding revenue with positive contribution margins, and it takes time to get some of the contracts and execute. So, while a number of those different investments we've made are right on plan, those plans are not going to contribute any significant incremental profit in 2016.

And in cases like the Everett Clinic, which has a long track record of strong operating performance, nonetheless the growth opportunity is so substantial, we are eager with them to invest, to go pursue that growth opportunity. But in the short term, that means a bunch of expense.

So, we understand that it's our responsibility to delineate this with good conceptual and analytical rigor at the Capital Markets Day. In the meantime, the net number is nothing to get excited about from a short-term profit point of view..

Okay. I guess, that makes sense.

What about the Arizona and New Mexico, I thought those were kind of on a multi-year kind of a rebuild?.

Yeah. I think our policy is not to go through every individual market on every call.

What I can tell you is that if you look at our sort of portfolio of new markets and joint ventures, some which are two-years-old, some are one-year-old, some are six-months-old, that the 2016 versus 2015 results in aggregate are going to be about the same, and that's a mix of – of some moving into profitability, some moving into bigger losses and everything in between.

But the portfolio is basically a non-story in terms of helping or hurting 2016 versus 2015..

Okay. And then I guess maybe last question. If the CMS reg was finalized, I just wondered (0:26:13) your interpretation of the provisioning there to kind of include drugs more quickly into the bundled rate.

I think there's been some hope that as EPO goes generic, there can be notably a period of time where you guys benefit from the lower cost drug for a while, it seemed like what TLS was trying to do is trying to narrow that window.

And so, I just want to understand your interpretation of that, and then also, if in fact Amgen waits a while to match, and one of the drug that's currently out there starts to get used a little bit, is that going to put you – is that a headwind potentially into 2017, I guess?.

Yeah. Let me turn that one over to LeAnne..

Yeah. Well there was a couple of questions in there. So let me adjust restate what CMS is doing. One, they have categories which they have identified for when a drug or a service would be new, and so how that would come into the bundle.

And number two, as you're specifically referencing, I think, the introduction of IV Sensipar, they have accepted the industry's recommendation that that product be outside of the bundle for a transition period, which time that they will be to able to establish the cost and clinical efficacy, et cetera of that product, and then as they suggest that that period be a minimum of two year.

After such period, both that product as well as the oral equivalent will come into the bundled payment system. They don't go through much more detail than that or a little bit more detail, but I'm sure we look forward to working with them over the next couple of years through the detail implementation.

I'm not sure if that answers your question, but if you want to be more specific, I can certainly provide a little more data..

No, that's definitely helpful. I guess the generic biosimilar, could a biosimilar EPO gets thrown into that same....

Yeah. So, in the first – in my first statement, they have identified categories where a new entrant would just come in under existing payment. So yes, the biosimilars, we would expect, would be under the bundled payment system when the FDA approval is complete..

Okay.

And they're just going to – weighted average for the use of those drugs versus the average to come up with what the new rate for that drug will be?.

Yeah. So, remember, for the ESRD payment system, there is no particular quote rate for any single component of the bundle, but it's the bundled payment system. I haven't thought through for you how non-ESRD clinics would be reimbursed for a product like that. I can give it some thought and certainly get back to you..

Sure. Okay. No, that's helpful. All right. Thank you..

Thank you. Next question is coming from Mr. Gary Lieberman. Your line is open..

Good afternoon, and thanks for taking my question. I guess the first question on the HCP expenses for the infrastructure and investments. The way you were speaking, it sounds like most of that's going to be expensed.

Is there some portion that would be capitalized or are you still trying to figure out how much of that would get capitalized versus the expense?.

Some will be capitalized, but not a big percentage..

Okay.

And so I guess excluding the sort of some of those upfront investments, you didn't say specifically, but sort of insinuated that operating income would be positive without that? Is that a fair statement?.

Well, let's see. What I did say was that because of the expected headwinds, netting against the organic growth, et cetera, that we expect OI to be down. I actually – trying to do all the math in my head, without the investments, I can't answer your question spontaneously.

But in aggregate, given the two definitive headwinds and the one potential headwind and given our current sense of organic growth, et cetera, that we expect the net to be unfortunately one that leads OI to be down 2016 versus 2015, so I realize I just restated what I said earlier, but I think I just have to leave it at that..

Okay.

And then maybe on that, the third potential headwind, is there any more detail you could throw us on that, is that a large contract, is that somewhere that you've had issues before?.

I think that would be not in our shareholders' best interest to go into any more detail on an active negotiation..

Okay.

And then maybe turning towards the Kidney Care business and just getting an update on, to the extent that that you can give it on your ESA strategy, specifically I guess the 10% of the drug that you could use non – not of EPO based under the current contract, are you doing any of that or you're thinking of doing any of that? And then also maybe comment on, it sounds like Amgen is trying to move some customers to – onto Aranesp to see if you are doing that or what your thoughts are around that?.

LeAnne, do you want to go ahead and take that please..

Can you repeat your question please, sorry?.

Sure. The – first part of it was, is sort of just an update on your ESA strategy and specifically....

Yes..

...the 10% of your contract that you're allowed to use outside of Epogen? And then the second piece of it was, any comments or thoughts or anything that you're doing regarding Amgen's apparent move to try to get someone dialysis operators to move to Aranesp as opposed to Epogen?.

Yeah. Sure. We do intend to do a pilot on the long-lasting Micera (0:32:32) agent in 2016, and certainly we do have availability with that 10% to try both a long-lasting agent as well as one other biosimilar for Epogen that would come in and we certainly will consider both options.

As for Amgen-specific actions with respect to moving the industry to Aranesp, clearly that seems in some way for them to be competing with the steroids, the long-lasting agent and making sure that they have an opportunity for the marketplace to test our product. We are not presently doing anything significant with Aranesp.

Does that answer your question?.

Yeah. I think that answers my question. And then, excuse me, really just a follow-up on that, (0:32:24) any questions – not any questions, any thoughts or comments on the FDA's letter on Retacrit..

No, just we've seen what's in the public marketplace the same issue and we wish them the best if they answer the questions with the FDA..

Okay. Great. Thanks very much..

Yeah. Thank you..

Thank you. Next question comes from Margaret Kaczor. Ma'am, your line is open..

Good afternoon. Thanks for taking the questions. So, I know you guys don't want to talk about specific kind of partnerships. But you've seen (0:34:01) you've seen (0:34:02) running at a $500 million run-rate.

And just broadly speaking, as we go out until year three, year four, and year five, what should we think of top-line growth rate as well as the profitability profile? And then just to follow up on that, as we think of other partnerships that you guys are doing, are you expecting a more similar profitability and top-line growth rate? Thanks..

Yeah, we are not in the practice of giving that kind of market-by-market guidance. And even if we were, we would hesitate because there is so much uncertainty in exactly how it will unfold.

And we, as you know, ramped up from nothing to $500 million, imputed top line in a very short time, and as (0:35:00) going in the markets to the range of outcome over the next year or two is quite wide. And so, we're excited about it and we have a high-quality partnership with the big-positioned IPA and with IVC.

But to go any further would just not be prudent. There's just two wide a range of outcomes..

Okay. Great. And in terms of kind of the NAG growth, I know you touched on the impact of acute care contracts and maybe those patients coming in.

But can you give us any kind of clarity in terms of what the chronic non-acquired treatment growth was in the quarter?.

I'll have to turn to my partner here, I don't know if it's a number we've disclosed before or not. We have not done that in the past, but we'll let us reflect on it, given our NAG is down and that's one of the reasons it's a very fair question. So let us reflect and maybe starting next quarter, we'll put it out..

Okay. And then, I'll sneak one more in if I could. In terms of kind of the delays – the regulatory delays in opening some clinics, do you expect that to move into different states as well? Are you prepared for that? And is it just you guys that are maybe seeing some of these delays or competitors as well? Thank you..

We think everybody is experiencing the same delays on that front. However, we have a significantly higher percentage of our de novas in some of the states that are the slowest right now, California being prominent among them..

Thank you..

All right. Thank you, Margaret..

Thank you. Our next question is coming from Mr. (0:36:43). Your line is open..

Good afternoon. With regard to Everett, you commented that it serves mostly a fee-for-service population, and that you hope going forward, it becomes more of a value-based enterprise.

How do we move from sort of the fee-for-service model today to where you want to be in the future? And is that primarily going to come in the Medicare Advantage space or commercial partnered with hospitals, or how do we think about the conversion there? Thanks..

Got it; three points. Point number one, we think good multi-specialty groups can make significant contribution margins in a fee-for-service world, as Everett Clinic and others have demonstrated.

So, we never want to confuse profitability as being only the result of having globally capitated contracts that – it's our premise that exactly the opposite is true, especially, when we start partnering with a group and they have more access to capital to do some of the things that are quite leveraged even in a fee-for-service world.

Second, that the – one of the powerful levers to pull to enhance the value proposition and profitability of a major medical group is actually to sign some global risk contracts and begin to invest in eliminating waste from this system and improving health.

And then third, there's all sorts of less dramatic value-based contracting that can go on in between, whether it's shared savings and bonus plans and new market incentives and combined ancillaries, and so that the menu of intermediary steps that can be taken with plans in a market, or with a health system or with other medical groups is quite long.

And so, with the Everett Clinic, we're excited because our five-year strategy encompasses accomplished all three of those fulcrums..

Got it. And then just a follow-up on HCP and you sort of touched on this generally. But investors, I would say, have been patient with sort of the business and profitability trends. And I think a lot of people were optimistic that 2016 would sort of be the inflection year, where things generally start to turn for the better.

Clearly, some of the things that are going on next year are true business sort of things that will come up, other – some of it's going to be discretionary.

I guess, what would you say to people that – when should we really start to thinking about an inflection in the investments in the patients really begins to pay off for the shareholders? And I'll leave at that. Thanks..

Yeah, that's the X-hundred million dollar question.

And right now, we just can't give a date where that happens, although we certainly respect the fact that patients can run thin, and it's part of why we look forward so much to the upcoming Capital Markets session, where we can spend a significant block of time going through this with more analytical rigor.

I would remind folks that absent the change in the RAF model, which certainly we've mis-handicapped, but absent the change in the RAF model, we would all be sitting here quite content with our margins and returns and their trajectory. Now, that just so happens to be a major issue.

And not to be ignored, and government policy can continue to change although that model of course is 100% implemented in the MA program has an awful lot of political support in terms of supporting the benchmark rate.

But we do want to make sure people continue to parse through the impact of that single MA model change from the performance of the legacy market – from the performance of the new market. And at Capital Markets, we'll attempt to do a real good job of parsing through those different components.

And so, you can assess whether your patients should be sustained or jettisoned..

Great. Thanks a lot..

Thank you..

Thank you. Next question is coming from Gary Taylor. Your line is open..

Sorry. Hi. Good evening, a couple housekeeping items first, I want to make sure I have correct.

The refund of the pharmacy payments in the ESRD segment, that was a revenue item?.

Yes. That reduced revenue..

Okay.

And the new revised guidance for consolidated company on operating income, the $1.870 billion to $1.915 billion, that is versus the $1.421 billion nine-month figure or is that nine-month figure actually being adjusted in some way?.

People are reflecting and staring at pieces of paper, Gary. So, can you go on your next question and....

Sure..

...I'll come back to you later..

Yeah. On that, I guess I'm getting to kind of – I'm trying to understand just the implied fourth quarter operating income, which I think is $449 million to $494 million, which tied to again kind of your comment sequentially, but I just want to make sure I'm apples-to-apples there? And....

Gary. Yeah. You said that the year-to-date $1.421 billion, that's correct. Yeah. That'd be non-GAAP adjusted..

Okay. And revenue per treatment in Dallas has been stronger year-to-date than we thought, I know in the last couple of calls, you've talked about commercial mix being kind of a surprising positive trend factor.

Obviously, that number was stable sequentially, so it couldn't have done – it couldn't have done much, maybe the growth year-over-year narrowed a little bit.

So is that the right conclusion, commercial mix kind of holding stable with that – that year-over-year improvement, Kent?.

Of the two dynamics, one is mixed, and of course, even small increments and decrements can move the dial. And I'm trying to remember at what level we were around on the numbers that you've seen. But if it's a full percentage point, which is my memory, then....

I think it's right..

...there can be a significant movement within that. And then, second, as you know as well as any of us, that we're always winning and losing some battles on the payer front in terms of rate negotiation. And right now, we're having a few more victories than defeat in that realm, and so some of that – that's – some of that is contributing..

Okay. Last question, just trying to understand a little bit, going to the ATP segment, capitated number of months down – no actually pure enrollment, I think down about 18,500 or a couple of 2% sequentially and down a little bit year-over-year. I know you call out in your text legacy markets and for months (0:44:43) approximately flat.

So will this include – you've intentionally dropped some membership in some of the newer markets or is that the right conclusion?.

We do have one of the new markets where we very intentionally dropped a plan that led to a significant drop in membership, and that was a good thing for our P&L and for our strategic position. Now, having said that, I'm not sure that explains exactly what you're bringing up, so let me look around the room here.

Yeah, Gary, yeah, that is the explanation. It was very conscious and negotiated and has significantly enhanced our P&L..

Okay. Thank you..

Thank you. Next question is coming from Steven Erito (0:45:38).Your line is open..

I just wanted to follow up on the HCP questions. I think the keyword was patients, and we've been in your stock for a couple of years on in-patient. Is there any way we could get some outlook prior to the Analyst Day in May? Certainly, you guys have made a decision to budget higher expenses.

I'd just like to get an idea of what type of return you're looking for to get on those expenses and not have to wait until April or May of next year? Thank you..

We will think about it. We are contemplating moving the Capital Markets up relative to last year. And in addition, we're going to give the actual quantitative guidance after Q4. So, I think you'll have two good bites of the apple of getting more information and being able to test it relatively soon.

Am I answering the question, or am I missing it?.

No, I think you got it. That's fine. And the other questions, kind of addressed it, so I won't belabor the point. Thank you..

Okay. Thank you..

Thank you. At this time, there are no further questions..

Okay. Well, thanks everyone for your consideration of DaVita. And we will do the best we can in the intervening months until we talk again. Thank you..

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