德維特 (DVA) 2015 Q4 法說會逐字稿

Welcome to the DaVita HealthCare Partners fourth-quarter 2015 earnings conference call.

(Operator Instructions)

And now I will turn the call over to your host, Mr. Jim Gustafson. Thank you. You may begin.

Thank you, Ben, 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 are Kent Thiry, our CEO; Jim Hilger, our Interim CFO and Chief Accounting Officer; Vijay Kotte, our CFO for HealthCare Partners; and LeAnne Zumwalt, Group Vice President. I'd like to start by noting 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 these statements.

Further details concerning the risks and uncertainties, please refer to our SEC filings included in our most recent annual report and subsequent quarterly reports. Our forward-looking statements are based upon information currently available to us, and we do not intend and disclaim any 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.

All right. Thank you, Jim, and welcome to all.

This will be a pretty high-density call, and I'll be covering more topics than normal because of some of the nuances contained therein. As usual, I will first talk about our clinical outcomes because that is what comes first. Second, for each major business unit, I will talk about the operating performance for the quarter year and provide some thoughts on 2016. Third, we will then step back on each business briefly and on the enterprise overall to try to set the table for our Capital Markets Day coming up on May 18 in New York City. And then lastly, I will talk about enterprise capital allocation.

So let's launch right in since there's quite a bit to cover. On the clinical outcome front, excellent news once again. Kidney Care, 97% of our patients with a Kt/V 1.2 or greater, 73% of patients with fistulas placed for access. Of our recently final results announced for the CMS QIP program for another year period, once again, we outperformed the rest of the community with only 1.4% of our facilities facing a penalty compared to 7.1% for the rest of the industry. Of course, no quality rating system is perfect, but in rating test after rating test, we come out as clinically differentiated. On the HCP front, equally promising results. With respect to HEDIS clinical metrics, we'll just pick Nevada this time. We try to move it around for you geographically.

And in terms of subject matter, we once again exceeded the Medicare fee-for-service benchmark on all metrics, and had four or five star across all MA patients on all nine HEDIS metrics. So in both cases, both main sides of the house, our outcomes compare very favorably to national averages. This is good for patients. This is good for the taxpayer.

Now, let's move on to the quarter and the year. We'll hit HCP first, international second, Kidney Care third. HCP operating performance for the quarter, $25 million, that excluded the estimated write-down. This was within our guidance range. On a normalized basis, this was actually about $37 million if you normalize for prior-period adjustments, et cetera, which actually is about exactly the same amount of profit in Q4 of 2014 normalized.

For the full year, OI improved, as you know, from $215 million to $240 million, which is also within our guidance, although at the low end. In order to achieve that, the legacy markets were up a bit, the new markets were up a bit, and the combination of those bits was more than enough to make up for the medical cost inflation and some very substantial investments in capability building/G&A. And Vijay Kotte, our new HCP CFO will discuss those investments and capabilities in G&A in more detail in just a few minutes. But I will move right on at 2016 guidance for HCP. It is $175 million to $225 million.

There are three primary drivers of that range. Driver number one, $58 million in reimbursement cuts. This is primarily the result of the new acuity coding RAF model being implemented the final chunk of the way, a 100% implemented as of that time. As previously discussed, the HCP was more comprehensive in its coding capture. Complete diagnosis of patient conditions is a good thing, but it also left the entity far more vulnerable to any coding reimbursement compression. So $58 million from that source, most of it the model and the model is now 100% in.

Second big driver of that range is our investment in additional capabilities. There's two components to this $60 million year-over-year increase. Component A is really remedial. Their prior business leadership essentially stopped investing in the company. It was working to maximize profitability for the sale either knowingly or unknowingly; and as a side note, just want to remind you that we knew that. That is why we only pay the 6 times multiple in a world where other allegedly comparable assets were going for 9 to 10 times then and now much greater than 10 times in the market. And the second component of that big G&A capability investment is offensive, meaning investments that we think are going to create significant competitive advantage for us over time.

The third primary driver is the positive one, which offsets a big chunk of those two negative ones. Solid operating performance, good old solid operating performance. So if you look at the math, you have a $58 million hit from essentially the completion of the RAF model. You have a $60 million hit from the increased investment in G&A, half remedial, half offensive. That would equal $118 million hit. You then have a $78 million operating performance improvement, which offsets all but $40 million of the two negative trends, and that yields the change from the $240 million in 2015 OI to the midpoint of the guidance, $200 million for 2016. We can of course take questions on all of that but those are the three primary drivers.

2017 does look better than 2016; the model will be behind us. We continue to make steady progress on our capabilities and our contracting. If we put the P&L aside for a moment and look at cash flow and take as a scenario the midpoint of our guidance, in other words the $200 million for HCP, and simultaneously take the midpoint of our guidance for the total enterprise, that $200 million would equal 11% of total enterprise operating income. However, HCP operating cash flow is projected to be over $400 million, about 25% of total enterprise operating cash flow. This happens because of what we've talked about in the past, low working capital intensity, low CapEx requirements, and a $100 million per year hard dollar cash tax benefit. If we step back for a moment and look back at three difficult years, the total reimbursement cut from the implementation of the new RAF model for us, $165 million. What we had anticipated was a much smaller number than that, in fact, less than half so about $100 million of incremental P&L harm that we had not expected is due to that single variable, $100 million. Now the fact that it came from that does not make it any less painful than if it came from anything else, but the important message is, it did not come from operating problems or operating issues.

Looking forward instead of backward, we have six primary markets: California, Nevada, Florida, New Mexico, Colorado, and Washington, or more particular, the Seattle area. In those primary markets, we have six leading independent medical groups. It is in those places, plus our joint venture, Tandigm in Philadelphia of course, but that is a horse of a different color, that is where we'll be placing most of our emphasis in the near and perhaps intermediate term. Prices are very high right now for valuable properties. Our bandwidth is pretty stretched given how much we've grown and given how much opportunity we have in those six markets plus with Tandigm.

And then third, we need to prove to you that we can get the right returns and margins in a number of those places before we do too many other significant things. Because of all that, it is unlikely we will do any other big Everett like deal, unless it is through a capital-light transaction or is for a very attractive multiple. Other good news to take into account and looking forward instead of backward, I'll list a few of them, each of a different type. First, our legacy markets in 2015 once again outgrew their markets in terms of MA growth. The markets grew 6%; we grew 9%. Number two, we've dramatically improved patient service metrics since the time of the transaction. Number three, we've had a number of significant IT advances that have improved our support for our front line physicians. We have a long journey there, and Vijay will talk about that a little more, but we've got some nice early momentum and victories in better supporting our frontline physicians.

Number four, we've had a number of forecasting and prior-period adjustment issues. You know that painful truth as we do. Our finance leadership team is literally 90% new. And fifth and finally in this case, if you look at our top 22 executives, we have five great veterans with immense amounts of valuable HCP experience, and 17 new executives that we think are the right people to help take us into that next chapter going forward. So that's it on HCP for now, although Vijay will come back and talk about some of those capability in G&A investments a little bit later.

So to move on to international. We underperformed in 2015, $55 million in losses compared to original $40 million of guidance. But why? Well, we had a $5 million AR reserve, which almost entirely came from one country where there were two fiscal intermediaries that became insolvent. We actually hope to get a bunch of that money back. We also are $10 million behind plan or were $10 million behind plan in two countries where we built new centers and patient growth was behind plan. In 2016 for international, our guidance is losses of approximately $40 million. This assumes no unusual AR reserves. We are experiencing payment delays with the Saudi government. So that's a watch out, but we have done nothing on that front now; we still expect to receive all of the funds.

And the good news is the Ministry of Health in Saudi is explicitly very happy with our service, and very impressed by the patient feedback they have received. Their words, not ours. In 2017, we anticipate improvement over 2016 on an OI basis, and in 2018 in international dialysis in our current country portfolio, we expect to achieve breakeven. We are, in fact, already in 2015 or we did already in 2015 generate positive aggregate EBITDA at the clinic level in 8 out of our 10 countries as we continue to grow and cover our G&A. And another reference point that gives you a sense of the per country scale, in 2014 we had an average of $10 million revenue per country. 2015, an increase of 50%, up to $15 million. 2016, if we hit our plan, will be $27 million in revenue per country. So you can see that at reasonable margins, we are making strong progress in covering the fixed nut of global G&A.

Finally, most of our growth internationally has been through acquisition. Virtually every one of those acquisitions has been competed for with others. And so these are market valuable assets that real competition wanted to have. And our competitors continue to invest in growing internationally as well because of the returns they see. Stepping back for a moment with respect to international, we are still very bullish on the long-term opportunity both in Kidney Care and other healthcare services.

Now, on to the Kidney Care operating performance. Once again, strong quarter, strong year. Operating income, $449 million, and then for the year, $1.658 billion. First number was for the quarter, of course, once again excluding some non-recurring stuff. Jim Hilger will provide more detail on the numbers.

I'll go right into guidance. We anticipate in 2016 another solid year, $1.625 billion to $1.725 billion. Of course, there's always risk we'll fall short, and there's always hope that we will exceed. This guidance, per our normal customs, does include the international economics, and it also includes the unfortunate fact of flat Medicare reimbursement for the third straight year. The uncertainty in our 2016 performance, as in many recent years, it centers on revenue and revenue per treatment.

We anticipate our performance in the first half of the year with respect to RPT to be positive, but we have a lot less visibility into the second half of the year, hence the broadness of the range. And regarding the strategic initiatives, there could be some earnings volatility there. One reason is ESCOs, as you know we have launched, and so we incur those costs, particularly those extra startup costs now, and we get the shared savings for the payment later if we perform and the data is correct. And the second variable are some Rx -- DaVita Rx renewals. All of this, of course, is incorporated into our guidance.

Stepping back now with respect to Kidney Care and looking out three, four, five years, there's one big downside and three attractive upsides. The big downside is what will happen to private pay. It is unfortunate that we have a large cost shift in our dialysis industry in America with private patients paying a lot more to subsidize the 80% to 90% of our patients that are Medicare and Medicaid. And when you put that on top of payer consolidation, distributed risk pools, exchanges, and other things going on, it would not be prudent to not be nervous about what will happen with private pay.

On the other hand, we do have three upsides. One is in the ESA market. For the long term, as many of you know, we spend about $800 million per year on ESAs. We are intensely looking for the right long-term partner or partners and hope to consummate some type of long-term partnership well before the expiration of our current contract at the end of 2018. Second, integrated Kidney Care. We are very competent at this. Regardless of who has the risk, we think we will be one of the subcontractors of choice. And third, finally, the flat Medicare reimbursement is scheduled to go away at the end of 2018. In 2019, we hope to be back to our normal market basket. All in all, our strategic position in US Kidney Care is strong.

Now, let's step back to the enterprise overall. The guidance, OI of $1.8 billion to $1.95 billion; OCF, $1.55 billion to $1.75 billion. But on an equally important topic, how are we thinking about capital allocation at the enterprise level. Well, first with Kidney Care, we stay the course, and since there aren't a lot of large properties available out there, that means they will not use all the cash they generate. HCP, they will focus on existing markets unless something that is capital-light or a very attractive multiple comes along. International, we will continue to invest to grow. Putting all three of those together, what does our capital allocation look like if you pick something arbitrary like the next three-year period.

We will generate in a reasonable scenario with of course downside risk and upside hope, but in a reasonable scenario, we will generate operating cash flow of approximately $5.5 billion in the next three years. If you count normal use, meaning our current operating plans, business plans, et cetera, which of course could change, we will use about $3.5 billion for those purposes. This leaves about $2 billion on the side for us to contemplate what to do with, with of course your counsel as well, as we compare other growth opportunities, to debt repayment opportunities, to share repurchase opportunities.

Now, Vijay Kotte, our new CFO of HealthCare Partners, will walk through a few more details.

Thanks, Kent.

I'll take a few minutes to provide more detail into the investments we're making into the future. As Kent stated before, we are continuing to make both remedial and offensive investments into the business. The best way to look at these items is to put 2015 and 2016 together. When you do that, we have a total of approximately $80 million in incremental investments over 2014. To provide more context into these investments, I will put them into three primary buckets. First, we have information technology; second, legal and compliance; and third, the next-generation capability and change match.

In the bucket of IT, we plan to spend $40 million more in 2016 than we did in 2014. This includes the following areas: first, security; second, applications to support population health; third, a community portal to enhance communication between patients and providers; an enterprise data warehouse; our accounting system conversion; and a national IT infrastructure to enable our creation of one company. Next, in the legal and compliance bucket, we will invest an additional $10 million to $15 million over 2014.

In our final bucket, we're investing approximately $18 million into research and development related to next-generation care management capability, a team we call Catalyst, with applications to our current markets as well as others.

Now, Jim Hilger, our CFO, will walk you through a few more details on the numbers in the quarter.

Thanks, Vijay.

First, I'd like to point out a couple of non-GAAP items in the quarter. In the fourth quarter, we recorded an estimated accrual of $23 million for potential damages and liabilities in our DaVita Rx pharmacy business. We have excluded these numbers from our reported non-GAAP income from continuing operations. A few words about this estimated accrual. The reserves relate to the period from 2010 through 2015. As a part of our normal process, last spring, we initiated an internal compliance review of DaVita Rx during which we identified potential billing and operational issues.

We notified the government in September of 2015 that we were conducting this review of DaVita Rx and began providing regular updates of our review. Upon completion of our review, we filed a self disclosure with the OIG on February 5, 2016 and we have been working to address and update the practices we identified in the self disclosure. In addition, as disclosed earlier today, on February 5, 2016 DaVita Rx received a Civil Investigative Demand from the US Attorney's Office. The information requested has some overlap with the items we self disclosed, and we do not know if the US Attorney knew we are already in a process of developing a self disclosure with the OIG.

At HCP, we took an estimated $206 million impairment charge of non-cash goodwill in an intangible asset of certain HealthCare Partners' operating units. These impairments were driven primarily by underperformance of the business reporting units in recent quarters as well as changes in other market conditions, including government reimbursement cuts and our expected ability to mitigate those cuts. The final amount of these impairment charges will depend upon the final outcome of this valuation work, which we expect to be completed in the first quarter of 2016. This non-cash charge will not impact go-forward performance or our cash taxes.

On to the overall enterprise. Our debt expense was $103 million in the fourth quarter, which is a good run rate for debt expense in future quarters. Our income attributable to noncontrolling interest was $40 million. Next, our effective tax rate for income attributable to DaVita HealthCare Partners in the fourth quarter was 36%, and for the year was 38.2%. And we expect the full-year tax rate for 2016 to be in the range of 40% to 41%. We have also repurchased $151 million of our common stock in the fourth quarter. And we also repurchased an additional $249 million in the month of January. As a result of these transactions, we now have approximately $259 million remaining under our current Board authorization.

As you think about modeling the first quarter, here are a few things that you should keep in mind. In our dialysis business, Q1 2016 contains one fewer day than this past quarter, so you should expect lower revenues and higher fixed costs per treatment. Second, our payroll tax caps reset at the beginning of the year, which leads to higher costs of a $1 to $1.50 per treatment. At HCP, OI fluctuates from quarter to quarter due to the seasonal needs of patients, and Q1 tends to be a bit lighter than the full-year average.

Now, turning to cash flow. We continue to generate strong cash flows as operating cash flow was $437 million in the fourth quarter and $1.861 billion for all of 2015, excluding the Vainer settlement. The strong cash flows in 2015 are borrowing a bit from 2016 operating cash flow mostly due to the timing of cash tax payments and other working capital items. But despite that, we still expect 2016 operating cash flows to be $1.55 billion to $1.75 billion, showing that we continue to generate strong cash flows. As always, this guidance range captures a majority of probabilistic outcomes, but we could be above or below this range.

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

Thank you.

(Operator Instructions)

Matthew Borsch, Goldman Sachs.

Yes, hi, thank you. Could you maybe just address the areas of operating performance improvement that you are expecting in the HCP business? Maybe just, I don't know if there's any kind of granularity that you are prepared to give at this point, whether it is by geography or function? I'm just curious the types of things, that you think are going to be going better, this year versus last.

Matthew, this is Kent. It's -- thanks for getting on the call. It's pretty broad-based. So there's nothing really that jumps out. There is no dramatic disparity in unit growth or margin enhancement, either through MLR improvement, or G&A savings or revenue enhancement. So it is pretty mixed across the portfolio.

And let me ask on a different front, still related to HCP, if you look at -- as you look at things that are potentially for sale, and you mentioned prices are high, is that still principally because of the major hospital systems that are bidding up? Is it more of the same hospitals? How much is hospitals, how much is managed care versus other?

It is certainly health systems bid -- sometimes breathtaking amounts for these medical groups. But we have been surprised by some of the other players, including some of the health insurance entities, and the offers that they've put on the table as well.

Okay. All right. Thank you.

Thank you.

Kevin Ellich, Piper Jaffray.

Good afternoon. Thanks for taking the question. Kent, I guess kind of big picture, thinking about the guidance which historically you've had a track record of being conservative, but if you look over the last few years, we haven't seen much growth in operating income. I guess, clearly, there has been some issues with HealthCare Partners, but I guess broadly speaking, what will it take to get growth re-accelerating?

A very fair question, Kevin, and one that we are pretty intense about on the inside. In the Kidney Care front, with that flat Medicare reimbursement, that's just a real problem that we've got to get addressed. And then hopefully, through a new partner, or the same partner in a new partnership with ESAs, or getting some integrated care runway, we can start to break out of the current trend.

On the HCP side, of course, some of the declines have taken away the Kidney Care gains. And so, if we just stop that, and get back to the reasonable steady growth in HCP, that together with the normal growth in Kidney Care, could start to generate some, much more interesting numbers. And then lastly, international is unfortunately just a couple of years away from being able to really help, although once it starts helping, it could be a long-term big deal.

Got it. Okay. And then, going back to your comments on Kidney Care and the potential downside, and three factors for potential upside, in the ESA component, you said that contract expires in 2018. Should we expect to see something happen in the next year or two?

Yes, we would like to develop the right kind of long-term win-win partnership sooner rather than later. We have -- the contract we have with AMGEN, and so, if they don't want do anything new with us, we certainly can't force them to. Having said that, there are other people we can create agreements with, that wouldn't kick in, until the day after the AMGEN agreement expired.

So our point is pretty simple that, we think we can be a great partner with someone for the next 5 to 10 years in that area. And we are eager to find that party, and start working towards that long-term future. Necessarily, even if we got very serious with someone tomorrow, these deals are pretty complicated, and nothing would be signed for some time. But that's one of the reasons why we want to start working on them now, because it takes a while to put them together. Is that responsive?

It is. And can you remind us? I think in the contract, you had the ability for 10% of your ESA supply to come from someone else. Are you guys testing other options out right now, and if, so how is that going?

LeAnne, do you want to talk about that?

Certainly. We do plan to do some pilots over the next year.

Okay. Will you go with one source, or will you try different options, LeAnne?

Certainly, we will try multiple options.

Okay. Great. And then I guess, going to Hammer -- going to the share repurchase, you guys were very active in January. I think you said you had $259 million remaining. Should we expect to see continued share repurchase activity, maybe are you guys going to go back to the Board to get a -- to re-up the authorization? And even though you don't provide EPS guidance, is that part of your outlook for 2016?

I will go ahead, and take that one. We're going to apply the same sort of measured calculus we've always applied, that looking at the alternative deployments, looking at the different scenarios going forward, looking at interest rates, looking at the stock price. As the CEO, I am feeling a little sheepish about the fact, that we bought back quite a bit, when the stock was a fair amount higher than it is today.

And we would have to done more value for our -- created more value for our long-term shareholders by waiting a little bit, as opposed to buying when we were at above historical average EBITDA multiple. So we bring our normal sort of intellectual calculus to it. But certainly, we demonstrated over the last year, and certainly many of you were actively engaged, and encouraging us to, certainly we've demonstrated, as we have at different times in our history, the willingness to go into the market and take some shares out of play.

Okay. Thank you.

Thanks, Kevin.

Kevin Fischbeck, Bank of America Merrill Lynch

Hi this is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So on HCP guidance and the breakdown of the different elements that are impacting the operating income, specifically, I recall the Company mentioned on the last call, Medicaid headwinds of $20 million. So should we assume that you would no longer include that headwind? Or is it just small, that it's -- you don't -- you didn't disclose that?

What happened -- we thought it would be Medicaid of $20. It turns out the Medicaid is $8. And so, when we talked about $58, $50 was that RAF model (multiple speakers) Medicare (multiple speakers) $8 was Medicaid.

Okay, that makes sense. So then, I know, you mentioned that those headwinds you expect to be offset by growth against operating improvement, but are you willing to talk about the legacy market performance in 2015 -- I don't know whether it is specific numbers or up or down, or the magnitude of amount of improvement? And then, what do you think this would be, 2016 versus 2015?

Right. In 2015, our legacy markets contributed to the profit growth, the OI growth -- excuse me -- the OI as did our new markets. So both were contributors to our ability to offset the bad stuff that happened, and normal medical cost inflation, and our big investments. In 2016, we anticipate the same, that independent of the rate cuts, that both legacy markets and new markets will do better than they did in 2015.

Great. And then, just to follow up on your comment around the dialysis business, and the pricing, that you expect the pricing to be positive in the first half, but there is less visibility for the second half of the year? So can you share a little bit more light, why you think that?

It's not because of any particular normal negotiation between us and the payer. It's just because of all the noise in the air, with everything going on with exchanges, regulatory ambiguity in those areas, what some of the new payers are going to do in terms of getting in and out of exchanges. So it's -- just so much going on, that we are uneasy, increasingly uneasy, and we thought we should share that.

So there is nothing specific to call -- because I wanted to say you mentioned something about -- around a specific contract? Or I guess, maybe there was [two other] on the HCP side, so maybe that is irrelevant. And I guess, that's all from me now. Thank you.

Okay. Thank you. And I think you might be referring to our -- the DaVita RX renewals, I referred to.

Right.

That is an independent point, separate from what's going on in the mainstream Kidney Care.

Great. Thanks.

Thank you.

Margaret Kaczor, William Blair.

Good afternoon, guys. First of all, thanks for all the details, in terms of where you guys are investing in HCP. So maybe a question on that. What impact should we expect these investments to have? I would assume is better outcomes that are going to lead to these higher patient adds. But even more specifically, over what timeframe should we see the fruits of these investments? Is it as early as 2017, or is it more 2018, 2019, 2020?

Well, Margaret, we knew this question was going to come and dreaded it, because it's going to be the answer you hate. It's not going to happen right away. For example, in technology space, it will take a year, one to two years to get a lot of that stuff done. And then the benefit has -- does not immediately leap off of the P&L. In terms of our next-gen care management, and change management group, that has got some near-term upside.

When you are managing $4 billion of medical costs, the spending that extra -- whatever it is -- $20 million with some new talent, with some new analytics, and with some new approaches, you can get a pretty good payback on that pretty quickly. But the whole team is so new, and the processes we are putting in place are so new, that we would just hate to create expectations, and then fail. We are very bullish on the impact they are going to have, but it just is not going to be overnight.

Okay. So maybe to take that even further, and I am sure you'll appreciate this question as well, but you talked about probability in HCP maybe improving in 2017. And part of that is that the reimbursement cuts from the RAF model go away. And so, that should be, if I am thinking about it right -- about a $60 million tailwind. But then are you going to increase the investments further in 2017 to offset that? And then, also the final bucket in terms of the OI performance, should that improve in 2017, as Centura and Everett start to have a larger impact?

Yes. Well, you do know us well. The elimination of the RAF model that has been hanging over our head, that is certainly the elimination of a headwind. It doesn't lead to a tailwind. It's just leads to the absence of wind, which for us right now, would feel pretty good assuming that benchmark rate increases would be roughly speaking, equivalent to what goes on with medical costs inflation. And so we do, we do want 2017 OI to be nicely higher than 2016 OI, because the elimination of those headwinds, and a lot of the other stuff hopefully kicking in. But did I miss a part of your question?

Yes. So does the operating performances of Centura and Everett, what kind of impact will they have in 2017 and 2018?

Oh, thank you. On Everett, we would also expect 2017 to be better than 2016. 2016 has some integration expenses. 2016 has some adding talent to take on risk pools, so we have that expense. We have some additional amortization from the deal. We have some special additional expenses that exist for the first year or two of the deal, and then go away. And so, we are counting on, we are expecting a nice operating income trajectory at the Everett Clinic in 2017 versus 2016, and 2018 versus 2017, and 2019 versus 2018. We have high hopes for the significant growth of the business there.

And then, on Centura, that is a tougher one. We certainly expect it to do better in 2017 than 2016. It really depends on if we get a quality risk contract, what the effective date is, and then how quickly we can make a difference. So that one could stretch out a little bit, based on the timing of all that. We're making nice progress, but right now there is nothing locked and loaded.

Okay. Great. And then, just one more for me. You guys were nice enough to provide kind of the de novo clinics that were waiting for regulatory approval last quarter. How are those looking this quarter, and should we expect they are still being -- they are still to be able, as clinics that we will see open in the first half of the year? Thank you.

Yes, the de novo backlog is still about the same as what it was last quarter. But what we're seeing is a much better improvement in opening new clinics. So that's where we will see improvement in the first half of the year.

And that person speaking is Patrick McKinnon, the Chief Financial Officer of Kidney Care.

Great. Thanks, guys.

Thanks, Margaret.

Gary Lieberman, Wells Fargo.

Good afternoon. Thanks for taking the question. Just sticking with HCP for a second, is it possible to get some color on Albuquerque, maybe just how it's -- how the recovery has gone, and where, it is today, versus what was say, a year or two years ago?

Well, boy, Gary, this is KT. I'll handle that. The difference between a year or two ago is night and day, just a huge orders of magnitude better. So that's the high level answer. The operations have been stabilized. We're in very constructive risk pool conversations with one of the major payers. We're in healthy collaboration discussions with two of the significant health systems. The leadership has been stabilized. The management team has been improved. So there hasn't been any -- I mean, the numbers are certainly way better than two years ago, but I'm not wanting to represent this as we're on some stunningly steep trajectory of profit improvement. But all the fundamentals are better, and now we will see what we can get done in the next couple of years.

Okay. And then, how much of your time are you spending on HCP, versus on the Kidney Care business?

I spend significantly more time on HCP than on domestic Kidney Care.

Okay. And then, maybe just talking about the self-disclosure, and the CID both happening on the same day. Is that just coincidence, or is there something else that we could read into from that?

That's just totally coincidence.

Okay. And then, is there any additional color you could give us around it?

I don't think so, Gary. We just don't know much yet. We, the good news is that, through our own internal normal compliance processes, we uncovered some issues. And we did the right thing, in investigating them, and we did the right thing in reporting to the government. And we did the right thing, in doing some refunds.

All of these were small dollar issues, and transactions that were a tiny, tiny percentage of overall transactions. And we kept the OIG up-to-date along the way, as to the work we were doing, but not completed. And then we sent off our formal self-disclosure document. And then, it just so happened that very same day, that we got the CID from the Department of Justice. And we have no idea, if the Department of Justice had any idea, that we were already nine months down the track with the OIG.

Okay. And I think you said, your analysis went back to 2010, and it looks like their inquiry goes back to 2006. Is there anything to read into that?

No, I guess, it would suggest again, that the two things aren't at all linked, because clearly, they were coming up with their own set of issues, and their own set of dates. But beyond that, we don't know, as you know in many instances when they're -- once they decided to take a look, they often, that first document is very, very broad, because why not?

Okay. And then, on your comments regarding negotiating an ESA contract. It sounds like -- you're talking about it more than I think you had in the past, on a new contract. Is there anything tangible you can share with us, or any hope that it could get done in the near term?

No idea. This is -- we are eager -- I will be redundant, but we are eager to have a long-term partner and a long-term plan, and we just think there's a lot of opportunity. But getting there will take either, our current partner deciding they want to create the next generation together, or us doing it with some else, in which case the implementation, of course, would have to wait. But the reason we are talking about it more, is people are getting more serious, because it's just not that far away anymore, and $800 million a year and growing is a lot to play with.

And then, just maybe just last point on that, is there anything that you can share with us, or that you are aware of the -- the one short-term biosimilar that has been expected to come to market, but has not yet?

I don't personally don't think it makes much sense for us to start to talking about individual biosimilars, and what exactly is going on. And so, LeAnne, I don't know if there is anything you would like to get out on the table? Anything I do, would just be repeating publicly known information.

No, Kent, I think you answered that correctly.

Okay. All right. Thanks very much.

All right. Thank you.

Chris Rigg, Susquehanna.

Good afternoon, thanks for taking my question. We are going to get the advance notice for 2017 MA rates on next week. And obviously, I don't want to -- it is hard for you guys to predict what is going to be in there, but one thing that has been kicked around, is potentially adjusting the risk model to better codes for duals. Do you have any thoughts on that, particular if it was budget neutral? And if not, can you at least give us a sense for, within the HCP pool of enrollment, how many are duals? Thanks.

Yes. Like you observed, we don't have any idea what they are going to do. And we do believe that currently in Medicare Advantage, the sickest people we get under-reimbursed for, and the healthiest people they over-reimburse for, and for people like us, who are not insurance companies, and we want to keep the patients we have. We do keep them, we can't really determine which new ones come to us, the current reality works to our disadvantage. And then with respect to duals, in particular, while we have a bunch of, it is impossible to say whether we would benefit materially or not, until you know whatever the heck they would do.

Got you. And then changing gears here, just with regard to the seamless care organization rollout or pilot/fall, can you give us a sense for some initial feedback from patients? Or just anything with regard to that would be helpful? Thanks a lot.

This regarding ESCOs?

Yes.

It's just too soon. But we can tell you though, we have been in a globally capitated pilot with CMS for seven or eight years now. And it's pretty significant, there's 800 patients there or so. And then, we have another 800 or 900 globally capitated patients within our HealthCare Partners universe.

And in general, and in particular, on the Kidney Care side, where the SNP plan, special needs plan is focused just on these Kidney Care patients, it is spectacular, and that the patients get extra services, the doctors have extra support. The referring doctors get better information. The nurses get to provide coordinated care. The patient and family get support at home. So I can tell you in our mature other work, where we are globally capitated, it is a spectacular beautiful transparent victory.

Great. Thanks a lot.

Whit Mayo, Robert W. Baird.

Hey, thanks, good afternoon. Kent, you've discussed in the past your desire to re-engage in productive conversations with your health plan partners to ensure that your incentives are aligned with their incentives, and they treat you as a good partner, with the MA rate cuts? And are there just any developments along the re-contracting front, that would be of any interest to us?

Yes, is the short answer. Every -- I'm not going to get the mix right, but if you ask on Capital Markets Day, we will have it, and Jim Rechtin is not here right now. But I'd say, a healthy percentage of our renewals end up with a new agreement where our interests are much more aligned, and that has been true every year.

It's a big shift from what existed before. And the same statement is true, with respect to health systems and hospitals, where a very solid percentage of our new contracts there, create a lot more alignment than the old ones which were so zero-sum. So I would say, it's steady progress, nothing dramatic. But it is really healthy, in reducing downside risk, and over the long-term will create some shared upside.

Great. And just on Renal Ventures. I don't think I have heard an update, just maybe I should know this, but just divestitures, FTC, and any sense for the contribution this year?

Hi, this is Javier Rodriguez, CEO of Kidney Care. There is no update. We are still anticipating a Q2 close.

Okay. And maybe one last one is just -- any way to get a sense of the size of DaVita RX now, either by patients or revenue?

Boy, I don't remember what our historical policy has been. It has certainly grown. It is making some money. It is not losing money anymore. And I'm going to have to turn it to Jim Gustafson, so I don't violate any policy. Go ahead, Jim.

Yes. We've disclosed -- we are serving in various capacities 165,000 patients, and that includes both internal and external.

Great. Thanks, Jim.

Ryan Newman, Promus Capital.

Hey, guys. Thanks for taking my call. You spoke a little bit about the softness in some of the international markets, and how all the players were attracted to those (inaudible). So I know you expanded a little bit in Colombia and Portugal, China, Germany. Can you talk a little bit about where the most softness occurred?

Where the most -- what has occurred?

Where the softest conditions existed internationally?

The softest conditions?

Yes.

So soft as in --?

The worst performance.

Poor performance, okay. Thank you. Sorry for my --

No, I misworded the question. I apologize. Thanks, guys.

I'd say the softest performance from a profit point of view -- I mean, my mind is racing as to how much I should disclosure.

Sure.

We've had some profit problems in the Colombia. That probably sticks out as one of the softest. In Saudi, we have been growing a little bit behind plan, but the microeconomics appear to be solid. And I think beyond that, I would have to get into so many nuances. In the China, we still put in the R&D category, where we are very, steadily consistently investing to look for the winning formula. And we don't have it yet, but we are not discouraged.

We've got some stuff that's working there, and now we have some stuff that is not working, and that's kind of the hit rate we expected. India, we know is a long haul kind of thing, an immense market, but we're not going to start doing anything big there quickly, because the microeconomics are just too tiny. So there is a little bit of flavor across three or four. And I'm probably giving Jim Gustafson a heart attack by providing all this.

Yes. No, that's great. Thanks guys. Thanks for the detail, and I appreciate your time.

Thank you.

Thank you. At this time, we no longer have further questions on queue.

(Operator Instructions)

Well, we -- the Capital Markets are May 18. Correct Jim?

Yes.

In New York, we are going to nail down the location. There is a lot to talk about. We look forward to going into more detail. We are going to be longer general session than we normally do, so that we hopefully give you a very comprehensive, and analytically thoughtful, not only a reiteration of our strategy, but our progress, and the right kind of leading indicators to stare at. So we're looking forward to a real high intensity, extended exchange. And we will do our best in between now and then, to get through 2016, and start growing again in 2017. Thank you very much.

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