DaVita Q2 2024 Earnings Call Transcript

Participants

Corporate Executives

• Nic Eliason, Group Vice President, Capital Markets & Investor Relations
• Javier J. Rodriguez, Chief Executive Officer
• Joel Ackerman, Chief Financial Officer

Analysts

• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Justin Lake, Wolfe Research
• A.J. Rice, UBS Group AG
• Andrew Mok, Barclays PLC
• Kevin Fischbeck, Bank of America Co.
• Ryan Langston, TD Cowen

Presentation

[Operator]

Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Second Quarter 2024 Earnings Call. [Operator Instructions] Thank you. Mr. Eliason, you may begin your conference.

[Nic Eliason, Group Vice President, Capital Markets & Investor Relations at DaVita]

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

Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements.

For further details concerning these risks and uncertainties, please refer to our second quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we may make with the SEC.

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

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

I will now turn the call over to Javier Rodriguez.

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Thank you, Nic, and thank you all for joining the call today. On behalf of all the teammates who provide life-saving care to our patients, I am grateful for the opportunity to report another positive quarter for DaVita. We continue to enhance our clinical capabilities while optimizing our revenue operations and cost structure.

Today, I will cover the details of our second quarter performance, comment on the CMS 2025 proposal and wrap up with our outlook for the remaining of the year. But before I dive in, let me begin, as we always do, with a clinical highlight. As you know, every day, tens of thousands of DaVita caregivers work to give life to our patients. Nurses play a central role within our interdisciplinary care teams, serving as our patient's caregiver, sounding board and familiar face, they see over 100 times per year. Unfortunately, thousands of nurses left the profession during the pandemic. As a result, the health care system is facing a critical nursing shortage. I am proud of the programs and initiatives we've implemented to support the next generation of dialysis nurses. I'll highlight three examples. First, we're collaborating with leading nursing universities on tailored nephrology-specific nursing curriculum. We're also providing financial assistance to remove barriers to entry for prospective nursing students.

Second, we've created a clinical internship program, immersing students with hands-on experience in DaVita Dialysis Centers. We have 700 clinical entrants this year with more than 2,000 individuals participating since inception of the program.

Third, we've built a Nurse Residency Program to support new nurses from student to practicing registered nurses. Our goal is to help hundreds of nurses in the program to feel more confident during their first year of practice, which, among other things, can lead to better patient safety. We're excited to do our part to alleviate some of the pressures of the nursing workforce and to help ensure access to care is not a barrier.

Transitioning to the second quarter performance. Adjusted operating income was $506 million and adjusted earnings per share was $2.59. This outcome was ahead of our expectations for the quarter, primarily driven by favorability in patient care costs and continued strength in revenue per treatment or RPT. Offsetting this favorability was volume growth that was lower than expected. This was primarily due to elevated miss treatments related to spring storms along with lower-than-expected census gain. Our second quarter adjusted results also included approximately $15 million of center closure costs.

In prior periods, we excluded these type of costs from adjusted operating income as non-GAAP adjustments. We'll expand on this point throughout the call today. Let me give some additional detail on RPT growth since it continues to contribute to our strong performance and support to our 2024 guidance increase. There are many variables in RPT, but I'll highlight two primary drivers. The first and largest component is continuous improvement in our collection capabilities. This is a multiyear effort. So let me elaborate a bit more on this one. The complexity of revenue operations has increased over the last few years. Billing and collecting from health plans now more frequently involves new data and process requirements. These challenges include navigating prior authorization, payer-specific billing requirements, numerous online payer portals and separately billable items.

These layers are exacerbated by a growing list of participating health plans due to the growth of Medicare Advantage and exchanges and by our patients more frequently updating their coverage choices. In response, we made a series of targeted investments in technology and teammates to modernize and retain top-in-class capabilities. These investments focus on greater automation of routine tasks, increasing rate of electronic claims submission and more frequent benefit insurance verification, among other enhancements. This has improved our overall collection rate and enabled us to collect on claims more quickly, reducing days sales outstanding. With more comfort and experience with these capabilities over the past year, we believe these improvements are sustainable and will continue into 2025 and beyond.

Second, our health plan negotiations have resulted in modestly higher rate increases as a result of higher inflationary environment over the past few years. Despite these rate increases, we are still not recouping the full impact of high inflation. We continue our track record of innovation and discipline within our cost structure to bridge this gap. The combination of these two factors, along with continued improvement in payer mix, increases our expectations for RPT growth for the year. In the first quarter, we communicated our expectation to land on the top end of our range of 2.5% to 3% RPT growth in 2024. With continued progress, we now expect 2024 RPT growth within a range of 3.5% to 4%.

Staying on the topic of revenue. CMS recently released its ESRD proposed rule to update the prospective payment system for 2025. The CMS expected rate increase of approximately 2.1% was broadly in line with our internal expectations. The methodology has become more complex with the introduction of new wage index. And while we appreciate CMS' effort to innovate the proposal falls short of reflecting the industry true cost inflation. We will provide feedback to CMS in hope of improving this methodology in the final rule and in the years ahead. Absent further edit, the proposed rule would continue to put pressure on the system.

Additionally, with the proposed rule CMS reconfirmed its intention to include oral-only drugs within the bundle as scheduled beginning next year and identified positive policy changes to aid with this transition. DaVita support CMS' position and given our experience with calcimimetics, we strongly believe this will provide more patients with access to these drugs since many of our patients do not have Part D coverage.

We understand that there are entities are going for Congress to delay the implementation with stated concern around patient access and the operational ability for providers to comply. DaVita is well prepared and investing the necessary resources to implement this transition in support of our patients. Turning to full year guidance. We are raising our 2024 adjusted operating income guidance while incorporating a change in treatment of our center closure expenses. We are raising 2024 adjusted operating income guidance from the prior range of $1.875 billion to $1.975 billion to a new range of $1.91 billion to $2.01 billion. This represents a $35 million increase at the midpoint of the range. This is the result of a $95 million increase in expected operating performance, offset by now including approximately $60 million of full year center closure costs that we previously would have excluded adjusted operating income as a non-GAAP adjustment. Joel will provide more detail about this change in our non-GAAP reporting presentation.

This guidance reflects sustained momentum in our key operating metrics including the revenue per treatment progress we highlighted today and our expectation for strong performance in the back half of the year.

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

[Joel Ackerman, Chief Financial Officer at DaVita]

Thanks, Javier. Our second quarter adjusted operating income was $506 million, adjusted EPS was $2.59 and free cash flow was $654 million. Before I dive into the specifics on our performance for the quarter, let me add some detail to the change in reporting presentation of our non-GAAP results that Javier mentioned.

As a result of a recent common letter from the SEC to DaVita, we will no longer treat center closure costs as an adjustment in our non-GAAP presentations. These center closure costs impact our patient care costs, G&A and depreciation and amortization expense lines. Our adjusted OI and adjusted EPS for Q2 now includes center closure costs and our updated full year 2024 guidance shared today follows the same methodology. To help with comparisons to prior periods, we are also now showing prior period results under the new methodology.

In aggregate, these costs represent approximately $15 million per quarter in 2024 for a total of roughly $60 million expected this year. For comparison, center closure costs in 2023 were approximately $100 million. For 2025, we are forecasting $20 million to $30 million of center closure costs. These presentation changes have no impact on how we manage our business nor our overall profitability, cash flow or long-term expectations. With that, let me break down each of the components of our Q2 performance, starting with U.S. dialysis and specifically treatment volume.

Sequentially, treatments per day were up 1.1% in Q2 versus Q1. This increase was primarily due to census gains in the quarter and a seasonal improvement in mistreatment rate. Compared to the same period last year, second quarter treatments per day were up 50 basis points. This year-over-year growth was below our expectations as a result of two primary factors. First, severe weather events in May and June resulted in higher miss treatment rates, representing approximately 20 basis points of headwind on year-over-year treatment growth for the quarter. We have seen a similar but more pronounced disruption in July with the impact of Hurricane Beryl.

Second, U.S. net census gains were weaker than expected. Although new to dialysis admits grew for the sixth consecutive quarter, mortality was above our forecast. We expect both of these factors to negatively impact the second half of the year. For the full year, we now expect treatment volume growth will likely be between 0.5% and 1%. Revenue per treatment was up approximately $6 sequentially. This increase is primarily due to typical seasonality from higher patient coinsurance and deductibles in Q1. As Javier outlined, we now anticipate full year revenue per treatment growth of 3.5% to 4% for 2024.

Patient care cost per treatment were approximately flat quarter-over-quarter. Typical seasonal declines from items like higher payroll taxes in Q1 offset higher health benefit costs and other inflationary increases in the second quarter. Depreciation and amortization declined $12 million in Q2 versus Q1, and partially as a result of a decline in center closure costs. Center closure costs in D&A were approximately $50 million in 2023 compared to $10 million in 2024. Since these costs are now included in our adjusted D&A numbers, we now expect a year-over-year adjusted D&A decline of approximately $40 million to $50 million.

For Integrated Kidney Care or IKC, our value-based care business, operating income declined $8 million sequentially. As we have seen in the past, we expect results in the second half of the year to be significantly stronger than the first half as a result of the timing of revenue recognition. International operating income was flat quarter-over-quarter. We have closed our acquisitions in Ecuador and Chile and expect our acquisitions in Colombia to close in Q3 and in Brazil by year-end.

Moving now to capital structure. In the second quarter, we repurchased 2.7 million shares and to date, in Q3, we have repurchased an additional 1.1 million shares. Leverage at the end of Q2 was 3.1 times EBITDA. This was down from three months ago due to growth in trailing 12-month EBITDA and a reduction of net debt by over $200 million. As of the end of Q2, we held approximately $400 million of funding from Change Healthcare's parent, UnitedHealth Group, related to the cyber event earlier this year. As of today, that balance currently sits at approximately $300 million and we expect additional repayment to align with successful collections on impacted claims.

We continue to collect unchanged health care impacted claims and U.S. dialysis day-sales outstanding have declined by 14 days quarter-over-quarter. As always, we are assessing opportunities to optimize our capital structure, which includes looking to address the remaining balance of our Term Loan B maturing in 2026. We continue to target leverage within our range of 3 times to 3.5 times. To this end, we are also assessing opportunities to increase our debt to ensure sufficient capacity to maintain leverage within this range. To conclude, let me share some additional detail about our updated adjusted operating income and adjusted EPS guidance for 2024.

As Javier said, our new adjusted OI guidance range is $1.91 billion to $2.01 billion. There are several moving pieces within this number. So let me give you the key puts and takes. First, we are now including expenses related to center closure costs in this adjusted OI range. This is an approximate $60 million of additional operating expenses that were previously not in our adjusted OI guidance. To reiterate my earlier comments, this is a change in the presentation of our adjusted results and does not impact our GAAP financials or cash flows.

Second, additional RPT growth of approximately 50 to 100 basis points relative to our previous expectations, represents an increase of approximately $85 million at the midpoint.

Third, the range reflects improved expectations for patient care costs, mostly related to labor and productivity improvements which is mostly offset by our revised volume expectations for the full year.

Altogether, these changes represent an approximate $35 million increase in our adjusted operating income guidance at the midpoint of the range. We are also updating our 2024 adjusted earnings per share guidance to a range of $9.25 to $10.05 and primarily due to the increase in adjusted OI. That concludes my prepared remarks for today.

Operator, please open the call for Q&A.

Questions and Answers

[Operator]

Thank you, sir. [Operator Instructions] On moment, please. Pito Chickering with Deutsche Bank, you may go ahead, sir.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Yeah, good afternoon, guys. Nice quarter and thanks for taking the questions. On the NAG, can you give us some color on what you saw through the quarter and what you saw in July just looking at the high end of your revised guidance, I get to grow like 1.5%, which is a big step-up versus what you saw in the first half of the year. So I just want to sort of see kind of what you guys are seeing to give you confidence in the high end of that.

[Joel Ackerman, Chief Financial Officer at DaVita]

Sure. Thanks, Pito. So through the quarter, what we really saw was miss treatments were elevated relative to what we expected, and our census growth was below expectations the pattern there has continued, new to dialysis admits remain strong, and the growth there is consistent with what we had seen pre-COVID and mortality remains elevated.

In terms of the back half of the year, I'd point out one thing that gives us confidence, which is we've got an extra treatment day in the second half of the year relative to the second half of the year last year. So that, in and of itself, is about 30 bps of additional growth. Other than that, we really haven't modeled in a whole lot of changes for the back half of the year. We haven't built in much census growth, and we're expecting miss treatment rate to continue to be challenging.

So, if you really think about the back half of the year, year-over-year growth, it's really about treatment days rather than any change in any of the underlying assumptions.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Fair enough. And you gave some art, but if we exclude the $60 million of closure costs you raised guidance by $95 million. Can you just bridge us the components of sort of how you raised guidance by $95 million versus previous guidance. Just -- I just wanted to understand that as anything towards [Phonetic] 2025. Thanks.

[Joel Ackerman, Chief Financial Officer at DaVita]

Sure. So I'd start with revenue per treatment, where we moved the guide from what essentially last quarter was 3%, now to 3.5% to 4%. So at the midpoint, 75 bps is worth roughly $85 million. So that's number one. And that's coming from a combination of continued success on the revenue operations, strength in contracting that we've seen through the year so far and then a little bit of mix improvement. So that's the dominant factor and worth $85 million. Contributing to that as well is some improvement we're seeing in labor costs. I'd highlight two things there.

First, some of the premium pay, whether it's over time or spot bonuses have come down. And second, we are seeing a little bit better productivity in the year than expected. Those two things combined are worth about $30 million, and offsetting that is about $20 million of OI headwind from the lower volume that we've called out. So plus $85 million from RPT, plus $30 million from labor, minus $20 million from volume, that will get you to $95 million increase before taking into account the $60 million change in center closure costs.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great, thanks so much.

[Operator]

Thank you. Our next caller is Justin Lake with Wolfe Research. You may go ahead sir.

[Justin Lake, Analyst at Wolfe Research]

Thanks. Let me just follow up on Pito's question there. You said $20 million from lower volume?

[Joel Ackerman, Chief Financial Officer at DaVita]

That's right, Justin.

[Justin Lake, Analyst at Wolfe Research]

And you took down volume by, what, 75 bps at the midpoint?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. I would say, as we were thinking about it, we probably weren't internally modeling as of last quarter that we'd be at the midpoint. So you'd probably get to a little bit of a lower -- you'd have to start at a slightly lower volume number to bridge to that $20 million..

[Justin Lake, Analyst at Wolfe Research]

So maybe it's 50 basis points. I'm just trying to think about the relativity here of volume to [Operator Instructions] [Speech Overlap]

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah, you're in the right ballpark there [Speech Overlap].

[Justin Lake, Analyst at Wolfe Research]

So in your mind, 50 basis points of volume is about $20 million of OI on an annual basis.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. I would -- I probably -- if you would ask me just standalone, what's 50 basis points of volume worth, I probably would have told you $50 million to $60 million. So not more [Speech Overlap] slightly lower number.

[Justin Lake, Analyst at Wolfe Research]

[Speech Overlap] the same thing.

[Joel Ackerman, Chief Financial Officer at DaVita]

Oh, I'm sorry -- I'm sorry. The team here is correcting me. 1% is worth $50 million to $60 million. So you're in the right ballpark there.

[Justin Lake, Analyst at Wolfe Research]

Okay. And then on center closures, did you say $20 million or $30 million for next year?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah for 2025, I think the number will be in that range.

[Justin Lake, Analyst at Wolfe Research]

Okay and...

[Joel Ackerman, Chief Financial Officer at DaVita]

And just to be clear about that, when you're modeling center closure costs, it's important to realize that not all the costs come right when we close a clinic. Some of them like lease acceleration costs, for example, can have a delay from when we close the clinic. So I think by next year, our clinic closure rate should actually be back to what it was pre-COVID level, call it, 20 clinics a year, somewhere in that range, but the costs we're calling out will be a holdover from what we've seen -- some of them will be a holdover from the clinic closures in 2024.

[Justin Lake, Analyst at Wolfe Research]

Got it. That's what I was trying to get to. So you think you'll be back to like 2020 center closures next year?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah, something like that. This year, I think last quarter, we had called out 50 for the year. We're probably running light. And I would guess, at the end of the year, we'll probably have closed only about 40 for the year and getting back to a more normal pace for next year.

[Justin Lake, Analyst at Wolfe Research]

Okay. And then just a question, before I jump off, on revenue per treatment. One, the -- I think you said in the release, the you had some offsets to pricing from mix pressure? What's mix in the second quarter versus Q1?

[Joel Ackerman, Chief Financial Officer at DaVita]

Mix was down a drop in Q2, but it's hanging right around 11%. It's right where it was at the beginning of the year. Our commercial mix at the end of Q1, which I don't think we disclosed was a little bit harder to estimate because of some of the changes -- some of the challenges with change health care, as some of the claims were delayed. But I don't think there's been a lot of movement on commercial mix between Q1 and Q2, that would have any real financial impact.

[Justin Lake, Analyst at Wolfe Research]

And then lastly, on the exchanges. So I assume that you were at 10.9% to end the year, if I remember the fourth quarter report. But the -- let's say, your 11%, how much of that is coming from exchanges today and how much of that came from exchanges, let's say, pre-COVID.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. The number is up about 200 basis points.

[Justin Lake, Analyst at Wolfe Research]

Okay, I'll take that. I appreciate it guys. Thanks.

[Joel Ackerman, Chief Financial Officer at DaVita]

Thank you.

[Operator]

Thank you. Our next caller is A.J. Rice with UBS. You may go ahead sir.

[A.J. Rice, Analyst at UBS Group]

Hi, thanks for the question. On the IKC business, I guess, year-to-date, the loss, if I've calculated everybody, it's about $60 million. I know your target for the year is $50 million. And as you did say in the prepared remarks, you think you'll see more positive in the back half of the year. Is $50 million still the expectation? And does that suggest you'll be positive in both the third and fourth quarter?

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Thanks for the question, A.J. You've got the numbers right, meaning we're at negative $60 million and change for the up to year-to-date, and we still expect the year to come in that $50 million range. But it's not necessarily because there's a big change in the business, but rather revenue recognition on the back end of the year. So that's the big difference there. And as you know, this business, and we've asked you to look at it more on an annual basis because quarter-to-quarter fluctuation can be a bit more dramatic, but that still holds on the range.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. A.J., just on the quarterly spread between Q3 and Q4, it can be hard for us to predict when the revenue will land. That said, I would expect in Q3 to be a loss-making quarter again and Q4 to be a much, much stronger quarter. Then again, depending on when we get information some of the Q4 revenue could pull forward to Q3.

[A.J. Rice, Analyst at UBS Group]

Okay. And obviously, it sounds like the comments on the volume are mostly around the storm impact on miss treatments, but you did not sort of mention mortality. What did you see in mortality? And was that a significant contributor to your decision to adjust or that's just the normal fluctuations you see from quarter-to-quarter.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. So -- the short answer is mortality is definitely higher than we expected. And maybe it would be helpful to step back for a second and just give you a sense of how we're thinking structurally about where we are on volume for the year.

And as we step back, the question we are -- have been asking ourselves is we are behind on volume growth, call it, 150 bps relative to pre-COVID, relative to where we'd like to be. And we are -- we spent a lot of time trying to quantify that. We are limited by the information we have, both the quality of the data, as well the timeliness of the data, recognizing we're playing with relatively small numbers here, right, 100 bps, 150 bps with inputs that have a decent amount of volatility or variability. That said, as we try and quantify it we think the $150 million gap between where our volume growth for the year is relative to where it was pre-COVID, it is really made up of two things. About 50 to 100 bps of that gap is related to mortality. Mortality is just running higher than it was. It's actually up this year relative to where it was six months ago. And we think structurally, that's the biggest component of why we're not 150 basis points higher.

The second thing we believe relates to the capital-efficient approach we took to managing our clinic footprint. You go back three or four years, volume for us and the whole industry was beginning to decline. We recognize that our capacity utilization was going down and we were very focused on getting back to a healthy capacity utilization, one that could support our investment in our teams in clinical quality and in information technology. And the result of that was we pulled back on de novos before others did, and we closed roughly 200 clinics over the last few years.

The result of all that was a decline in our clinic share over the last few years, of call it, a point and a quarter roughly. And with that, we believe we have lost some volume. It's hard to quantify, but if we had to put a range on it, it would probably be somewhere in the range of 40 to 60 basis points. So you put those two things together, set a [Phonetic] 50 to 100 basis points of mortality higher than historical combined with 40 to 60 basis point impact from our clinic footprint management, and we think that explains the majority of the 150 basis point gap.

I will note one important thing, new to dialysis admits is not on our list of the gap. As I've said before, those remain strong. The growth in new dialysis admits is consistent with the growth we saw pre-COVID and remains at a healthy level. So I hope at the beginning, I answered your question about the year and then gave you a bit more color on the bigger picture.

Javier, anything to add?

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Yeah. I'll add one thing. First of all, at the beginning of the [Indecipherable] Joel, inadvertently said $150 million, and he was talking about 150 basis points just to make sure that the record reflects that the rest of the conversation, I was clear on the 150 basis point. But I think while he walked you through a lot of numbers, at the end of the day, the question that you and all of us are trying to ask ourselves is, is there a structural change that is going to change the growth rate.

And to the best of our ability on the work that we've done, the answer that we come up with is no. It appears that we are in a bit of just a, let's call it, a period of time where mortality is elevated that we see through these new to dialysis patients that the volume should come back to normality over time.

[A.J. Rice, Analyst at UBS Group]

Okay, great. Thanks so much.

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Thank you.

[Operator]

Our next caller is Andrew Mok with Barclays. You may go ahead sir.

[Andrew Mok, Analyst at Barclays]

Great, thank you. Maybe just to follow up on that mortality point. I guess, what's the working assumption on why mortality is elevated because I think the excess mortality of dynamic during the early years of the pandemic would intuitively suggest there would be a tailwind in the aftermath. So what's your kind of working assumption here on why it remains elevated? Thanks.

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Yeah. Your question is one that we've been asking a lot, and we've been talking to our physician community and trying to understand what is driving it the reality is that people come up with hypothesis, and you can actually support it a bit a higher elevated flu season, etc., but the real quantifiable answer is not one that we could say with confidence. And if you were going to say on the other side of the equation, we're starting to see improvement, something that should have an impact on mortality like the Integrated Kidney Care, managing people, upstream, new drugs, SGLT2 and GLP-1, etc. And so we are scratching our head and we will be working on it. And as soon as we get something with confidence, we will share with you.

[Andrew Mok, Analyst at Barclays]

Great. Okay, thank you. And then in the prepared remarks, I think you mentioned that the improvement in collections is a multiyear effort. And given the strong gains we've seen over the last six quarters, just where are we in this process? And how much runway is left beyond 2024? Thanks.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. I would say there's certainly going to be more in 2025 from nothing else than just the annualization of the improvements we're anticipating in the back half of the year. Looking forward from there, I think it's safe to say that any benefits from this are going to decline over time. And what I mean by that is their contribution to RPT growth will combine over time. I think everything we've achieved so far is sustainable. That said, it's hard to predict how much more there is and over what time period we're likely to capture it. I think it is fair to say relative to when we started this a few years ago and when we started talking about it with the Street in Q2 of 2022, it has certainly exceeded our expectations.

[Andrew Mok, Analyst at Barclays]

Got it. And if I could just follow up on one more point. I think you called out the clinic closures as being a potential drag to volume growth as well. I think given you and your competitor -- one of your big competitors are closing clinics at the same time, where do you think -- how much leakage do you think there is there? And where are those patients going to get their dialysis treatment, if not one of the two large dialysis chains? Thanks.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. So we've done a lot of work on this. And interestingly enough, that the data we have on clinic -- clinics is actually better clinic share is better than the data we have on treatment share. And we believe that the midsized and smaller dialysis operators have actually gained share over the last few years. They have closed fewer clinics. They have built more clinics. And the result of that is probably picking up some volume as a result of that.

And the question on that -- and we ask ourselves, is that good or bad? In general, of course, you start to think of market share. And in this one, it's clinic share. And the way that we looked at it, and of course, time will tell is that we led the way in stopping de novos as the mortality escalated during the pandemic. So if you see DaVita build it was very aggressively stopped. And then we led the way in rightsizing the capacity. And so if you were just going to do shorthand, you would say we've closed roughly 200 centers, and depending on the math, you could say it's roughly $100 million to $150 million of fixed expense reduction. And the loss of volume is roughly in that $50 million. So you would say that just with that math, it looks like we're making the right trade-off.

Of course, there's a lot of other dynamics of patient access the local relationship with physicians and all the normal considerations that we have to go into, but I'm just giving you the money side of it.

[Andrew Mok, Analyst at Barclays]

Great. Thanks for the color.

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Sure. Before we take the next question, I just want to come back to an answer I gave to Justin on the exchanges. I talked about 200 basis point increase from the exchanges. I just wanted to clarify, that's 200 basis points of revenue, not 200 basis points of mix increase that came from the exchanges. So I just wanted to make sure that was clear.

[Operator]

Thank you. [Operator Instructions] Our next call is Kevin Fischbeck with Bank of America. You may go ahead sir.

[Kevin Fischbeck, Analyst at Bank of America]

Great, thanks. Maybe just a follow-up on that point. Do you just have like the percentage of revenue that comes from the exchanges year-to-date so far?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. I'm not sure we're going to -- I don't think we're going to give that number, Kevin.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. And then you made a comment in the prepared remarks about leverage. And I think you said that you were looking to add debt to ensure capacity would be in this range. Are you saying that you would look to potentially lever up deploying more capital, I guess, on share repurchase? Or were you just talking about something else?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. So I wouldn't use the phrase lever up because what we're really targeting here is maintaining the leverage range of three times to three and half times. And if our goal was to get our leverage range or our leverage multiple above that, that's what I would characterize as levering up. I think the reality is as our EBITDA grows in order to maintain that leverage range of three times to three and half times, recognizing we're at the low end of that range right now, we need more debt capacity. And it's just using the middle of the number as EBITDA goes up, you multiply it by 3.25%, and that's the capacity you need. So we're thinking about how much debt capacity do we need to make sure we can stay in that range as EBITDA grows.

[Kevin Fischbeck, Analyst at Bank of America]

And in theory, that capacity would be used on share repurchase. Is that -- or is there anything else?

[Joel Ackerman, Chief Financial Officer at DaVita]

I mean it would be used using our capital allocation philosophy. So the first thing we would love to do would be to invest it in growth, recognizing it needs to be capital-efficient growth and hit our return thresholds. Barring that, share repurchases would certainly be on the -- at the top of the list of how we would use excess capacity to maintain our leverage level.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. And then I guess just on that point as well, the change line of credit, how do we think about that? That's going to be -- I mean it doesn't impact, I guess, your free cash flow, but I guess that would be a use of free cash flow to pay that back? Or you just collect less from United [Speech Overlap]?

[Joel Ackerman, Chief Financial Officer at DaVita]

No, I just think of it as debt. And we -- it's included in our net debt number today and if -- we had -- if we drew an extra $400 million on the revolver or we did a bond deal, and we used it to pay down the change debt, it would -- it's just one form of debt exchanging for another form of debt. So it wouldn't hit free cash flow, it wouldn't change our leverage ratio.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. And then I guess just going back to the mortality point because it is hard to understand why it's such an issue now? And I mean, I guess it's hard to say you don't fully know the reasons behind it. It's hard to say when it would normalize. But is there any thought about why things wouldn't get back to normal over the next couple of quarters? And I guess -- what is it that you're looking for to kind of know that you're on the other side of that?

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Well, predicting it is not a good idea, I don't think because the odds of being wrong are probably 100%. But the reality is that we do agree with you that we don't think it's structural and that it will revert back to normality. And again, I've highlighted some of the improvements that we think can happen from mortality. And many people say, well, why don't you know exactly what happened. And the assumption is that death happens while they're in dialysis. And the reality is that there's a lot of more moving pieces and that people can relocate, can go to a SNF, etc., etc. And so you don't actually get the full story, you have to follow up and there's a lag in time. And so that's why we're having a piece it together and work hard to get the information, and we'll be back to you. But we've talked to a lot of nephrologists and no one seems to think that there's any systemic trend that we can identify.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. And then maybe just last question. Since revenue per treatment seems to be like a big part of the guidance raise, it sounds like everything that's happened so far you think is sustainable, I guess, mix maybe moves around a little bit, but can you talk a little bit more about the commercial contracting? It sounds like that has kind of a little bit better maybe than you thought it was going to, at least as far as better capturing recent inflation. How should we think about commercial contracting into 2025? Is that still going to be a tailwind similar to what you're seeing now? Or is that going to normalize for some reason?

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Well, on RPT, basically, you have to think of three dynamics. You have mix, you have negotiations and you have revenue cycle. And so you're asking about the negotiations. And I think to think about the future, you have to kind of put yourself into the future, which is -- what is the environment? Is it still inflationary? What contracts are up for negotiation, etc. As we've explained in the past, we are comprehensively contracted. And our big contracts usually come up every three to four years. So in any given year, you don't get many of that. What we're focused on is to be a really great partner to our payers.

And what that means is to have great clinical solutions at the best cost. Now -- so I can't predict what that looks like. We don't foresee anything that dramatically would change what occurred in 2024. That said, if you wanted to just kind of answer the question, how do you feel about margin, i.e., bring in the cost considerations to the conversation, I think the margin strength is likely to remain in 2025.

[Kevin Fischbeck, Analyst at Bank of America]

Helpful. I guess maybe just to ask a little bit differently. If you're getting a little bit better commercial contracting, do you feel like there's a shift at all in the negotiations, either managed care companies realize they need you more for network reasons or they are appreciating the value you provide more, and that's giving you stronger negotiating power? Or it's just more, inflation is higher and so rising [Indecipherable]?

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

No, I think the conversations are the same, meaning everybody is trying to do their fair share in containing costs. Everybody is trying to add value to the patient community and have an expansive network and just do the best we can. And of course, we have to take into account cost and inflation and all those type of things. But those dynamics haven't changed other than the consideration for inflation.

[Kevin Fischbeck, Analyst at Bank of America]

Great, thanks.

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Thank you.

[Operator]

And our next caller is Ryan Langston with TD Cowen. You may go ahead.

[Ryan Langston, Analyst at TD Cowen]

Hi, good evening. Thank you. Just a couple for me. On the lower census growth, maybe I missed it, but is that isolated to any particular geographies? Or maybe are there certain geographies that are maybe performing below kind of the average and maybe pulling that down a little bit?

[Joel Ackerman, Chief Financial Officer at DaVita]

No, Ryan. We're pretty much seeing that across the board.

[Ryan Langston, Analyst at TD Cowen]

Got it. And then just to clarify, maybe on the RPT improvement, it sounds like, obviously, you're still working through that and some of that will annualize into '25. Is it fair to assume that may end up just from a year-on-year, maybe closer to 3.5% to 4%, you're guiding this year as opposed to maybe the 2.5% to 3%?

[Joel Ackerman, Chief Financial Officer at DaVita]

I'm sorry, are you asking about 2025 RPT?

[Ryan Langston, Analyst at TD Cowen]

Yeah, I'm asking if you're guiding to 3.5% to 4% this year, but some of it will annualize into next year, is it fair that the growth rate might be higher or closer to 3.5% to 4% in 2025. versus maybe prior, we would have thought maybe closer to 2.5% to 3%.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. It's early for guidance, but I would not go to 3.5% to 4% for next year. I think that would be a real stretch to perform at this level for another year.

[Ryan Langston, Analyst at TD Cowen]

Yeah, okay. Thanks.

[Joel Ackerman, Chief Financial Officer at DaVita]

Thank you.

[Operator]

Thank you, Pito Chickering with Deutsche Bank, you may go ahead, sir.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, guys. Just a quick follow-up here. What percent of your treatments were home premiums this quarter? And what was your center equalization this quarter and how it compared with the first quarter?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. Home utilization is still running in the mid- to high 15s. In terms of capacity utilization, were somewhere between 58.5% and 59%, somewhere right around that.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And on the international business, the margin looks to be about 7% range. I guess, how do you think that evolves over the next couple of years?

[Joel Ackerman, Chief Financial Officer at DaVita]

I think growth in international for the next couple of years, especially next year is likely to be higher than it's been in the past, largely driven by the acquisition that we've done in Latin America.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Sorry, for the OI margins, I track around 7%.

[Joel Ackerman, Chief Financial Officer at DaVita]

OI margins.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

OI margins for international, I guess, how does that evolve over time?

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. I think it will continue to tick up I don't have a view on could it ever get to the U.S. margins, but I would say that's highly unlikely.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

All right. Last one for [Speech Overlap]

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

The margins internationally have a couple of dynamics. Number one, there is no such thing as international. There's 12 to 13 countries. And of course, they weigh differently. And in some of these, you have one payer, the government, and so they will go in periods where there's no increase, and then they will have a lump increase. And so it's got a little more unusual dynamic and harder to predict, the margin.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

So the margin is, I guess, harder, I guess, why is that a better use of cash flow than doing share rebuilt?

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Well, we're confident on the adjusted return. But you're asking a different question, which is are we seeing margin increases.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Fair enough. And then last one for IKC, you booked about 3,000 live this quarter as last quarter, but the medical spend per life is about half what it was in on the average the last quarter. So as you're bringing new patients on IKC, can you sort of talk about what type of patient dynamics they are versus who you have currently in there? Thanks very much.

[Joel Ackerman, Chief Financial Officer at DaVita]

Yeah. I would be cautious with that ratio of medical cost per life. A lot of the lives you're talking about there, their medical costs are not -- don't actually flow through our P&L. It's only the SNF lives where the medical costs flow through. So I probably wouldn't go there with that calculation.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

All right. Thanks guys.

[Joel Ackerman, Chief Financial Officer at DaVita]

Thank you, Peter.

[Operator]

And at this time, I'm no showing no further questions.

[Javier J. Rodriguez, Chief Executive Officer at DaVita]

Okay. Thank you, Michelle, and thank you all for the questions. To conclude, it was another strong quarter for DaVita resulting from our investments in recent years to build a great team, strong systems and enhance our capabilities. As we look ahead, while it's a little early to offer guidance, we believe that the underperformance -- the underpinnings of our margins are sustainable.

With this foundation, we're excited about the future we can achieve to benefit our patients, partners and teammates. Thank you for your continued interest in DaVita and be well.

[Operator]

[Operator Closing Remarks]