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Edited Transcript of FME.DE earnings conference call or presentation 2-May-19 1:30pm GMT

Q1 2019 Fresenius Medical Care AG & Co KGaA Earnings Call

Bad Homburg May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Fresenius Medical Care AG & Co KGaA earnings conference call or presentation Thursday, May 2, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominik Heger

Fresenius Medical Care AG & Co. KGaA - Senior VP, Head of IR & Corporate Communications

* Michael Brosnan

Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG

* Robert Maurice Powell

Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG

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Conference Call Participants

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* Edward Nicholas Ridley-Day

Redburn (Europe) Limited, Research Division - Research Analyst

* Hans Bjorn Eskil Bostrom

Crédit Suisse AG, Research Division - Research Analyst

* Oliver Metzger

Commerzbank AG, Research Division - Analyst

* Patrick Andrew Robert Wood

BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team

* Thomas M. Jones

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Veronika Dubajova

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Hailey, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care earnings release for the first quarter 2019 results. (Operator Instructions) I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.

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Dominik Heger, Fresenius Medical Care AG & Co. KGaA - Senior VP, Head of IR & Corporate Communications [2]

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Thank you, Hailey. We would like to welcome all of you to the Fresenius Medical Care earnings call for the first quarter 2019. We appreciate you joining today. Also, you might be already very tired from all the earnings releases today.

Before we start, I would like to use the opportunity for some short marketing. We will do a conference call on home dialysis to explain the strategic logic and medical background. It will not be about how to model the financials. This will take place on the 20th of May at 2:00 p.m. CET. And on 27th of June, we do offer a site visit to our production site in St. Wendel in Germany. Details for both events are posted on our website.

Now it is my pleasure to start out the call by mentioning our cautionary language that is in our safe harbor statement as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings.

(Operator Instructions) I assume you might be tired anyhow on this eventful day. With us today is, of course, Rice Powell, our CEO and Chairman of the Management Board. Rice will give you some more color around the strategy and business development, go through some of the major topics of the quarter. Of course, also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook.

I will now hand over to Rice. The floor is yours.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [3]

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Thank you, Dominik. Good morning, good afternoon to everyone, depending on where you are. We're great -- it's great to have you with us today, and we appreciate your interest in the first quarter of 2019.

Turning to Slide 4 and looking at some key parameters of the service business. You can see our clinic growth in the quarter, patient growth and treatment growth. I would also say, looking at our statement, quality remains on a consistently high level.

Why don't we turn to Slide 5? And you can see that in print that our quality outcomes do remain on a higher level. Our quality indicators do look quite well. I would like to make one point. You probably saw an announcement from us a couple of weeks ago that we've created a global medical office. Wanted to make sure you understand that we believe we are at the right time in our company's history to really take more of a global approach to the medicine and driving the clinical outcomes across the regions as we continue to see product businesses turn into service businesses and the opportunities to try to work closer with payers.

I'm happy to say that Frank Maddux has been appointed the Global Chief Medical Officer. Frank has been with us a number of years and most recently was the Chief Medical Officer in North America. Frank will be working very closely with the other regional chief medical officers and some small staff as well to help us make sure that we're delivering the best quality of care we can from the most developed markets, Germany, U.S., France, et cetera, to emerging markets in any region. And I think this will help us in the years to come.

Turning to Slide 6 and looking at the update of the quarter. Very quickly, you know that NxStage, the acquisition has closed and we're beginning the integration process. You also have seen previously from us that we were able to negotiate a non-prosecution agreement with the U.S. government as it relates to the Foreign Corrupt Practices Act, and that is for international business, not business in the U.S., and we are glad to have that behind us and continue to move forward in our business.

Now looking at the underlying business performance, it was in line with our expectations. We were pleased that the revenue growth for the quarter was on the higher end of our guided range. Looking at earnings, we did see earnings being supported by some agreements that came to us earlier than they were planned in the year. But my main point here is simply that this is a shift within the year. These activities or these agreements that we reached were expected to come in this year and so there's no new change there, simply the calendarization, if you will, or the accomplishment of it came a little sooner than Mike and I had anticipated.

Then looking at our cost optimization program, that has been initiated, so it is underway. And then lastly and most importantly, and Mike will talk more about this, but our outlook for '19 and '20 has been confirmed.

Turning to Slide 7. I do believe the first quarter was a solid start to the year. I will not run you through this slide. I will say, however, looking at the adjusted revenue, EBIT and net income, you can see the performance. Got a few bullets for you on the right part of this slide that probably give you a little more color. I would highlight, for those of you that need more of a detailed reconciliation, we've provided that to you on Chart 19, and we hope that will be of benefit should you want to look at that.

Turning to Slide 8. Taking a moment to focus on organic growth. We had 6% organic growth across the world on a global basis, and yet we also had good contributions from all of the regions. Obviously, when you look at the constant currency revenue in North America, you have to consider the impact of the Sound divestiture, which I know you're all well aware of. And if you do that and some other adjustments that we've stated for '19, we see about 5% constant currency growth in North America. And the other businesses are as they were laid out on the chart for you. But again, we are seeing good contribution from each region, and we're seeing some very nice progress in Asia Pacific and Latin America as well.

Turning to Slide 9 and focusing on the service organization in the quarter. I would say that what we are seeing is very good -- delivered growth was good. It was solid on an organic basis. But additionally to the organic growth that we generated in the quarter, the volume or same-market treatment growth was also very good. If you paid attention and had a chance to dig into the press release, you note that we did highlight for you that the same market treatment growth in the United States was at 3.7%, which is an improvement from where we had been.

We also are happy to report that we continue to see slight improvement in our payer mix in the United States. We had slight improvement in Q4 and we saw a continuation of that in Q1. More to do. We are not where we want to be or where we need to be, but we have some more quarters to continue to focus on that.

Looking at EMEA. The positive development for their organic -- due to their organic growth and acquisitions, that's what contributed to their performance in the quarter. And with Asia Pacific, their growth was driven by same-market treatment growth and acquisitions as well.

If we turn to my last slide, which is Slide 10, take a minute and talk about the products business in the quarter. As you well know, our products and the technology that we bring to the market is the center of our vertical integration, and I'm pleased to see that we delivered a solid first quarter with 5% organic growth in the new year, and this is on top of strong performance in the fourth quarter as well. So we do like the trend that we are seeing here with the products business.

If you take a moment and you look at EMEA, you can see the mix of products that they sold through the quarter to deliver their growth. You see the same with Asia Pacific. I won't read you through each and every one of those, but needless to say, we're pleased with that. And yet this was the first quarter in North America where we used or we captured the revenue from NxStage's result of the acquisition closing. We're happy to talk about that if you have some questions.

In summary, Q1 was a good start to the year. We are seeing improvement in key areas that we know we need to improve in. We are not done. We believe that the guidance that we've given you is appropriate. We have a lot more to do and we will be very busy as we go through the rest of this year. And with that, I will turn it over to Mike and he can give you more color on the financials.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [4]

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;

Thanks, Rice, and hi, everybody. So moving to Chart 12 and just starting with revenue and income. You can see at the high-level reference slide to guide you through the developments of the first quarter.

Starting with revenues. We have adjusted the base period Q1 '18 for the divestiture of Sound, so that was EUR 251 million in revenues for Q1. This gets you to the base of EUR 3.7 billion. You can see the 6% business growth that we had or roughly EUR 210 million on a constant currency basis.

The 6% growth, as Rice mentioned, reflects an organic revenue growth of 6%, 2% growth from acquisitions. This was partially offset by about a 1% decrease related to closed or sold clinics and a 1% decrease related to 1 less dialysis day. The revenue development is clearly within our guided range of 3% to 6%.

As you continue to move through to the reported numbers for the first quarter of 2019, currency translation was favorable, EUR 190 million [starting] on the top line. In addition, we've added EUR 22 million for transactions that under the old leasing standard, prior to the adoption of IFRS 16, would have been classified as revenues, and EUR 30 million revenues generated since our close of the NxStage transaction to get to the reported revenues of EUR 4.1 billion.

Continuing on the bottom of the page with regard to net income. We're adjusting in the base period for the loss from divestitures in our Care Coordination activities in the first quarter last year and a loss generated by the Sound operations of EUR 4 million, which gets you to a base of EUR 296 million. Business growth of EUR 9 million, which -- on a constant currency basis, which gets you to 3%. This is slightly above our target range of minus 2% to plus 2%.

Following on, there were favorable currency translation effects of EUR 13 million, an unfavorable front-loading effect from the implementation of IFRS 16 of EUR 18 million, largely driven by interest expense. Unfavorable effects from the NxStage operations of EUR 14 million, and EUR 12 million of costs associated with transaction and integration activities. We had EUR 3 million of costs related to the cost optimization program, which gets you to the reported net income of EUR 271 million.

Turning to Chart 13 and now looking at the regional margin profiles. Just a reminder, these 2 pages are on an as-reported basis, not on an adjusted basis. The -- you can see in our press release tables, which are on Page 18 of the material we distributed, that on an adjusted basis, EBIT margins went from -- declined from 13.6% in the first quarter to 13.4% or roughly 20 basis points, just to give you that one data point on an adjusted basis.

So reported margins improved from 12.5% to 13% or 50 basis points. The weighted contributions to this increase were favorable impacts from EMEA of 60, favorable impacts from Asia Pacific of 30 basis points, partly offset by unfavorable effects from corporate, decrease in the margins of North America and a mix effect.

So now looking at North America as the first regional margin profile. Operating income was up EUR 10 million to EUR 372 million. This is a 4% decrease in constant currency. The EBIT margin was 12.9% and the operating income includes favorable effects from IFRS 16, the integration and operational costs associated with NxStage and costs associated with the sustainable improvement in our cost base.

Dialysis business operating margins decreased from 15.4% to 12.9%. The margin decrease was driven by higher personnel expense, the integration and operational costs associated with NxStage, an unfavorable impact from legal settlements, and this was partly offset by positive impacts from the consent agreement on some pharmaceuticals, a favorable effect from the IFRS 16 implementation, some favorable manufacturing variances and a little bit of unfavorable foreign currency transaction losses.

Revenue per treatment increased by $7 from $348 to $355, and cost per treatment, adjusted for the effects of IFRS 16, increased by $12 from $289 to $301. The drivers for the revenue per treatment increase were the higher utilization of oral-based ancillaries, the impact from an increase in the ESRD base rate on Medicare, and this was partially offset by lower revenue from commercial payers. The increase in cost per treatment was caused by higher utilization of oral-based ancillaries, higher personnel expense and the effect of 1 less dialysis day.

Care Coordination margins increased from 2.6% to 13% and on an adjusted basis from 8.3% to 12.3%. The margin increase was mix-led, driven by losses related to the divestiture of Care Coordination activities in the first quarter of last year, increased member months in our health services business, increased volumes coming from our vascular access business and a positive effect from IFRS 16.

Turning to Slide 14 and going through the remaining regions. At EMEA, operating income was up EUR 29 million or 26%, 27% at constant currency. Margins increased from 17.1% to 21.1%, driven by a reduction of a contingent consideration liability related to Xenios. This was partly offset by higher bad debt expense, some higher rent expense, the impact of 1 less dialysis day and a favorable effect associated with foreign currency translation.

Asia Pacific operating margins increased from EUR 74 million to EUR 95 million or 28%; that's 25% on a constant currency basis. And this increase in margin was primarily driven by favorable foreign currency transaction effects, a favorable impact from business growth, partly offset by an unfavorable margin development in Care Coordination business in Asia and an unfavorable effect of foreign currency translation. Care Coordination margins in the region decreased from 13.7% to 11.3%, largely related to higher startup and operating costs in that business in the first quarter of this year.

Latin America operating income declined from EUR 14 million to EUR 11 million, resulting in a margin decrease of 120 basis points from 8.3% to 7.1%. This was mainly due to the impact of hyperinflation in Argentina, partly offset by favorable foreign currency transaction effects. Our corporate costs, which are not on the slide, increased by EUR 17 million from EUR 62 million to EUR 79 million mainly due to higher stock compensation expense, unfavorable foreign currency transaction effects and higher project costs.

Turning to Chart 15 and going through cash flows and our leverage ratios. Cash flows in the first quarter of '19 increased compared to the comparable period of last year. The implementation of IFRS 16, which led to the reclassification of rental payments into financing transactions, had a significant effect on these values. This resulted in cash from operations of 1.8% of revenues compared to the minus 1.1%.

Looking at CapEx, it decreased by approximately EUR 19 million year-over-year. Days sales outstanding increased from 75 days to 83 days. That would be 75 days at the end of 2018 to 83 days. This reflects an increase in DSOs of roughly 12 days in North America, which is driven by the seasonality of our invoicing in the U.S. Asia Pacific and Latin America had a slight increase in DSOs just due to the results of the Chinese New Year and normal fluctuations in payments from public health care organizations. DSO in EMEA decreased by a couple of days due to improved collection efforts.

As a result of the development of our acquisition spending and the operating cash flows in the first quarter, our net debt, which is debt less cash on hand, excluding IFRS 16 has increased from EUR 5.5 billion at the end of December 2018 to EUR 7.7 billion at the -- as of March 31. If we include the additional lease liabilities as a result of the implementation of IFRS 16, debt would have increased to EUR 12.3 billion.

From a leverage ratio perspective, if you exclude the new leasing standard, the leverage is at 2.5x EBITDA, an increase from -- up from 1.8 at the end of 2018. If you include IFRS, leverage is at 3.2. Obviously, having closed the NxStage transaction, these values reflect that flow-through.

Turning to my last page and taking a moment on the outlook. As Rice indicated, we're confirming our outlook for 2019, anticipating revenue growth of 3% to 7% on a constant currency basis using EUR 16 billion as the base, and net income of minus 2% to plus 2% at constant currency. We're also confirming our target for 2020, anticipating increases in revenue growth and net income growth of mid to high single digits.

As I've stated before, and I'll just repeat here, the targets for the outlook in 2019 and 2020 have been adjusted to make the business performance comparable to 2018, having made adjustments such as the FCPA-related charges, the IFRS 16 implementation, the gains and losses related to the divestiture of some of our Care Coordination activities and the expense for the cost optimization program. All the effects also from the acquisition of NxStage are excluded from the outlook provided for 2019 and 2020.

So with that, I'll turn the call back to you, Dominik, and I think we're ready for questions.

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Dominik Heger, Fresenius Medical Care AG & Co. KGaA - Senior VP, Head of IR & Corporate Communications [5]

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Thank you, Rice, thank you, Mike, for your presentations. And I'm happy to open the Q&A for more insights now. Hailey?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Tom Jones of Berenberg.

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Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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Two questions. The first is my pet subject really, commercial pricing. If I look at the revenue per treatment in North America, if I ex out maybe $5 per treatment from that number for the increased used of calcimimetics and look at what's going on with Medicare rates, which up about 7.5, it does suggest that the commercial book of business was -- it was only down very slightly. Now we know payer mix is still down reasonably year-on-year. So I'm just wondering what I can infer from those numbers about like-for-like commercial pricing trends? I know the Q4 numbers might -- you've kind of cautioned us to expect a little bit of softness this year. I just wondered how Q1 developed relative to your initial expectations.

And then my second question, probably for Rice. I was quite surprised by you calling out growth in your health plan business as a driver of revenues in North American Care Coordination. My understanding, we should wind back quite a bit of your CSNP business. So I'm just wondering where this is coming from. Is it more subcontracted risk-based type stuff you're taking on? Or is there something else going on that I'm missing?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [3]

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Tom, it's Mike Brosnan. I'll take the first question as you anticipated. The short answer would be yes. I mean I elaborated quite a bit in our guidance in February that we were expecting flat to slightly down in terms of revenue per treatment. That was at least in part driven by our expectations with regard to some of the contracts we'd renegotiate in 2019.

I think you are seeing some softness in the [control] rate in the first quarter. When I look at that and put it together in terms of confirming the revenue per treatment guidance I provided, I would still stick to what I had indicated, flat to slightly down for the full year. But you are basically seeing in Q1 what I expected would take place over the course of 2019.

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Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Perfect. So I mean there was -- you expected -- sorry.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [5]

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Go ahead. Please finish.

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Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

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Sorry, Mike. Just -- so I'm going to guess that the key thing is that at least it's not worse than -- or any worse than you expected. It's progressing to plan, is that fair?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [7]

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That's fair. And I would also, to your point, because you mentioned the year-over-year commercial mix, yes. And I had said this in February, measuring year-over-year, you're going to see that. But when you measure off our Q3 base going into Q4 and Q1, that ties back to the comment Rice made that we are seeing improvement off our low point, if you will, with regard to where we finished third quarter of 2018.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [8]

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So it's Rice. Talking about the health plan. As you remember correctly, we decided that the CSNP business was not really making it for us and so we exited that business. That leaves us with the sub caps and with the ESCO obviously, and we feel pretty good about where we are there. But I think the bigger piece of this is simply we got rid of a fairly significant drag that we were seeing with the CSNPs.

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Operator [9]

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The next question comes from the line of Veronika Dubajova of Goldman Sachs.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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I will also keep it to two. My first bigger picture question is just wondering, Rice, if you have any comments on the statements made by CMS around the home hemo pilot, how you're seeing kind of accelerated uptake of home hemo would play on your business and what it would mean for you guys. So that's my bigger picture question, apologies.

And then my second question in terms of same-store or same-market growth in North America, do you think that the growth that we're seeing at the moment is sustainable? Any risk that it flows back down or conversely that you can see some acceleration from here?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [11]

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I'm just writing feverishly. So on the home hemo pilot, we were delighted to hear CMS come out and talk about that, but they're a little short on detail. So we don't really know where this will ultimately go, but we are anxious to be part of the process and understand it.

I would say to you, when you think about the current book of business that we've got in the ESCOs, we are running today at around 8%, 8.5% of that. Roughly, I want to say, about 47,000, 48,000 patients, is -- they are home patients. Now the vast majority of that 8%, 8.5%, like 7% and change is PD, and then there's 1.5%, 1.7% that's home. So we're kind of in that space today, not in a huge way, but we are there. And we look forward to seeing how they want to elucidate the detail on where this -- where it could go. And we'll sit and see where that happens.

On same-market growth, you would ask me this, we get to 3.7%. Now you're asking me if I would keep it, grow it or am I going to lose it. I would tell you that we worked hard at this. I would hope that we would continue to see good performance here. I don't think I want to speculate up and down, I'm just going to bask in the moment that we got to where we are with a lot of good hard work from people and we're going to do everything we can do to try to grow that and certainly make sure that we don't slip back down the mountain, if you will.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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That's great. We think -- can I just follow up on the home HD front? I think one of the concerns for investors out there is that as you see adoption of home HD, it depresses profitability of your business. And I know I don't want to preview what your guys are going to say on the webcast in a few weeks. But maybe just conceptually, can you talk to us about within ESCOs, the experience that you have for the PD, HD and home HD patient, do you see meaningful differences in profitability between those 3 groups?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [13]

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Yes. Honestly, I could not tease that out for you because I haven't been close to it. And if I did, I'd get shot by the ESCO guys and probably the guys at CMS as well, CMMI. Look, what we do know is generally, we do see very good clinical outcomes with home patients. In some cases, we see that they have less hospital days than the in-center patients, and that is a very general trend, Veronika. I'm not saying that specifically to this ESCO experience that we're getting. That's something -- why don't we talk about it at a later date? I need to spend some time with the folks who are really running that business. I just don't want to speculate on it, but we're happy to look into that. Maybe we can have a chat about that at another time.

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Operator [14]

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The next question is from the line of Patrick Wood of Bank of America Merrill Lynch.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [15]

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And I really feel like you guys touched on this. There's been a lot of conference calls today, so trying to juggle things. Just curious, in the Q1 numbers, and I hate to be the quarterly guy on this one, but if you can give any kind of quantification of Xenios and some of the other, not one-off in the bare exceptionals, but the phasing-related adjustments. I'm trying to understand how you feel the performance of the business was before those factors kind of came into play, the more underlying, underlying, if you will. I'm just curious if you can quantify any of those, that would be very helpful.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [16]

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Yes. Patrick, it's Mike. I guess because I did see in some of the material that all of you released before the call today some curiosity about a couple of things. So on Xenios, hopefully you'll understand, we can't disclose the specifics due to -- we've agreed to confidentiality. But maybe to help folks size it, I would offer that from a modeling perspective, you could look at the Q4 2018 EBIT margins and maybe use that for EMEA as something indicative for full year. And I think if you do that, you'll get a sense as to what the Xenios effect was in the first quarter.

And with regard to the -- just anticipating some other folks' questions with regard to the consent decree, what I would say there, again, similar to what we did last year, we have some confidentiality agreements in place. But I would say, big picture, for the full year, we'd expect a similar amount. But as we mentioned last year, this is kind of lumpy in terms of when it's recognized, so the timing will be a bit different. Last year, it more oriented around the second and third quarter. This year, my expectation is it's probably going to be a Q1, Q4 overall impact. But the total value for the years will be roughly the same.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [17]

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Yes. And Patrick, as I think Mike has mentioned before, this is the third year where we've experienced this. So I appreciate you not calling it really one-off because it is kind of an annual thing that we're seeing.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [18]

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That's very helpful. Maybe one quick, more structural follow-up, if I could. And apologies if this is out there already, but I'm just curious on any update on either the PATIENTS Act or on the Medicare Advantage side, any discussions as to how that's progressing on those 2 issues? That would be kind of helpful to get your latest thoughts.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [19]

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Yes. So on the PATIENTS Act, I would tell you that we are still bullish. We still have conversations when we're in D.C. on this. But in today's environment, there are many, many distractions relative to what's going on, so I can't say that we've had long, long substantive discussions about this. But it is on people's radar screen and people realize -- and when I say people, I mean health policy folks, staff in the congressional offices. But I don't see a take up and an action on it right now given kind of what's going on in D.C. at this point in time.

Now Medicare Advantage continues to be good for us. As we all know, the Cures Act is going to come January 1, 2021, and that will have some impact, but there's no real news that I would have to share with you that's of great nature, negative nature. I think it's sort of trundling on as we thought it would on Medicare Advantage.

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Operator [20]

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The next question comes from the line of Ed Ridley-Day of Redburn.

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Edward Nicholas Ridley-Day, Redburn (Europe) Limited, Research Division - Research Analyst [21]

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On NxStage, obviously, great that you mentioned [closed] it in the quarter. Could you just go back again and -- looking at the sort of the -- very helpful, by the way, breakdown you gave in the financials on the various NxStage effects. It seems to me that -- well, March do look pretty good in terms of the revenue side, but also the operating costs were slightly higher than expected. First of all, on revenue, obviously, NxStage also had a good year last year organically. Would it be that we could infer that the run rate is pretty good relative to the guidance you have given on the revenue side? But equally, how much of it should we use, your disclosure that you have given for the underlying profitability of NxStage this year?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [22]

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So Ed, it's Mike Brosnan. And I guess we did provide an estimate for NxStage at the time shortly after we closed the transaction. So on the top line, I would say maybe the best way to look at 2019, and I mentioned this previously, that you just need to keep in mind, when you look at NxStage's reported revenues, that was inclusive of our business with them. So obviously now, just like all the other products deals we've done over the years around the world, once we acquire, that becomes an internal revenue and cost to us.

So if I think in terms of the guidance we gave of EUR 240 million to EUR 260 million and you look at 2018 adjusted, taking us out of NxStage's 2018 results and also doing some cost adjustments because NxStage for the next couple of years will be selling bloodlines to B. Braun at a lower value as agreed. So when you look at that as a baseline, I'd expect -- we're not revising our estimate for NxStage, but I'd expect something in kind of mid-single digits in terms of revenue growth off the new adjusted base, excluding Fresenius Medical Care as a customer of NxStage.

And on the earnings side, really not much more to say at this point. We did close the business. We are getting the teams put together in terms of leadership that came from the NxStage business with folks in our existing business that will be working together through the integration process to get this off to the right track. So probably more to come as we get through 2019. But the estimates that we provided, we're holding to it at this point in time.

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Edward Nicholas Ridley-Day, Redburn (Europe) Limited, Research Division - Research Analyst [23]

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Just a quick follow-up on Patrick's question. Just the legal costs that were one-off, but not one-off in the first quarter that affected your North American dialysis margin, could you give us any more color on that?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [24]

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Yes. I will give you a bit more because our 6-K, which you haven't seen yet but which will be filed shortly, details potentially significant legal and regulatory matters for the company. And based on our regular review of those outstanding matters, we sometimes will increase our legal accrual. So in the first quarter, we increased our legal accruals by about EUR 20 million. The largest single item in that was made to address an agreement that we had to resolve a matter with the state of Mississippi. The 6-K actually separately discloses that value. So I can just tell you today that, that single item was USD 15.7 million. And that should hopefully give you a sense of the overall earnings effect in the North American results.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [25]

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Yes. Ed, I have -- Mike's nailed that. The only thing I'd tell you is this is sort of a Mississippi matter, was in that growth of the GranuFlo settlement that we did, and this False Claims Act that I would say a very grave state's Attorney General decided to file. And we settled this fractionally for what they thought they might get. So that's kind of the sum and substance of what happened there.

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Operator [26]

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The next question comes from the line of Oliver Metzger of Commerzbank.

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Oliver Metzger, Commerzbank AG, Research Division - Analyst [27]

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First one is on the ESCO programs where -- from the (inaudible) program where that should come soon. You commented earlier that currently 8.5% of the patients in the ESCO programs are already home HD patients. Are these patients valued under different criterias and are also part of this [2017] review process? And my second question is for Mike. So depreciation, amortization charge in the first quarter was EUR 362 million. Can you just give us a split between the underlying D&A and where -- extraordinary amortization, please?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [28]

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So Oliver, it's Rice. Relative to the ESCO, it depends on which plan year these patients came into the program on, and I can't tell you what number of that -- what percentage of those patients were in plan year 2 or they got started in plan year 3. I mean we have it, I just don't know it, but they are part of the program. And as we've talked before, our understanding is plan year 2 resolution, if you will, or the calculations of how that turned out, we're expecting that we should hear something about that in the May or June time frame coming from CMMI.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [29]

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Yes. And Oliver, it's Mike. On Page 23 and 24, the material we sent out, I think this would hopefully answer your question. We detail out the incremental depreciation associated with the adoption of IFRS 16. So that alone in Q1 was EUR 167 million. And in the full year, we'd expect it to be just under EUR 700 million.

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Operator [30]

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The next question comes from the line of Hans Bostrom of Crédit Suisse.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [31]

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I just had one main question. Just to understand how I marry the 6% growth in clinics, 4% in patients and 3% in treatments which seem to be at this change. I mean I presume the difference is the de novos that have been opened in the first quarter. How should we think of those metrics changing over the course of this year?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [32]

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Yes. Hans, it's Rice. Obviously, de novos do have a hand in that, and so maybe let me give you a little bit of clarity. As we look at where we were coming out of 12/31/18, we were basically looking at 59 de novos that were awaiting certification. We were able, in the first quarter of this year, to get 15 certified, of which the vast majority of those were done with the outside accreditation firm that we hired -- that we were able to hire as a result of legislation that was passed. But then just also keep in mind, on the treatments, we had 1 less dialysis day in the quarter.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [33]

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And should we think about these numbers sort of equalizing each other by the end of the year? Or is this not really a way you manage the business?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [34]

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Well, we don't really look at it in that level of granularity. I mean we obviously know that having 1 less or 1 more dialysis day will make a difference in the quarter. But it is a little more nuanced than just trying to run those numbers out because obviously you have certifications, you've got to be up and running the clinics, things of that kind of nature. So it's not as straightforward, I would think, as you might have expected it would be.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [35]

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Okay. And actually, one follow-up question. You did make a specific comment about your Care Coordination business in Asia Pacific, which to my knowledge is mainly -- or maybe solely, the Cura Group in Australia weighing on your margins. Could you elaborate on that, please?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [36]

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Sure. They continue to acquire and add to their footprint, and so I mentioned some startup costs associated with that. And that's really directed towards just acquisitions and de novo development in that market for Cura.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [37]

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Yes. Hans, I think they had -- Mike and I are looking at each other -- 2 or 3 acquisitions that would make the effect that Mike's talking about.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [38]

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We still feel -- yes, we still feel very good about the business.

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Dominik Heger, Fresenius Medical Care AG & Co. KGaA - Senior VP, Head of IR & Corporate Communications [39]

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Okay. So I see we have no further questions. I do apologize to everyone who dialed in. We had technical problems with the system provider. So if you dropped off, I do apologize. And we have no one on the list right now. So there's nothing on purpose. With that, I would say we can't answer questions because no one is on the list. Therefore, we would close the call, and I'd say thank you for taking the time on a busy day to dial in.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Management Board & CEO of Fresenius Medical Care Mgmt AG [40]

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Thank you. We appreciate your interest. We know you guys and ladies are all very busy and it's something we appreciate. Thank you.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [41]

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Thank you very much.

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Dominik Heger, Fresenius Medical Care AG & Co. KGaA - Senior VP, Head of IR & Corporate Communications [42]

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Thank you.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Management Board at Fresenius Medical Care Mgmt AG [43]

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Take care. Bye-bye.

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Operator [44]

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Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.