Kent Thiry - Chief Executive Officer Joel Ackerman - Chief Financial Officer Javier Rodriguez – CEO, DaVita Kidney Care Jim Hilger - Chief Accounting Officer LeAnne Zumwalt - Group Vice President Jim Gustafson - Vice President, Investor Relations

Thank you for standing by. My name is Colene and I will be your conference facilitator today. At this time I would like to welcome everyone to DaVita's Fourth Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Mr. Gustafson, you may begin your conference.

Thank you Colene and welcome everyone to our fourth quarter conference call. We appreciate your continued interest in our company. I'm Jim Gustafson, Vice President of Investor Relations, and with me today in the room are Kent Thiry, our CEO; Joel Ackerman, CFO; Javier Rodriguez, CEO of DaVita Kidney Care; Jim Hilger, our Chief Accounting Officer, and LeAnne Zumwalt, Group Vice President. 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 fourth quarter earnings press release and 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. Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website. I'll now turn the call over to Kent Thiry, our Chief Executive Officer.

Thank you, Jim. As you probably already noted, we had solid fourth quarter results that were consistent with prior communications and of course J.R. and Joel will discuss those in greater detail a little bit downstream. But we are first and foremost a caregiving company and so as usual we will start by talking about a clinical highlight today, Antibiotic Stewardship. As many of you know, dialysis patients are highly prone to infections. We have continued to get better at supporting evidenced based prescribing of antibiotics, which has a couple of benefits, including reducing harm to patients from excessive antibiotic use and also preventing the emergence of antimicrobial resistance. This is something that all caregivers should be doing across American and Global Health Care and we are proud that we are getting better. In fact in 2018, among patients with symptoms of Blood Stream Infections, we actually decreased IV antibiotics starts by 12% while maintaining all clinical quality. This is important not only in terms of what we did this year, but we continue to collect data to improve our ability to do even better in the future. Now, a quick update on the DMG transaction. We are working closely with Optum to obtain FTC approval, which of course is necessary. The timing of the process was very negatively impacted by the government shutdown as it was for so many other transactions and we cannot speak definitively to the timing for all the reasons we haven't been able to do that up to this point and all the same reasons that other companies involved in other transactions cannot. But everybody's working very diligently to move that ball forward. In addition, some good news is that in 2019 the DMG Financial performance will improve – is expected to improve significantly. There are a number of very tangible reasons for this. One for example is significantly better Medicare advantage rates than in prior years; number two, the elimination of the health insurer fees, a dollar for dollar significant pick up; number three, the dollar for dollar elimination of considerable consulting expenses incurred in 2018 that will be gone in 2019; and fourth, the number of operating improvements, investments that we made in prior years that are bearing fruit. So the net is that 2019 DMG would be significantly better as is expected to be significantly better than 2018. Now over to Javier for a summary of our Kidney Care business.

Thank you, Kent and good morning everyone. Today I’ll cover two topics. First, I'll provide a recap of our financial performance, and second, I will discuss the legislation recently introduced in California. For the fourth quarter 2018 our results are in line with our guidance. Adjusted operating income was $370 million for the quarter and $1.513 billion for the full year. Our 2018 operating cash flow from continuing operations also came in line with guidance at $1.48 billion. Related to cash flows, our 2018 CapEx spend came in better than our guidance and we are guiding to a lower spent in 2019. There are several drivers to this declining CapEx spend, two of which are worth calling out as they should decrease the CapEx spend on new centers in the next couple of years. First, we continue to focus on driving the right modality for our patient. For many of them dialyzing at home may be the best option. Now that we have a more secure supply on PD products, we anticipate more patients will be able to choose home dialysis. In fact, in 2018 we trained and educated over 13,000 new home patients. As you know, home growth has an incremental benefit of being more capital efficient. Second, as we mentioned earlier this year, some recent data suggests that ESRD industry growth may be slowing, but we don’t know whether this is a short term impact of increased transplantation availability or whether there is a long term implication in the immediate term we plan to build fewer centers to keep pace with patient demand. Next, as many of you know Q4 includes open enrollment decisions for many of our patients. Overall we observe stable results from open enrollment, which is consistent with our expectations. In the individual markets in…

Thanks Javier. Let me walk you through some components of our U.S. Dialysis and Lab Segment. First, growth; our treatment per day growth in Q4 was 3.1% and normalized non acquired growth was 2.6% as we continue to see a decline in volume growth. We continue to expect non-acquired growth to range between 2.5% and 3.5% in 2019. Next on revenue; revenue per treatment was down $0.65 from Q3 to Q4. If you exclude the impact of calcimimetics, revenue was up a little more than $1 per treatment sequentially. To give some perspective on this for the full year, commercial RPT for the year was down approximately 1% as we shifted out of network business to in network, which offset commercial rate increases that we've achieved across much of the portfolio. For the year commercial mix was down approximately 10 basis points from 10.5% in 2017 to 10.4% in 2018. We believe that our decline in mix was consistent with the demographic headwind that we have previously outlined. Finally on revenue, our strategic initiative revenue was negatively impacted by our previously announced wind down of DaVita Rx. DaVita Rx revenue was down approximately $100 million quarter-over-quarter and Q4 is reflective of the go-forward run rate. On costs, patient care cost per treatment was up $1.26 quarter-over-quarter, primarily due to an increase in professional fees. Dialysis and Lab Segment G&A was down quarter-over-quarter approximately $4 per treatment, $2 driven by a decrease in advocacy spend and the remainder due to normal quarterly spending fluctuations. For international, we achieved a slightly positive adjusted operating profit for the quarter, excluding the FX impact of our joint venture in Asia. We expect positive operating income from international operations in 2019, excluding any FX impacts, which are incorporated in our enterprise guidance. For the fourth…

I like to just make a few comments for: Number one, please be reminded that the next few years Medicare year-over-year fee for service rate increases will be better than the almost zero increases over the last few years. Second, the international business now has a foundation on which we can expect year-over-year or like contributions rather than offsets. Number three, we continue to generate strong cash flows and they are fact incrementally better than some of the prior years. And four, we are very well positioned to be a differentiated high value added provider integrated care for these needy and expensive patients. Operator, lets switch to Q&A please.

Thank you. [Operator Instructions]. The first question comes from Kevin Fischbeck, Bank of America. Your line is now open.

Great, thanks. I guess we want to start of with DMG as a question. I appreciate if you can’t say exactly when it’s going to close, but I didn’t see your comment review that you are still confident that it’s going to close. Just want to make sure that from your perspective everything is still on track and it's just a matter of timing at this point.

Yeah.

Okay, great. And then I wanted to talk a little more about the slowdown in growth that you are seeing and expecting from a treatment perspective. I missed, I think you mentioned something about factors that may or may not be temporary. Can you talk a little bit about what those factors are and if there is anything else that you are thinking about or thinking about what organic growth should look like?

Yeah, thanks Kevin. This is Javier. We started to see a bit of a slow down on new starts in the back end of the year and that's why when we provided guidance, you saw the number came down to 2.5 to 3.5 of non-acquired growth. Some of the factors that are still in play are what's happening upstream with other comorbid conditions and how that is impacting, how many patients have ESRD, and another dynamic is how many organs are gone into that transplant pool, as the number of organs has picked up due to the opioid crisis with many people being young and having healthy kidneys. So there is a lot inter played, many dynamic upstream and so we are trying to see if they are short term or if they are going to be longer term.

Okay, from your perspective, the new starts that you are doing over the next year, is that going to position you for inline industry growth, market share gains, market share loses, how are you thinking about that?

I’m sorry, are you asking how we are positioned within that growth? Is that the question?

Yeah, your guidance of 2.5% to 3.5%, does that mean that you expect to gain share or are you going along with what you think the market overall should be growing.

Yeah, in the last couple of years, actually not the last couple of years, maybe the last couple of decades we've outperformed a non-acquired growth. We believe that there's nothing in the data that would say that we would not do that and so right now we are just looking more at the market dynamics overall.

Okay, and then maybe a last question for now. On the commercial mix, I think you said that you know mix was down 10 basis points year-over-year in line with kind of what you would expect in all demographic trends to kind of argue for. But I think your guidance assumes that actually mix will be relatively flat. So I’m not sure if the demographics point to a decline each year, how you're thinking about being flat you know in 2019?

So Kevin, its Joel here. The demographics are certainly a headwind, about 10 basis points a year. We see opportunities to offset the headwind through upstream, education of patients, as well as helping them with their insurance once they’ve come on dialysis. So we see opportunities to offset the headwind, but we do see the headwind persisting.

Okay, alright great. Thank you.

Thank you, Kevin.

Thank you and our next question comes from that Justin Lake, Wolfe Research. Your line is now open.

Thanks, good morning. First, let me follow up on Kevin's question around the deal close. I understand the government shut down and delayed everything, but the last thing you had talked about was expecting the deal to close in the first quarter. So with the government shut down about 30 days, you know that would take us out to end of April. Is that still kind of where you would expect or do you feel like the first quarter, even ex the government shutdown, you know things have changed?

Yeah, so Kevin its Joel here. We are certainly still trying for Q1, that is a real possibility, but the government shutdown has certainly lowered the odds of that happening.

Is there anything new besides the shutdown that would change that trajectory?

Justin, there is always a lot going on and [Audio Gap] nothing new would suggest that nobody's doing any work, nobody's asking any questions. But Joel’s answer still applies, were we are hired with a goal that he cited.

No problem. And then on the California legislation, just given this is the second time they are coming here and they've got a Governor that you know might be more likely to actually sign this legislation if it gets past. Curious if you can help us, you know put a range around the potential financial impact that we should think about for 2020 if this legislation does pass.

Yeah Justin, as you can imagine the legislation moves and there's different ways to interpret and of course you can never predict how it'll play out, but to try and be constructive and give you a range, I think it would be useful to have somewhere in that $25 million to $40 million as a range.

That is helpful. I will jump back in the queue. Thanks guys.

Thank you.

Thank you. Our next question comes from Steve Tanal, Goldman Sachs. Your line is now open.

Thank you guys, good morning. I guess just on the slower normalized, non-acquire treatment growth in the quarter at 2.6, is any of that attributable to pick-up in home dialysis or is that capturing that?

That is captured in there; the home growth is in the 2.6.

Got it, okay. And how are you thinking about home hemo. It’s just a comment of sort of growing in the home and making that more available. Is that – that’s sort of the new technology in the market. Are you guys planning for growth in that business or how should we think about that?

We’ve been leading in home for as long as I can remember and we will continue to do what's appropriate for the patient and the right modality for each patient, so we of course assess technologies. There is a lot of talk of innovation, but if you really look carefully there's a lot of smoke in that innovation. It really is a lot of the same, and people are just trying to talk up their products. But we of course love it when there's something that's good for the patients and we will pursue whatever is best for them.

Okay, got it. Then just on the slower De Novos, can you give us a sense for what you are planning for ’19 and how you are thinking about sort of the number of opening of longer term at this point.

Sure. So I’ll preface the answer by highlighting the fact that there is a lag between the slowing of growth and the slowing of the De Novos. De Novos that are coming on now are decisions that were made, they are leases that were signed a year or two ago. So with that said, we are looking at a significant slowdown in De Novos in 2019 and we think that will continue going forward. I’ll highlight that it's a function of two things. One, it’s a function of the slowing NAG; it's also a function of the growing home. And you know as more and more patients are dialyzing at home, our need for the traditional in-center dialysis, De Novos, comes down.

Understood, okay, got it. And then just lastly from me, just on the RPT side in calcimimetics, I think you had mentioned it was a $1 sort of headwind sequentially. Is that sort of calcimimetics in total added about $17. I think it was $18 in Q3 if I recall correctly?

Yeah, that's about right.

Got it, okay, thank you.

Thank you, Steve. And our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Good morning guys and thanks for taking my question. Two questions, first one of the review per treatment. You talked about bringing more revenues from outer network to in network. We sort of estimated about 3.4% of revenues now, out network for your book of business. Is that in the ballpark or can you talk about that?

I think that question has been asked for many years and I think we are not going to change our stance today to give more clarity on that. We try to be as useful as we could in January to provide some of the trends over the long haul and Kent talked about sort of a nine year trajectory of that number coming down, and I think that's as much as we can do right now.

Right, fair enough. And then on the weaker growth in the quarter, can you sort of talk about any impact from wildfires or weather and then because it’s sort of varied so much in fourth quarter versus what we saw through the rest of the year, is there any way of getting us any sort of monthly numbers, just so we can get a better feel for sort of what was the core growth rate and also the way you guys exited January.

Yeah, so nothing to point out relating to wildfires or any sort of one time stuff like that. In terms of monthly numbers, I don't think we are going to go to that level of granularity.

Okay, fair enough. And then last question from a leverage perspective. As the DMG business hopefully gets sold, I think by the next three years, what’s the right leverage ratio we should think about you guys running?

No real change to our thinking around that. 3 to 3.5 times is the range we expect to generally be in, although we have gone above that for a variety of reasons. Obviously we are well above that right now. But I think the 3 to 3.5 times is still the range to think about.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from Patrick Healy with Barclays. Your line is now open.

Hey, good morning, thanks for taking the question. You mentioned in the past that as an industry you’d be looking to introduce some proactive legislation in California. Can you just provide some color on what that legislation might look to do?

Yes, thank you Patrick. Of course, we are trying to make sure that we educate the legislators to understand all the dynamics that are going on in an ecosystem that is not something that they normally are discussing. And so in our legislation what we want to make sure is that whatever guardrails are needed so that everybody understands that the right patient that have continuity of care are getting access to charitable premium assistance, and so it's clarity on that is what we are trying to do as opposed to the bill now, which goes beyond that.

Got it, and the other thing is Kent I've heard you speak recently about desire to get more involved with the pre-dialysis CKD population. Any color on what kind of investment you may look to make there? Why you think there is opportunity for DaVita and just something that could better enable you to provide integrated care once patients are you know transitioning on to dialysis and you know better address the cost of the patients outside the clinic. Just any color around that would be helpful? Thanks.

We will be able to add significant, really impressive clinical and economic value if we're allowed to move upstream and help take care of people who have kidney disease, but have not yet experienced kidney failure. And by intervening with those patients, in different ways we’ll be able to delay the onset of dialysis and in some cases prevent it, and then not only delaying it, but also having people be healthier and have a healthier start to their dialysis. All of these improvements have big clinical and economic implications, but there's a bunch of regulatory work to be done, as well as contracting work to get there, and we are making some nice incremental progress, nothing to bake into any forecast yet, but we're working hard.

Got it, thank you.

Thank you. And our next question comes from John Ransom, Raymond James. Your lien is now open.

Hi, good morning, I went back and looked at some of the qualitative comments about commercial contracting all of last year and it seems like we ended up in a place in 2019 that was a bit below at least what I was expecting. So was the thought that you would always end up here or did we get some kind of late breaking news that caused the needle to move.

John, obviously I don't know what’s in your assumptions, but it came in line with what we were seeing and of course on any given time there's pluses and minuses. But for the year it was in line with what we expected.

I was just simply talking about the five to six large contracts being redone and you are pleased with the increases and I guess I was thinking zero to one wouldn't be what should be shooting for, but that's what I was referring to. Okay, that's it for me. Thank you.

Thank you.

And our next question comes from Gary Taylor of J. P. Morgan. Your line is now open.

Hey, good morning, just a few quick ones. For 2019, is the expected advocacy spend still in the $30 million range?

Gary, that is the additional spend from our regular advocacy spend, yes.

Okay, that compares to the 93 extra last year, right?

Correct.

And then I just want to make sure I understood in response to Justin's question on the California legislation, the equivalent of 1156. So you are saying if every CPA patient in California moved to the Medicare rate, it would be a $25 million to $40 million revenue in OI hits or there is some offset between revenue and OI?

I’m glad you are asking it Gary, because basically we didn't provide much detail because there are so many assumptions that go into it around a lot of dynamics and so what we are trying to do is just be useful and give you the top line, which is basically there is a range of $25 million to $40 million, but we are not going into specific dynamics.

And that would be every CPA patient going to Medicare, right?

Like I said, patience and the way the system will work is yet to be seen. So it’s probably not good to assume anything, rather be constructive and give you the range of all of the dynamics going in there.

Okay, last one is for CapEx can you tell us and I apologize if it is on that last page, but CapEx for new centers in 2018 and what you think that looks like for 2019 and in 2020. Just if you talked about your new center openings, I was trying to get a sense of the impact on annual CapEx there.

Gary, so we can't give you a specific number. There's a range built into that as we watch over the course of the year exactly how many De Novos get built, where they get built, what the cost per De Novo is. But it is safe to assume part of that significant decline from 2018 to 2019 will be the result of fewer De Novos getting built. But let me jump in and just correct something I said before. There was a question about calcimimetics RPT and I think what I confirmed was a number of $17 just to be clear. $17 was the number for the year, the number in Q4 was about $16 of RPT.

That's it for me. Thank you.

Thank you.

Thanks Gary.

And our next question comes from Whit Mayo, UBS. Your line is now open.

Hey, thanks. On the commercial book, how much of your contract or how much of your book is set to reset in 2019. I guess I'm just trying to get a sense of you know what your expectation is for renewals in 2019 and what the expectation is for revenue for treatment. Thanks.

Thanks Whit. We don't disclose how many contracts are up on any given year and so I can't give you that. What we guided to at JPM was that the commercial book would be down 1% to up 0.5%.

For 2019?

Correct.

Okay, looking at the deceleration in treatment growth, I know that we are all you know speculating and guessing on a lot of the contributing factors, whether it’s better insurance management transplants or whatever. But have you been able to size maybe internally what do you think some of these contributing headwinds are, just to maybe help frame up for us how to get from Point A to Point B?

Yeah Whit, so we spend a lot of time on that. It's challenging because the data bounces around and a lot of the data we are using comes on a really long lag. So how to assess kind of current numbers is more challenging than we like. So I don't think we can be particularly helpful in trying to break down how this – how the deceleration comes about from the different components.

I think we're all trying to do the same exercise. Looking at G&A in the fourth quarter, if we exclude the $30 million of advocacy costs in California, it would have been around $180 million and I know that there are quarter-to-quarter fluctuations, but it still stands up a little bit lower than I would have expected and I guess I'm just trying to think about the starting point into 2019. Is this the new run rate? You know just any color to put the G&A trend for this year into perspective.

Yeah, it is – it does bounce around as you pointed out. I don't think there's anything major that we would call out for Q4 or in the year-over-year numbers, so roughly flattish would be a reasonable expectation for 2019, and that's on a per treatment basis.

On a per treatment? Maybe two other quick ones and I don't know if you’ve disclosed this metric before, but any idea how much of your total treatment mix is Medicare advantage today or you know maybe another way to get a more responsive answer is like I think CMS is five, the industry around 20% of total treatments. Any reason that you’d be you know different one way or the other and I guess I'm trying to sort of gain some insight into 2021 and maybe where you think that that mix can go over time?

Yeah, thank you. We have not disclosed our MA mix and we're not going to disclose our MA mix, but as you try and look out at what happens into the future, it's difficult to predict, because as you can imagine individual’s will make their own decisions. But maybe one reasonable assumption could be that it's in line with the overall market, which is around 35%. But as you know, individual decisions, there's going to be a consideration on co-pays and deductibles and out of pocket and coordination of care. They are going to try and see if physicians are in their network, etcetera. So to try and guess that on a total population is hard, so we of course have done some modeling and right now a reasonable assumption is it'll be in line with the overall market.

Okay, thank you and just one last one. Joel, you decided to increase professional fees. Any more color there? Thanks.

Really nothing interesting there. Some legal stuff is probably the biggest component of that, but really it’s just kind of normal fluctuations up and down.

And that’s in – is your professional fees, is that flowing through G&A?

No.

It’s in your – it’s in the cost number, patient care.

Well, it’s in both. I think my recollection, and I'll get an answer for you in a second is that most of the swing up is in the patient care side.

Okay. So nothing in the ancillary segment that would be allocated?

No.

Okay, thanks guys.

Thanks.

And our next question comes from Jeff Gate for Gates Capital. Your line is now open.

Yeah, I'm looking at the U.S. dialysis segment margins and if I exclude the so called incremental advocacy costs and if I exclude the calcimimetics – however you pronounce it, revenue, and then if I moved $25 million per quarter out of 2017 numbers. If I added back because of the, we’re moving the 401 K benefit, I'm showing that underlying comparable U.S. dialysis margin was actually up for the year and I just wanted to confirm that that math was approximately correct.

Yeah, I'd suggest we kind of take this offline. I'd be happy to walk it through with you. I'm not 100% following your math. So why don't you reach out to Jim Gustafson and we’ll follow-up on this.

Okay.

Thank you, and our next question comes from Justin Lake, Wolfe Research. Your line is now open.

Thanks for taking another question, I just got a few more here. Commercial price, so just trying to come at this another way, you said 60% of the outlier water rates have normalized over nine years. Maybe you could tell us how much more normalization you are kind of assuming for 2019. Kind of where would we end this year at?

Alright, Justin I just think talking about it year by year, it is just not reflective of reality, which is why we gave you the long term data. We pledged many years ago to work down the outlier part of the book in a constructive way and in some cases that can be easy-peasy. You got a payer that’s got some really high rates and some really low rates and so you move everything to the middle on sort of a net neutrality basis. In other cases it's not so simple, but that's what we said at the historical data is, so that people know that over a period of many years it has not lead to any material disruption, although there have been give good quarters and bad quarters and good years and bad years, and it's quite unpredictable. And so once again we give you the empirical data, so you can see that it is relatively predictable over the long term, but not over the short term. So guessing and giving you a guess on a single year, we just think could be really a lot more noise than data. We do however are commit to our belief that over the next five, six, seven years, this trend towards fewer outliers will continue and there'll be some bumps that are positive and some bumps that are negative along the way, but it shouldn't be anything fundamental.

Right. I guess you know I'm sure you can understand, investors are trying to figure out the potential impact and you know this year there was – you know you have zero kind of built in for commercial rate growth give or take. So you know given you normally get increases in contractors as you said, we’re just trying to figure out like is this a nor – is this what we should consider a normal year over the next five to six that you talked about or is this a you know a bigger year of these outlier rates moving to normal.

Yeah, I don't think we can say. We put a lot of work into giving the guidance for this year, we're going to put a lot of work into providing the three year outlook at our upcoming capital markets in 2019, but I’m just spontaneously trying to figure out where in that the word normal applies to that particular number in the particular year of 2019. I don't think I want to say – we don't want to say either yes or no to what exactly is normal. Hopefully we really helped you understand that. Clearly there's some offsets in ‘19 that are offsetting the fact that in a lot of our books we're getting nice rate increases. So that is going on and we've done our best job at calibrating it for you, but I wouldn't want to characterize it as either normal or abnormal. If you look over the next, the last eight, nine years, it’s not an outlier, it's just a tough year.

Okay, and then just switching over to volume, you know obviously you've got a ton of medical directors who are nephrologists and I assume they are seeing upstream, their pre-ESRD patients, and so I'm curious what they are telling you in terms of this slowdown in you know patient growth. Are they saying that you know people are taking longer to you know – if they are able to prevent the kidneys from fully failing, so that's why it’s slowing or are they seeing an actual slowdown in growth in pre-ESRD. I would have assumed that would be something that you would be able to you know see coming from a pretty long distance.

It's a fair question and as you know there's a wide distribution of sophistication of the way that the practices are ran from very small practices to large practices. With the people that I'm talking to Justin, they have not seen their CKD practice slowdown in any significant way, but one can never put too much stake in that, because the reality is that many of these practitioners are not that sophisticated that their practice is busy and they don't segment, as well as a sort of a Fortune 500 would. But at the end of the day there's nothing that they are picking out.

And Justin, it’s worth throwing out a few numbers to help explain why JR’s answer is the appropriate one. You just take a typical mythology group and say there's three doctors and say they've got 100 dialysis patients each, that’s 300, and then there's a 13% mortality rate let's say. So that's 39 patients to replace the ones that passed away. And then you have 3% growth and so you add another nine patients on, and so you’re talking about 48 new patients per year spread across three doctors. When you have a 1% change in the organic population, you are talking about two patients difference over the course of an entire year and settle up whether or not a group has 48 new patients or whatever number spread across 12 months or 50 or 46, that is not something a practice can notice, because year-by-year they are going to have those fluctuations. It’s not going to have anything to do with the aggregate CKD incidence or advancement and so that's why JR’s answer to the practice wouldn't pick up on this, unless it was way, way, way more than 1%. For us in aggregate and for you we pay a lot of attention to 1%, because there's some incremental EPS math attached to it, but it's highly, highly incremental and not discernible at the practice level with rare exceptions.

Okay. Just a few other numbers questions here. You mention international as getting to profitability. Can you give us any kind of trajectory there, maybe a margin kind of target over the next few years that we think, you know you think would be a reasonable range to think about where this business can operate.

Yeah Justin, we're not going to – we're no longer going to call out specific guidance for international. We will continue to report on it every quarter, but given the magnitude in the context of the whole company, we don't think guiding on it as a specific number is something we're going to do.

But we will add just to try to be a little responsive without going into misleading details there. We've had three consecutive years of improving the EBITDA margin by 2% per year. So just to give you a sense of the incremental operating improvements and mix improvements, so things are moving in the right direction, we can say that right now.

Okay, but no even target margins?

I don't think that would be a good idea right now given the different country mix. It’s heavily influenced by which countries grow the most and sometimes you might have a lower margin country, but in fact it's got higher return on capital and so it – I don't think – it wouldn't yet be a useful number for you Justin.

Okay, and then two more here. The CapEx, you know that’s before where your CapEx can go and Joel you said CapEx couldn't you know materially decline over you know some period of your time if your De Novo’s moderate. Can you give us an idea of what kind of you know – you know if you had to look today and obviously this takes years to kind of play out because of how far you have to plan them ahead, but two or three years from now, given the growth you are seeing in the business, what kind of CapEx moderation do you think can happen here from that net you know seven and change number that you are reporting for this year.

It's hard to predict Justin. We're just not in a position right now to give kind of multiyear guidance on this. It will depend on a bunch of things, including growth and depending on what happened to the growth, whether this decline is temporary or not, as well as what happens to home penetration and other things. There can be some real impact on that number, but we are not in a position to give longer term guide.

No, I apologize, but I thought you said it was material. You know it could be a material decline if the growth continues and you continue moving towards home, which it sounds like you are trying to, so I’m just trying to get some order of magnitude. I understand if it were to re-accelerate you’d have to spend more money. But just at this growth rate, in both of those factors, where do you – you know what would you call material?

Yeah, we're not in a position to quantify what exactly that would mean right now.

Okay, last one on Medicare advantage. I know to which question you – it was helpful to say that you – that you think you can get to an industry average over time in Medicare advantage penetration. But obviously the starting point is pretty important and I just recollect you guys having said 10% to 15%. That was kind of the range of where you were today. Am I wrong in picking that number up?

We're looking around the table Justin and no one remembers ever having shared that number, which is not to say it didn't happen, but there's just a bunch of blank stares across the table.

Okay well, then I'll come out with a different way. You know obviously we’ve talked about this being a potential meaningful positive. To get in getting the 35%, 40% where the industry is going to be a few years from now, it obviously could be significant, but not understanding where the starting point is. There's no way to say whether that’s even going to be a benefit or not, unless we understand the starting point. Is there any way you can give us you know even a round number, 10%, 20%, 30% of where you are today?

Yeah, hey Justin, I want to predict this, because we weren't prepared to do that for today but you are making a fair point. So this is obviously a multiyear issue and we do expect our MA to grow in a non-trivial way and it's going to be great for patients and we think great for the system, because it will also bring down total cost. But none of that is responsive to the specific starting point question. So if you just let us not make a spontaneous decision here, instead think about it and then maybe next quarter we'll provide that number.

I appreciate it. Thanks for all the questions.

Yeah, thanks Justin.

Thank you. Our next question comes from John Ransom from Raymond James. Your line is now open.

Hi, let me just go back one more time on something. So you mentioned wanting to get more involved in pre-CSRD and it would involve some contracting. Is it you know the commercial payer has only been on the hook for 18 months and then Medicare being kind of slow. Are we talking probably the Medicare advantage payers would be most receptive to do some different type of contracting that would actually incentivize you to keep people from crashing into dialysis or nothing about that long?

No, you are thinking about it correctly. You were already doing that work with some payers and both they and we believe were having quite an impact clinically and economically and so we would expect that to increase over time. However, right now there's not math associated with it that's exciting enough for you to bake it into any near term forecast. Hopefully the future rolls on and we get better and better at it and have more data to prove how good we are at it, it'll be more relevant to your model.

And is this part of the tuition from DMG or does this accelerate your learning curve in some of these risk based types of contracts.

Yes, there was some very good learning in both directions where DaVita Kidney Care was able to help DaVita medical group do better on kidney care patients, both dialysis and pre-dialysis and similarly DMG was able to help DaVita kidney care do better at managing down the total cost, and managing the economics of our dialysis patients. So it was a good, mutual, and it continues to be a good, mutual learning highway.

The other question I had is our D.C. BC folks think that CMMI might do some different payment structures for home dialysis. So two questions; one, are you hearing any of that, number one; and then number two. Let's just waive a wand for example and say three years from now you've got a set of 12% of your patients, let's say it's 25%. How do you think about that at a high level from a return on capital or contribution margin total economic today across. Thanks.

Yeah, I'll take a stab at it. Number one, CMMI is looking at a bunch of kidney care stuff, including eliminating some of the obstacles to home and PD growth and we are supporters of that and we're on regular constructive conversations with them about the best way to do it. We've had a series of meetings. We've also talked with other people and so we applaud a bunch of the stuff that they are looking at, and hope that they go ahead and put it in. I think there's a good chance that they will. And then second, if you waive that wand, that is a good world in a couple of different ways. One, it just significantly reduces the capital intensity of our business. Number two, there are some patients in America who would be happier or healthier on home that are not on it today, because of local practice patterns, nephrology group preferences, etcetera, and we've been growing homes steadily. Javier referred to the fact that we've been the leader for a long time in this and intend to remain the leader, but that doesn't mean that every single patient that should be on home or might be happier at home, is on it now. And so implication number one is that a step outside of capital intensity excuse me would be happier and in some cases healthier patients. Having said all of that, that right now when people walk around saying that home is almost uniformly a better form of care for dialysis patients, it’s factually incorrect and so for a lot of patients it leads to a better life. For a subset of patients it leads to better clinical outcomes, but not for everyone and what you tend to have is that the type of people who take the initiative and have the desire to dialyze at home are a fundamentally different type of patient on average than those who stay in the center. So it's very, very difficult to do an apples-to-apples clinical comparison, because of the type of population you have that is willing to take on the burden and responsibility and risk of dialyzing at home.

So thanks for that and last one for me. Just at a very high level for home, how much of the relatively minor mix in your opinion is qualitative factors around physician practice patterns versus quantitative and clinical factors?

Could you say the question again please?

Probably not, but I'll try. So what we have been told is that some of the shortfall and the growth has been kind of tiny, 20, 30 bips a year. What we've been told is that some of that is just physicians, not being trained physicians, not being in the rhythm of thinking about home and just the default answer is the clinic. You know whereas others, you know some patients don't belong at home as you mentioned. So if you had to guess – if we normalize physician practice patterns across the country and everybody was thinking about it like this is the first option, look to the patient, how much we can, where can the mix go to just with the qualitative physician decision making versus some of the other factors you know around the famous structures and you know clinical offsets.

John, this is Javier. I think when we look around and we see the most, let's call it home champions, the most dedicated physicians that have a good education program and are really trying to champion the right modality for the right patient, you get into a low you know 20 or so mix. Maybe you get it up to 25 if they are really, really good, but that's on the high end and as you look around the world, that’s probably also a good number to use.

Thanks, that’s great. That’s all from me.

Thank you.

Thank you. Our next question comes from Kevin Fischbeck of Bank of America. Your line is now open.

Hey, just a few more from me. I guess I might have missed it, but did you say that the guidance for 2019 includes additional advocacy costs or is that included in the normal run rate spend?

No, it includes this $30 million which is consistent with what we’ve said before and think of it as you know $60-ish million less than the $90 million something that we had in 2018. The point I think Javier was trying to make is that we’ve always had advocacy costs built into our cost structure. It went up significantly in 2018 as a result of the California stop. So this $30 million is kind of the remnant of that California piece that will roll through. There is other stuff that’s always been in there and that that hasn’t changed.

Okay, great, and then some on home health commentary, obviously home health that you guys have talked about from time to time and have been supportive off it. But this is just – I don’t know, this feels a little bit more of a discussion that I’m used to hearing from you guys. Is there anything, so obviously lower cap on density is good; it’s good for some subset of the patients. So that’s good, probably better for commercial patients, so that’s good, but is there anything that you have to worry about as you move the home hemo, because one of the things that structurally I would think that you and Fresenius have. There is some varied entry and that you guys already have you know bricks and mortar across the country to the extent that we create and push towards a less capital intensive model probably speaking. Does that create the potential for disruption or more competition that you were – so (a) am I off base on that concern and (b) is there any downside that you can think of as now that is towards home hemo getting bigger.

Yeah, so one of the most important things to remember is that our patients are big consumers of the entire healthcare system and by definition when your kidneys fail, you are fragile and you’re quite sick. And so one of the things that’s not discussed when discussing home is that the peritoneal cavity (a) there is an high infection and two that sometimes it doesn’t last and sometimes it’s probably not the right world. Most times it actually gives within two years or so and so if you were to look at a patient of ours, they are (a) hospitalized; home patients that are hospitalized and of course DaVita and Fresenius serve in the acute setting and then number (2) is approximately 85% of patients that treat at home will have to use an in-center at some point in their care. And so having the entire suite meaning the hospital, the clinic, and the home service is a very important part of the value proposition for a patient, because they want the continuity of care, they want their doctor to go from the hospital to the center to the clinic and then of course home. So is that responsive to your answer.

Yeah, no, that’s good, that’s – the bricks and motors always going to have an important role even if home hemo becomes a bit bigger than what it is now. And then, the other question I wanted to understand a bit more about the sale leaseback dynamic. Are you signaling that you plan on owning you rights as a percentage going forward through these sale lease backs or is this more just a method of financing that disruption and that you wouldn’t expect to be leasing a higher percentage of your facilities going forward.

So Kevin, there is no real change in the amount of real-estate we are planning on owning, which is extremely low. What the dynamic here is that we have found rather than having someone else build the center for us and us leasing it, it is more cost effective for us both in terms of the capital and the ultimate lease expense for us to build the center and then sell the already constructed center. So the impact on our cash flow is that we are – we have an increase in CapEx as a result of this which flows through the normal CapEx line. There is a net benefit which doesn’t flow through the CapEx line, but is effectively, economically an offset to our CapEx when we sell this, when we sell the center. So no real change in how the ultimate ownership of the center, but it does create a little noise on our cash flow that we wanted to really clarify and that’s why we’ve added over the last few quarters how this plays out in table six, what the net kind of bring back against the CapEx is. We understand it’s a little bit confusing, but we thought it was important to lay it out to make sure everyone has the clearest view of what the real CapEx and cash flow of the businesses is.

Alright, great. Thanks.

Our next question comes from Whit Mayo, UBS. Your line is now open.

Thanks. I just had a couple quick ones on those numbers kind of moving around versus my notes. So just want to make sure I’ve got the correct headwinds and tailwinds written down. On the tailwind side for this year, I’ve got DaVita Rx losses reversing to be a $25 million tailwind. I think Joel you cited now a net $60 million tailwind in California on advocacy and then maybe a $35 million pickup on Medicare rates. Are those the big buckets? Are those the right numbers, are we missing anything?

I think the sizes are about right, the Medicare is actually a headwind. I’m getting puzzled here what was you’re…

I guess I was thinking more just on the rate update.

Oh on the rate update, yes. I thought you were talking about the Medicare bad debt issue which is going to bring positive revenue.

Yeah okay, is that in the ballpark, you know $35 million just incremental tailwind from the rate update.

That’s about right.

Okay and then on the headwinds as you mentioned that you’ve got a $36 million headwind from the Medicare bad debt recoveries and may be a $17 million reversal from DaVita Healthy Solutions. Any other major headwinds and are those the right numbers?

Those are about right. DHS I wouldn’t call it a reversal in an accounting standpoint. It was a -.it’s the lack of, yes.

Okay. And so that implies…

The one other thing I would point to was the retirement cost that we had in Q3. The number was roughly $25 million, $23 million precisely.

Got it. Okay.

Add that to the tailwind category.

Yes. Got it, okay. And then one last one, just the calcimimetics landscape is like fairly fluid right now, some drugs coming on/off at the market. Just what’s the expectation for 2019 and I’ll get off, thanks?

Yes. So I think you’re exactly right. It is a very fluid situation. It is one of the largest components of the swing in our $100 million of OI guidance given the different ways it could play out. But roughly speaking kind of if you think about the middle of the range it’s not a big change year-over-year, but again a lot of variability in terms of how it plays out.

So, what would be the scenarios that would play out that would get you toward the low end versus the high end? Is there any way to share what would have to happen with calcimimetics to be within that range?

The couple of dynamics that you have to consider are one, prescription patterns. In there you have the oral come down or go up or do physicians prefer IV or oral, so there is a mix in there. In addition then you have to consider whether more generics come in t0 market. So if it’s one player versus five players and what happens to pricing and so then of course you have a calculation on ASP that has got a lag, and has got a six-month lag in that. So those are the dynamics in play.

Okay. I lied, one last one just on ASP. Can you comment how ASP has trended the last six to 12 months, and what that implies for the next six months, and I promise I’m off now.

ASP has trended down. And then as it relates to prediction, you can’t have one because of all the things I just went through.

Thank you. And the next question comes from Gary Taylor, J. P. Morgan. Your line is now open.

See what happens when you move your call to the morning. Nobody knows how to get off the phone. Everybody is double dipping. I just had a quick one. I just want to go back to, while I had you, kind of this question about slower growth in the industry, and looking at the U.S. RDF data maybe there’s a good reason why it’s not good or comprehensive. But if you look at prevalent population growth before 2000 it was in the fives, from 2010 it was in the fours, since 2010 it’s been in the threes. You know it’s a couple of years lag, but it looks like it is poised to drop into the two’s. So when you look at kind of that bigger picture, the industry maturing, you’re saying you’re seeing something that looks more step function-ish than sort of that that long decline we’ve seen over the last 30 years?

No. I would say the opposite probably is that the data is quite clear that nothing dramatic happens quickly, and yet the trend is the trend and we’re not predicting any significant change in either direction of the trend. But recognize that there is an awful lot of dynamism underneath that number. On the one hand treatment for diabetes and hypertension, some of the primary causes of kidney failure are getting better. So you could argue that that would lead to a reduction in dialysis patients. On the other hand the African-American and Hispanic populations are growing significantly in America, and they are far more likely to have kidney disease and kidney failure. So that pushes exactly the opposite direction and I could cite two or three or four other variables. So under the surface of that long-term trend, which we think may very well continue without any significant discontinuity up or down, but underneath that are a lot of basic fundamental forces in American healthcare and American demographics and so it’s very difficult to get too confident, because if any of those underlying trends change, that would in fact create some sort of discontinuity in the trend. It just hasn’t for the past 25 years.

Got you. I just thought the opioids transplant commentary was perhaps suggesting you thought you were seeing something more onerous or steeper. So I appreciate the clarification. Thanks.

Let’s stay on that for one second, because that is a perfect example of a new discontinuity, but we would also predict probably relatively temporary one and that we would say that five years from now the incidence of opioid abuse and people getting to the point where their kidneys fail because of the lack of treatment is going to be reduced dramatically, because already the leading indicators for that things like prescription patterns, prescription limitations, prescription oversight, clinic availability to help these people, all of that is fundamentally changing throughout America and is quite well-funded in many cases. So that’s a classic example of a new thing that has had a negative impact in some ways on us in the short term, but will probably on a relative basis become an incrementally positive one over the next five, six, seven, eight years. But it’s once again very difficult to quantify and calibrate, because it has do with fundamental demographic issues and fundamental healthcare system issues.

Understood! Thank you.

Thanks.

Our next question comes from Pito Chickering, Deutsche Bank. Your line is open.

Hey, thanks, and thanks for taking all these, you know extra questions here. I want to take another crack at the organic treatment growth that you guys are – I mean where you guys have guided to versus what you did in the fourth quarter. Are they 2.6% in the fourth quarter guidance of 2.5% to 3.5 % for 2019? So the new point of guidance is implying an upside versus what is it you’re supporting and in fact they are calling the fourth quarter as the bottom of what the ranges can be. Can you give any additional color in terms of so why this has improved to the midpoint of your guidance for ‘19?

I’ll take a crack at that, although I don’t think I got much to add. The number does bounce around a bit, and we tend to look at things, you know some thing’s purely on a quarterly basis; other with a little bit of blending over time. So I’d say we’re blending the Q4 data point with some prior data and our go-forward model, so we come up with something that’s in the 2.5% to 3.5% range.

Alright, it is worth a try. Thanks so much.

And speakers, we show no further questions at this time.

Alright, thank you all very much for your interest in DaVita. We look forward to talking to you again next quarter.

Thank you, speakers. And that concludes today’s conference. Thank you all for joining. You may disconnect at this time.