DaVita Inc. (DVA) Q2 2016 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct the question-and-answer session. Now, I will turn the meeting over to one of your host, Mr. Jim Gustafson. Sir, you may begin.

Thank you, Joel, and welcome everyone to the DaVita HealthCare Partners' Second Quarter 2016 Earnings Conference Call. I 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; Javier Rodriguez, the CEO of DaVita Kidney Care; Vijay Kotte, Chief Financial Officer of DaVita Medical Group; 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 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 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 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 upon 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'll now turn the call over to Kent Thiry, our Chief Executive Officer. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Thank you, Jim, and welcome to all. We delivered solid adjusted operating income and strong cash flows in this particular quarter. The total adjusted operating income was $475 million as many of you have already seen, which were driven by the strong Kidney Care results at $431 million, and a disappointing DaVita Medical Group trajectory reflected with $44 million on a non-GAAP basis there. Operating cash flow is another bright spot of $517 million as we continue to successfully convert your earnings into your cash. We'll discuss several topics here before we get into Q&A. Number one is clinical outcomes, number two is DMG results, number three is U.S. Kidney Care, number four, a little bit of an update on international, and number five is just some additional financial enterprise level details. Let's start with clinical outcomes as we always do. We are first and foremost a care giving company and quite good at it. Now about 185,000 patients in the U.S. alone, about 35% of all dialysis patients in America. One of the areas where we've increased our focus is on reducing blood stream infections, a very big deal to our patients, a very big deal to their families, a very big deal to the tax payer. It's important because this keeps patients out of the hospital. Blood stream infections are one of the top five causes of hospitalizations for these patients and this impacts both QIP and Five Star. We're now performing blood culture tests on more than 90% of the situations when a patient is present with signs and symptoms of blood stream infections, will never get to a 100%, but 90% is remarkably higher than where we were ex years ago, and where so many dialysis centers are today. Despite testing a greater percentage of eligible patients, we've actually decreased our blood stream infection rate by 16% over the last 12 months. So we're working both sides of the equation, with tenacity and some success. On the DMG side, the DaVita Medical Group, year-to-date we've outperformed and the focused HEDIS measures that CMS uses attract Medicare Advantage clinical quality compared to the same period last year. And as a result, we are on track to achieve greater than four stars in all of our planned relationships. For some more detail on the DaVita Medical Group, I'd turn it over to Vijay Kotte.

Thanks, Kent. Turning to this quarter's performance, operating income was $44 million excluding non-GAAP items, as detailed in our earnings release. Unfortunately, year-to-date we have financially underperformed relative to plan and we expect this gap to increase in the second half of the year. As a result, we're lowering our 2016 full year guidance to $110 million to $150 million. The decrease in guidance has four primary drivers: fee-for-service growth; prior-year revenue reconciliation; Medicare Advantage growth; and rebranding effort. To provide a little more color, let me walk you through those. First, our fee-for-service revenue growth has not met our expectations. Our target was 6% year-over-year, but we're achieving 3%. Second, we made a mistake forecasting 2016 operating profit by overestimating expected reconciliation payments for prior year Medicare Advantage revenue. Third, while our in-year Medicare Advantage membership growth has been in line with broader enrollment trends and the geographies we operate in, is lower than we previously expected. Fourth, as we stated in our last call, we are rebranding from HealthCare Partners to the DaVita Medical Group. To accomplish this, we expect to spend $5 million to $10 million this year that wasn't previously included in our forecast. In addition, we will need to accelerate the non-cash amortization of $110 million worth of existing trademark intangibles associated with the legacy HealthCare Partners brand. This accelerated amortization has been excluded from our revised 2016 and long-term guidance. Despite these disappointments, we're making good progress on the key items we identified at Capital Markets. In terms of fee-for-service to value conversion, we're progressing in contracting discussions with health plan, while developing value based care capabilities in our newer markets. Additionally, we continue to invest in the business, which we believe will fuel our long-term success. One example is our investment in seven new de novo clinics, which are a capital efficient growth platform similar to what you are used to seeing in Kidney Care. Finally, as we look towards our long-term outlook, our 2019 OI target remain $250 million. Now, I'll turn it over to Javier Rodriguez to speak a little bit more about Kidney Care.

Thank you, Vijay, and hello, everyone. Before I talk about the quarter, I'd like to highlight a recent development that we're very excited about. At our Capital Markets Day, we talked about the powerful benefits of integrated care for chronic populations, including our own ESRD patients. Since then, two new pieces of legislation that are supported by the dialysis community have been introduced in Congress. The first is called the Dialysis PATIENT Demonstration Act and that provides for true integrated care model for Kidney Care patients. The second is called the ESRD Choice Act of 2016 and that would finally allow for ESRD patients to enroll an MA plan. Both of these acts would be a great gift to ESRD patients and play to our long term strategy of integrated care. We're hopeful about their prospects in Congress due to the strong bipartisan support and we will continue to work hard to pursue integrated care for our patients. Now on to our quarterly results. Overall, DaVita Kidney Care had a strong and reasonably straight forward quarter, so I won't go into much detail here. As Kent said, we delivered strong operating income of $431 million due to a slight improvement in revenue per treatment over Q1 as well as a slight reduction in cost per treatment. With respect to growth, our normalized non-acquired growth for the quarter was 4.3%, which falls within our long-term target range of 3.5% to 4.5%. With the first half of the year now behind us, we are raising the bottom end of our 2016 guidance range by $50 million. This is consistent with our comments from last quarter that were more likely to be in the top half of our original guidance. With this change, our new Kidney Care operating income guidance for 2016 is now $1.675 billion to $1.725 billion. As for next year, we plan to provide 2017 guidance during our fourth quarter earnings call. We made this change last year because ACA plans have become a more meaningful part of our commercial mix. This has added some new drivers of upside and downside to our business and our industry, as well as some seasonality. Providing guidance on our fourth quarter call allows us to incorporate the additional visibility we gain during open enrollment period. Before I turn it back to KT, I want to close by saying, we remain excited about the fundamentals of our business, the gradual shift toward integrated care, and the fact that our teammates are recognized for providing the best outcomes and quality of life for kidney patients. Now back to Kent to discuss our international business. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Okay. Thank you, JR. International losses, $13 million in the quarter, which is pretty much in line with our guidance of approximately $40 million in losses on the full year. We continue to maintain what we told you I think about a year ago that we committed to try to achieve breakeven by 2018 in our current market portfolio excluding any new countries and we are standing by that. And a number of you probably saw that we did in fact close the transaction that we had to announce four weeks to five weeks to six weeks ago, that being our JV transaction with Khazanah and Mitsui on August 1. Just to refresh your memory, Khazanah and Mitsui have each subscribed to acquire 20% share of ownership over time. At the closing, each provided $50 million of funding to the JV in return, while each receiving a 6.7% stake. We're excited to have them as partners. We have a very long-term point of view about the opportunity in that part of the world, as do they, and we think they're going to help us accelerate and deepen our growth. Now, I'll turn it over to Jim Hilger to cover some more enterprise financials.

Thanks, Kent. And just a little more about our Asia-Pacific joint venture. In regard to the JV with Khazanah and Mitsui, please note that we expect that this joint venture will be deconsolidated from our financials and that future operating results will run through equity investment income for our pro rata share of ownership in the joint venture. Please note that we expect to record a material non-cash one time gain in connection with the formation of this JV and this gain is excluded from our guidance. Now on to the overall enterprise. Our debt expense was $103 million in the second quarter, consistent with the recent quarters. Next, the effective tax rate attributable to DaVita HealthCare Partners was 37.2% in the quarter when adjusted for the nondeductible goodwill impairment charge and recognition of a state income tax benefit. We expect the full-year effective tax rate attributable to DaVita HealthCare Partners on our adjusted income for 2016 to be in the range of 39% to 40%. Now turning to cash flow. We continue to generate strong cash flows. Operating cash flow was $517 million in the quarter and $2.06 billion for the last 12 months. The last 12 months benefited from the timing of tax payments. We expect full year 2016 operating cash flow to be between $1.6 billion and $1.75 billion. One thing to keep in mind when thinking about the cash flows of our individual operating segments is that, DMG generates a disproportionately higher share of our cash flows and its share of our adjusted operating income. While the midpoint of our DMG guidance for adjusted operating income is $130 million, the business has a year-to-date annual run rate of $200 million in non-cash depreciation and amortization expense. In addition, as you will recall, there is a cash tax reduction of approximately $100 million per year, which is the equivalent to $167 million improvement in pre-tax operating income. This cash tax benefit is due to the tax basis step-up created when we acquired the Medical Group. And finally, as the vast majority of DMG's business is capitated care, where we are paid before and current expenses, it has favorable cash flow characteristics with low to negative working capital. Thus, DMG contributes more to our operating cash flows than is first apparent when looking at operating income. We continue to have a very strong cash balance with $1.68 million in cash and short-term investments as of June 30. We continue to weigh capital deployment opportunities across growth investment, share repurchases, debt repayment and holding cash. Additionally, as disclosed in our earnings release, our board of directors just increased our share repurchase authorization from the remaining $259 million to now $1.5 billion. And with that, I will now turn the call back over to Kent Thiry. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: I'll just make a few summary comments before we go to Q&A. Number one, with the DaVita Medical Group, we're certainly sorry that we had to reduce the guidance. In fact, it will take even more time to get it to where we think we can be regularly growing earnings and we're intensely intent on doing, but it will take some time. Number two, DaVita Kidney Care, wonderfully solid results yet again, probably even better than that, at the same time as JR has talked about recently, we could have some choppiness at the high levels. And we are, maniacally continuing to invest in becoming even more differentiated than we are today in quality and service and physician experience and IT et cetera. Third and fourth is the cash flow. Your cash flow continues to be a powerful weapon to be deployed in your defense and on offense. And lastly, fourth, we continue to have a lot of belief in our overall business platform, everything from a geographic footprint, for capabilities by function, et cetera, et cetera. So, thank you all very much and Joel, could you please open it up for Q&A.

Absolutely, sir. So for the participants on the phone, we will now begin the question-and-answer session. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Operator, are you having any problems?

I'm just waiting for the participants. But, at the moment, we don't have an incoming question.

Joel, I show seven people in the queue.

Okay. One moment. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Hey, Joel. There might be something wrong with the equipment that you're looking at, so perhaps, while the first person ask their question, you can do some checking with one or the other people there.

Yes, I'll double check sir because those are people that are on the queue. , but let me – yeah, let me open up their line now, hold on. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Okay. But that's okay to let them in Joel, because we know that there is a number of people who ask questions each and every call. So, it's okay if they do that.

Okay. All right. Okay. So, we have our first question from the line of Mr. Chris Rigg. Mr. Rigg, your line is open.

Hi, good afternoon. Just wanted to ask about DMG here. I guess just with regard to the fee-for-service revenue only growing at 3% versus 6%, is that tied to the Everett Clinic or is that something completely different? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: It's pretty much across the board although, of course, the Everett Clinic is the biggest single source, but we're just a little bit soft in a number of different areas, and the good news or bad news depending how you look at it is, we can operate some parts of that much better outside of the Everett Clinic and within the Everett Clinic, which operates, so accidently, they had kind of an uncharacteristic stumble. And so, it's a mix of all of our fee-for-service locations nothing really jumping out.

Okay. And then just a little bit forward thinking on the ESRD choice legislation that you guys highlighted. I mean how would that, at least, at a high level work in your guys opinion? Would you get better rates from the MA plans than you currently get on the fee-for-service side? Is that the right way to think about it? Thanks. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: There is a couple of ways about it and I'll chime in to Javier, and then LeAnne if you want to supplement. The main thing is that the lives would be attributed to the dialysis clinic. And so, therefore, the dialysis clinic would become the medical home, sort of de facto medical home, because we'd have the patients for 12 hours. The other important thing is that on the revenue side, instead of having a benchmark, which is a little of a black box thing, as you get a number, it would be linked to MA, and so the revenues would be a lot more predictable. Does that answer your question?

Yes. Thanks a lot. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Thank you.

Thank you, Mr. Rigg. The next question comes from the line of Mr. Matthew Borsch. Sir, your line is now open.

Hi, this is Tejus (19:36) joining on for Matt. Thanks for taking the question. There has been some recent articles about insurers focusing on third-party payments from charities like American Kidney Fund and even across other subsectors as well. I think it's been the longstanding practice for dialysis companies to donate to these charities, but for those of us less familiar, can you provide some color on how AKF fits into your overall strategy and any dynamics at play regarding increased focus? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: And before we do that, before Javier does that, this is KT, just coming back again, I want to make sure we covered all aspects of the previous questioners question. And in general, we do get paid more for an MA dialysis patient than a Medicare fee-for-service patient. It is totally intuitively to be expected, because if you have MA risk, if you're in MA plan, you care a lot more about aggregate integrated care because you're at risk on the entire expense for the patient. And so, coming to us where you get some of what we provide and therefore lower hospitalizations and happier repeat patients/customers, it is natural that given our more robust value proposition that the payer pays us more and in fact is happier than they would be paying less for fee-for-service type service. Now, on to the next question. Javier?

Sure, Matthew. Thank you for the question. First of all, it's probably worth stepping back and reviewing level setting here. We believe that it is vital for patients of all different disease states to have premium assistance. It is a critical part of our healthcare system and has been so for decades. And of course, we got to have appropriate rules. So those need to be reviewed periodically. In Kidney Care, we have been donating and so have all other providers to help patients with end-stage renal disease for decades in order to be assisted with their premium. The OIG has reviewed that framework more than once and actually just did it over a year ago or so. And so, that framework has been vetted and, of course, we have to make sure that we all stay and abide by the rules that were outlined by the OIG. Did I get to what you're going to...

Yeah. That was very helpful. Thanks. And just a quick kind of follow-up modeling question. For the D&A, in the quarter looks like there was an uptick there. Was that associated with the accelerated amortization from the rebranding?

No, it was not. We have not started the acceleration, that's a forward-looking event, but we will keep you informed about that matter as we determine the final amortization periods. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: But perhaps we can expect...

Okay. Can you comment on the uptick though? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Why don't you give us...

It's primarily, excuse me, it's primarily the Everett Clinic.

Okay. Thanks very much. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: And so we'll check and if there's any answer that should be appended to, primarily the Everett Clinic, we'll get it back out in the next 5 minutes, 10 minutes. But, next one please, Joel?

Thank you. The next question comes from the line of Mr. Kevin Fischbeck. Mr. Fischbeck, your line is open.

Hi. Thank you. This is actually Joanna Gajuk filling in for Kevin. So, question here on the transaction that you announced with Tandigm or rather selling a portion of it. So, the question here is, who did you sell the interest to? And the question, (23:34), we would like to know whether this was a strategic player maybe who could potentially help save money there or was it done for financial reasons? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: On, Tandigm, what we did is sold a part of our stake back to IBC, Independence Blue Cross, who has been our partner in Tandigm since day one and what both sides agreed was to do this in order to create more alignment between IBC and Tandigm. Otherwise, we were in a situation where IBC got a 100% of the profits in their non-Tandigm business, only 50% in the Tandigm part of the business, and this lack of alignment was getting in the way of some of the glass breaking that needed to go on in order to move the entire organization forward. And so we agreed to be bought out in part to get that alignment, and who knows, perhaps we'll get to – go backup to a higher percentage over time.

Okay, that's helpful. And then staying a little bit on that front and specifically on the production in – I guess outlook for operating income for that part of the business, HCP or DaVita Medical Group. So specifically, how should we think about this reduction as it relates to the sale in the stake and also the exit in Arizona markets. So, is that, the guidance changed to reflect those two things or there is chance to a core performance as well? And then if it is and if you could please quantify the two different sort of buckets, the asset sales versus the core performance of the business? Thank you. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Okay. I'm going to turn that to Vijay. There was a part on Arizona and then perhaps in relationship of Arizona with Tandigm and then core performance separate from those two if I heard correctly...

Correct. That's correct. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Were those the three parts, please?

Yes. Exactly, yes. Thank you. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Okay. Thanks.

So, Joanna, I think the first question was related to, does the guidance change, is that reflective or is that driven by the change in ownership in Arizona and in Tandigm. So it is incorporated, it is not a driving component. The four items that we called out are the primary factors that are changing our guidance expectations for the year.

So, is there a way to quantify those? So I've heard you said $5 million to $6 million of this additional cost from rebranding. So is there other, I guess, the other delta, the other part of the delta is (26:17) for service and MA, right?

Yeah. One is the fee-for-service growth being only 3% versus our expected 6% and then the in-year MA growth and then the stake in our estimate on the prior year revenue reconciliation amount.

So is there a way to sort of out of those four things versus the change in coming from the sale of Tandigm and Arizona?

I would... Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: I think, let me take a stab at the answer to the question I think you're asking. Those four factors explain the change in guidance. And the Tandigm and Arizona transactions had little to no impact on go forward guidance.

Great. That's what I was getting. Yes, exactly. Thank you so much. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Thank you.

Thank you. So the next question comes from the line of Mr. Gary Lieberman. Mr. Lieberman, your line is open.

Good afternoon. Thanks for taking the question. I guess maybe to stay with that last question for a second, is it possible to breakout those four components to put a dollar number on each one of those for the impact because it was a fairly large change for the guidance?

Yeah. I think all four are pretty significant meaty parts of it, and we're not going to attribute a dollar to each one individually, but each one is significant.

Okay. And then I guess maybe just going back to the explanations for the sale of Tandigm. I guess, could you just walk us through that? In other words, wasn't entirely clear kind of exactly what the driver was there? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Sure. I can. In establishing Tandigm where you know that IBC and DaVita together stood up 100,000 member at risk HMO essentially in a year, so an exceptionally aggressive implementation. It is necessary for us to work for a lot of the home departments within IBC and also to be negotiating with the same hospitals that IBC is negotiating with for their other products. And what we found is some IBC team mates as you would rationally expect, say hey, an extra dollar of hospital rate relief goes a 100% to IBC if I put it in this product, negotiated for here, and only 50% if I negotiate for their. Now the fact is, those perceptions are going to change over time because of the offensive potential of Tandigm and because more and more IBC people are becoming a part of Tandigm. But in the mean time, rather than try to deal with some of that understandable organizational friction, we said the simplest way to deal with it in the near-term is to let us be bought down. And so all of IBC could see that they had a significant majority of the profits in either case.

Okay. And then you mentioned the opportunity to potentially increase your ownership stake back up. How would that work? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Correct. Without going into a lot of detail, we have some rights with respect to buying back up to our prior position.

Okay. So you're still committed to Tandigm and it's going well compared to when you initially did the deal or how would you characterize that? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: We're still committed to Tandigm and they're doing well. I kind of hate saying yes or no to something like that. It's a young company. We're making progress every quarter. If you hit plan, then it sounds like you're doing well, but it could have been you made too soft a plan, if you're missing it, it can sound like you're doing poorly, but it could have been you set a good aggressive plan or had a little bad luck. And so, all I can say is that we're a lot better today than we were four months ago. We're better four months ago than eight months ago. We've got some new executives onboard and so we're feeling pretty darn good. But we also set out to do something that really hasn't been done very often. And so, we just don't have a lot of illusions about skipping up the mountain. We know we're going to skin our knees a couple of times on the way.

Okay. And then may be turning towards the comments by some of the managed care companies this quarter regarding the premiums from the American Kidney Fund. It sounds like some of them may actually be talking to state insurance commissioners or pushing back in other ways to maybe get out of taking those premiums. Can you talk about any conversations that you've had or your thoughts, generally speaking, about how any of this might transpire?

Sure, Gary, this is Javier. And again, it's very useful to step back a bit. And so, in a world right now, where in 2014 the exchanges came into play, we've heard so much about the risk pools and how they're not well funded. And so a new product comes into market. Our dialysis patients and our social workers work really hard to make sure that they explain and understand their new product and at that time the patient and the patient alone makes a decision on what's right for them. As you know, many of the chronic and high cost disease states have caused these risk pools to be challenging to the payers. I think that they've in some instances have highlighted ESRD expense, but the reality is that it's pretty much our chronic diseases. So, CMS is evaluating third-party premium assistance to see what their stance is, but it's complicated around the healthcare continuum. And so, right now they're evaluating because the last thing they want to do is use a broad brush and then have consequences on one disease state versus another. So, right now what's going on is that in every state people are trying to lobby to get one thing or another. What we have found is that regulators once they really hear our patients' needs and what they literally need as choice, they're quite sympathetic to the cause and so it will play out state-by-state and of course the patients and ourselves will do the best we can to make sure that they have right to these products regardless of the fact that they end up being expensive patients.

That's very helpful. And then maybe final question just on – staying on the Kidney Care front. It looks like patient care cost per treatment was down marginally in the quarter. Any changes specifically on use of drugs and then to the extent that you guys are willing to comment on any negotiations or conversations with alternative providers of ESA or your current supplier? Thanks.

Hi, Gary, thanks for the question. No big change on utilization of med. And there is nothing new to update. The negotiations continue and all the dynamics that we've explained before are the same.

Okay. Thanks a lot.

Thank you. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Thanks, Gary.

Thank you, Mr. Lieberman. The next question comes from the line of Mr. John Ransom. Mr. Ransom, your line is now open. John W. Ransom - Raymond James & Associates, Inc.: Hi, nobody ever calls me Mr. so that's a nice honorary. A couple of things. Kent, let's kind of step back and think big picture on HealthCare Partners now renamed. You've been in this for four years. Clearly the numbers haven't been what we all hope they would be. How much of that do you attribute to structural factors and what I would say about that is maybe not as many markets were ready for this revolution as we thought? Or secondly how much of it do you say, well, gosh, maybe we didn't execute as well as we thought we could have, if it's possible to do that? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Yeah. It's a very fair point, maybe I'd refer to the four chapters. Chapter one was huge reimbursement cut, $200 million of OI loss because HealthCare Partners was more adept than others that capturing the equity codes, which we knew going in, but didn't anticipate the dramatic change in policy. We knew there would be some softening there and some compression and we knew it wouldn't be small, but we did not – with respect to what happened so much and so quickly, and therefore we own that. So, chapter one was breathtaking reimbursement, that's $200 million annually. Chapter two was pretty much total displacement of the leadership; California, Nevada, Florida, the three markets, potentially 100% change and that took time. And, of course, while you're doing it, it does get in the way of things getting done and it does create some transitional trauma. Chapter three is bring in the new infrastructure. You can buy the house on the best lot with the best architectural bones. But if it needs new heating, ventilating, air-conditioning, you got a lot of work to do. It doesn't really start showing up until it's done that makes a hell of a difference as to the experience of going inside. And so that's a chapter we're in the midst of right now. Chapter four is the one we're just starting to feel in some places where we're bringing a new level of operating excellence, a new level of innovation and enhanced value proposition, new levels of creativity and contracting. But these are just little saplings breaking through the surface right now. The good news is they're there and we're ready to take care of them. So, I would divide the world into four chapters and then I would offer up my empathy for the fact that so many of the shareholders have had to lift through the excruciating burden of chapters one through three. John W. Ransom - Raymond James & Associates, Inc.: That's a great answer, and I've a follow up for Javier. Just to push back a little bit on this foundation issue. I mean, these patients, would be covered by Medicare. It's not as though they would be bereft to health insurance or then – I think, I've read 5,500 or so patients are now on exchanges, being paid full by the foundations. I mean, aren't you arguing that United Healthcare and Anthem should take, I don't know, $5,000-$10,000 in premium and have a fair cost of over $100,000? I mean, how can we make that argument to these plans, when they could be covered under the public plans that's and I would assume, you guys have your proportional share of the 5,500, just stepping back from kind of a public policy standpoint. How do you, at a time when the plans are losing money in the exchanges, how do you argue to them that they should cover people that could be covered for a fraction of the cost under Medicare? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Yeah. A couple of things. If you're on Medicare, you're not eligible, as we go on the exchange. And so, that is the benefit that you have. For the patients, that switch, I don't know, if the number you cited is right or not, we haven't disclosed those numbers. It is a very personal decision that is based on access to specialists, drugs, and other things. So, the patient actually do get differentiated care. And so the reality of this thing is that the system, set it up for individuals to make a choice as to what their best coverage is and so patients made that choice, and it's a very personal decision that I can't decide whether that's right or wrong for the system, but rather they get to make the choice. John W. Ransom - Raymond James & Associates, Inc.: Okay. Thanks. That's it from me.

One might well also ask the question how appropriate is for plans to make multiple times the magnitude of profit on MA patients that all the providers in America do combine, that might be another philosophical question to ask. The fact is, it gets interesting. There is pockets of profitability within healthcare and then you have pockets of loss. For examples, for us about 80% of our patients are Medicare fee-for-service and we lose money on every one of them. It really doesn't make any sense and so you end up having to kind of think of it as an ecosystem, where the plans might look like excessive margin somewhere and then have losses elsewhere, where we take care of some patients and an absolute significant unambiguous loss. In other cases, have higher margins than you would expect us to. So, you've sort of have to end up looking at it as an ecosystem and see if anyone part of it is getting out of balance, because it's hard to get each individual part of it exactly right. Operator, go ahead with the next question.

All right. So, we have another question from the line of Mr. Whit Mayo. Sir, your line is now open. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): All right. Excuse me, good afternoon. Maybe I missed this, but can you go back to the prior year revenue headwind within DMG or DMG – was that prior to your issue in the quarter or is this something that you expect to hit in the second half?

It was something that we expected to receive and recognize in the second half of the year. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Maybe just help us understand the process around identifying and truing up those claims and what specifically this is?

This is not related to claims, this is about revenue and the kind of finalization of revenue with CMS. And we typically bring that in on a cash basis in the second part of the year and our estimate of that was higher than what we now believe that amount to be that we will receive in the back half. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Okay. And if you just look at the four buckets that you've outlined I guess the sources of underperformers, if you will, within the be it medical group, the rebranding doesn't seem to be an issue that's probably going to recur into 2017, maybe it does to some extent, the prior year revenue that the stuff happens, but I would imagine that's probably something that doesn't recur next year. So how much of the guide down would you call to be – would be more from transient factors? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: I think the way you're thinking about it is right, and we don't want go any further into what 2017 would look like, but I think the way you think about it is right.

I'll go a tad further than that, because right on the mistake we made in forecasting and unfortunately cut it before we were into that forecasted period, we certainly hope that that doesn't recur. We like everyone else hope that MA enrollment growth is higher the next couple of years than the last couple that's not entirely under our control of course, it depends on what government policy comes out in terms of rates to a great extent. We're working hard to nudge off that fee-for-service growth, so we don't want that to be recurring, and we don't expect it to be recurring in the long run, but we don't know how quickly we're going to be able to either bump it up to take out some of the expenses associated with not having higher growth, and I'm missing the fourth one, but I think you – you also nailed that one, enough said. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Okay. And maybe just remind us, renal ventures, is this included in your guidance at this point and it feels like maybe this deal is taking a little bit longer than maybe we anticipated just an update with the timing of that. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Sure. The answer to the first question is, it is not included as to the timing. We are equally as frustrated and are moving as quickly as we can, we anticipate back in fourth quarter closing. As of now, but as you know that is a moving target. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Got it. Any specific reason that just for the hold up on the deal or is it just one of those things, it's out of everyone's control. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: It's normal profit but low for – I can't exactly tell you why, it's just the normal profit, but it's just gone low it seems that every step of the process. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Understood. Okay. Thanks.

Thank you. Our next question is from the line of Mr. Gary Taylor. Mr. Taylor, your line is now open.

Hi, good evening. Couple of questions. First on California, will that Arizona divestiture, will that close in third quarter?

That was already – that closed within Q2.

So it's included in the cash flow statement proceeds for the six-month, which is not very much. Can you just remind us then of – in that market, what the revenue model was in the membership.

We don't typically disclose our numbers on a market basis. So I'd refrain from giving you that level of detail, is there more specific question you can ask?

Well, I guess, I'm trying to understand what it was you sold and who do you sold it to and what the revenues come out for HCP. Obviously, you said it won't have a much impact on operating income, so apparently it wasn't that profitable, but we do need to model HCP revenues on a go forward basis. So any help there would be good.

Gary, absolutely fair questions and we didn't think of that one ahead of time and we don't want to establish – on the one hand, we don't want to establish new precedent for disclosing things and on the other hand, we don't want to keep it from being able to take care of your model. So, we'll work on it and say, hey, everybody it was a follow-up call can figure out what we can say or not say about the Arizona particulars, but for us to do it spontaneously is a little too nerve-racking.

Okay. On commercial mix, improved about 100 basis points last year, I believe, and I did note that revenue per treatment growth slowed this quarter year-over-year. So, I didn't hear you call anything out. So I'm presuming you're just counting that growth of commercial mix and are we right to think that maybe commercial mix is pretty stable year-over-year, is that down?

This is Javier again. So I think you're alluding to, 2014, we disclosed 10% and revenue per treatment was $342 million and 2015 we disclosed 11% revenue $348 million as you saw we're $351 million. We haven't disclosed the mix. So, it's fair to say that stable with a slight pump.

Okay. On the HCP side question. Are any of the rates contractually tied to the health industry fee holiday, in another words, we've heard from some plans that, as they get released in 2017, and not have to pay this industry fee holiday, some of their capitated groups contractually get a bump, because they effectively had to eat, as you did some rate cuts over the last few years. So, this is effectively a net rate increase to the plans and not to have pay this fee. Will HCP benefit contractually from that in 2017? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Again, as it relates to our contracts, there is a – it's a mixed bag. Some of our contracts will have it flow through, others won't, but in those where it does flow through, there may be some slight pickups there for the one-time period, as you know all the details we're up.

And last question, I believe at Investor Day, you had sized $25 million Medicare headwind for HCP, in 2017. And I wonder if there is any update to that, obviously we're thinking about potential negative impact of the dual risk or model change in some markets, but positive in others and then maybe a little bit of benefit from this industry fee holiday. At this point, is that $25 million still the best number? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: That is still the best number, including all the things you just described.

Okay, all right. Thank you.

Thank you, Gary.

Thank you, Mr. Taylor. The next question comes from the line of Ms. Lisa Clive. Ms Clive, your line is now open.

Okay, thanks. Three questions, just the HCP Arizona sale, could you talk to the rational for that? Second question, just on the write downs that we've had on HCP, over the last few quarters, are we at the bottom here or are there potentially more to come and obviously it depends on what your accountants say, but just be helpful to think through that. And then the third question is on the international business you mentioned a goodwill impairment charge, just wondering what the source of that was? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Let me first start on the Arizona divesture. In short, we got a good offer that was presented to us and as we looked at the alternatives, the way that we did invest and deploy our resources for a greater value, it was the right trade-off. So we decided to accept that offer and divest. Jim, you want to touch on the...?

In regards to the goodwill impairment that we took in the quarter, as we look forward there is a chance that we will have another impairment. As we disclosed in our 10-Q, we have a negative cushion in our Nevada and Florida markets, and there's a very kind of nuanced and detailed accounting rules around impairment accounting, and so when you have a negative cushion, that means that your fair value is less than your book value. And so if there was any further deterioration in performance or in our outlook of those markets, we could see a further impairment. Additionally, the FASB is looking at changing the rules around accounting for goodwill impairments. When they do that, there may be an effect related to the adoption of those new rules. And then the final part of your question was an international impairment. We did have a small international impairment last year, but we did not have one this year.

Okay. Thanks for that clarification. Just one follow-up on the Arizona deal. Who did you actually sell to? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: I don't know if we're authorized to say. Does anybody around the table know for sure? I don't know the contracts by – I tell you if you could call in and we'll check in now if it's fine, it's also relatively commonly known in the market in case you know anyone there, but we'd happy to give the answer once we confirm that we were legally allowed to.

Okay, thanks. Yeah, I was just curious as to what sort of entity would give you a good deal to take it off your hands. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Yeah. For us, it was better for us to focus on other markets than that one.

Okay. Thanks for that. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Thank you.

Thank you, Ms. Clive. We have another question from the line of Ms. Margaret Kaczor. Ma'am, your line is now open. Margaret M. Kaczor - William Blair & Co. LLC: Good afternoon. I was hoping to start out with exchange plans. Over the last couple of calls, this has been a popular topic for you guys. But now that we're in August, halfway through the year, are you seeing the regulatory environment improving, stabilizing or patients receiving adequate access to care, especially near term? Any trend data that you guys may have would be helpful.

Yes. We actually don't have any significant change. The patients are receiving great care. And right now, as we stated earlier in the call, there is a lot to be played, so a lot of rules and enforcement is still to be played, but right now there is nothing different to report than what we told you in Capital Markets Day. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: And I think the way I would put it is that the regulatory agency's capacity to enforce the regulations with respect to exchanges remain weak, either by virtue of lack of motivation because they're worried about the exchange's financial liability or because they just don't have the resources. Margaret M. Kaczor - William Blair & Co. LLC: Is that something that can change at some point in the next 6 months, 12 months, 18 months? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Yes, it could change and it's likely to change some, but one wouldn't want to pin one's hopes on it changing a lot. Margaret M. Kaczor - William Blair & Co. LLC: Okay. And then on your international ventures, how is Asia developing and some of these other countries like Saudi Arabia developing? And then how do you compare those businesses versus some of your clinics in Germany both in terms of patients, investments going forward and profitability profile? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: We're in 11 other countries now and the microeconomics and growth trajectory are different in every one. The good news is that in virtually every one, the microeconomics work at a very reasonable market share position. So, even if we're losing money now in a country just by increasing our scale with the existing achieved microeconomics of our current centers, we know we're on the path to the promise land of, first, being profitable and then, second, having an adequate cumulative return. But the differences are quite large, and Germany and Saudi are two of our more successful markets from many perspectives including the microeconomics. Am I getting to your question? Margaret M. Kaczor - William Blair & Co. LLC: Well, and part of it becomes how do you guys bridge to that profitability gap you talked about at the Capital Markets Day, and what impact and how many years really will it take for China to either be material as well as profitable? Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: So I don't know is the answer with respect to China. That day is almost certainly outside your investment time horizon, and yet the only way to become a leader in China is to get into China and learn it, very difficult to try to transplant your way in X years later. In China, we'll probably end up with a few partners is the right way to do it. Just as we concluded in Asia, despite the fact that we were doing well in Southeast Asia partnering with Khazanah and Mitsui we thought was going to help us grow faster and better everything from helping us recruit more talent, helping us oversee what we have, helping us interact with the government more and the regulators. So, in all sorts of ways, we learned important lessons, which should make the next five years very different from the last five years, but having said all that, in China in particular, you want to be very careful before you start talking about any bullish forecast because it is one tough place to do business. Margaret M. Kaczor - William Blair & Co. LLC: Okay, and then one last question. We're trying to balance some of the growth within dialysis, again some of the other companies we cover and what we're noticing is as some of the acute care demand at least for equipment is growing a little bit faster, you are seeing PD growth a little bit faster, so maybe what are you guys seeing in the field, are you actually seeing acute care patients improve in PD, and how does that end up benefiting you guys? Thank you. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Yeah, thank you, Margaret. We are seeing our PD grow similarly than our non-acquired growth in in-center, so we're not seeing a disproportionate growth there. And as it relates to our acute business, there is noting that stands out to our historical trend, so it could be that equipment of course is in this line with services and that equipment could be old or someone decides that they want to do some treatments in their hospital and/or change their staffing ratios and instead of having a room where they conduct dialysis, they want to go bed-to-bed in the hospital, so it's really hard to predict the alignment there, but we're not seeing anything different in our business. Margaret M. Kaczor - William Blair & Co. LLC: Great. Thank you. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: Thank you.

Thank you. Ms. Kaczor. At the moment, speakers, we have no more questions over the phone. Kent J. Thiry - Chairman & Chief Executive Officer and Chief Executive Officer, HealthCare Partners: All right. Thank you very much, everyone, for your interest in DaVita. We'll do our best for you in between now and our next call. Take care.

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