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Edited Transcript of FME.DE earnings conference call or presentation 20-Feb-19 2:30pm GMT

Q4 2018 Fresenius Medical Care AG & Co KGaA Earnings Call

Bad Homburg Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Fresenius Medical Care AG & Co KGaA earnings conference call or presentation Wednesday, February 20, 2019 at 2:30:00pm 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 Mgmt Board at Fresenius Medical Care Mgmt AG

* Robert Maurice Powell

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

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Conference Call Participants

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* David James Adlington

JP Morgan Chase & Co, Research Division - Head of Medical Technology and Services Equity Research

* Edward Nicholas Ridley-Day

Redburn (Europe) Limited, Research Division - Research Analyst

* Gunnar Romer

Deutsche Bank AG, 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 Call for the fourth quarter and full year 2018 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 fourth quarter and the full year. We appreciate you joining today.

As always, I'm happy 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.

I know that it has been number of planned news and many press releases on very different topics today, plus the news very early this morning about NxStage. Thank you for hanging in with us. Nevertheless, we have a little logistics time constraint today, and we will have to end the call at 4:30 p.m. sharp. Therefore, it will be great if we could limit the number of questions again to 2 in order to give everyone the chance to ask questions. If there are further questions and we have time left, we are happy to go a second round. I hope this works for everyone.

With us today is, of course, Rice Power, 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 Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [3]

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Thank you, Dominik, and a warm welcome from my side as well. Before we get into the specifics on 2018's performance and we talk about '19 and '20 and guidance, it's been a while since we talked a little bit about our strategic value and the things that we bring to the marketplace strategically. So if you'll bear with me, I'll try to do this quickly, but I think it's been a while since we discussed it and I'd like to cover it.

We are going to continue to move away from selling single products and continue to move toward selling comprehensive innovative solutions that help practitioners and patients and caregivers provide the best care possible. Given our experience and the depth and the breadth of our 4,000 dialysis clinics around the world, I remain completely convinced that we are positioned to deliver the highest-quality patient care and patient outcomes anywhere in the world.

We're also creating an opportunity for us to be able to capture growth in the developing economies. It's something that we've talked about quite a bit. Rice, you're too heavily invested in the U.S., you need to do more. So we are doing more. We're now in 150 countries, as you know, with products, 50 countries providing service. There's a certain amount of risk that goes with those developing markets, but we think we can handle that risk, and it's the right move in order to continue to grow the entire portfolio and not be so dependent on 1 particular region or country.

And I remain convinced that our Care Coordination assets and the opportunity it gives us to manage risk predictively predict where patients are going to go. I'm not sure that's the right phrase, predictively predict, but I'll stick with it. And it also gives us a way to drive value-based care, particularly in the U.S., which is something that is not going to go away. And in fact, it's going to become a bigger part of the dialysis industry in the years to come.

Now looking at our home strategy, a couple of things I thought are very U.S. specific what would be of interest to you. So if you look at the split of the total treatments, in 2018, you see that 88% were in center and 12% were home, and that book, if you will, grew 4%. Now focusing on the home treatments for 2018, we see the PD is 78% of those treatments and it grew 8%. Home hemodialysis is 22% of that book and yet it grew 14%. Combine those 2 and you see a 9% growth in 2018. I think you understand why we're so excited about NxStage, our capabilities and their capabilities combined. We continue to target 15% of our total treatments being in the home setting by 2022, and I'm optimistic that we can see better than 15% as we move through the next couple of years.

In order to make this happen, we do have to make some investments. So what is it that we're going to invest into if you're going to expand our home treatments? Patients and physicians and nurses need to be educated. We have home training clinics. We may need to refurbish some. We may need to build some new ones. For every home treatment that we want to provide, we have to get the product there. So the distribution infrastructure in the U.S. specifically has got to be maintained. It's got to expand, and we have to look at the most novel and creative ways to not drop product off at the corner and expect people to pick it up, but to take it into their homes and make it as safe and easy for them to use the product, store it in the right location, rotate the inventory. This is more than just a delivery per se. And then, obviously, we need equipment, bag, solutions, tubings, et cetera, as we look at what we have to put in the home for these patients.

We also believe that if we can do a better job of increasing earlier awareness to chronic kidney disease, we have more lead time to train patients, make sure they understand their options of in-center or home and take advantage of trying to put these patients in the venue that they desire and that they're capable of functioning and driving in.

Moving to Slide 5, again to talk a little bit about developing economies, and I think China is a great example. Just for you to take a look and you can see, health care expenditure in percent of GDP and look at the size of the diabetic population. We believe being an early mover is going to be key in China as well as some of the other developing markets. We're leveraging 15 years of experience in China in the product business, very competitive, yes. The competition doesn't mean you're not learning things and learning how to get better. And we're investing in our manufacturing capacities there, both for the home business and PD, as well as some of the HD things that we'll need as our clinic book of business grows. And we'll continue to look at the opportunities, particularly in Asia because it's the one place where we see Care Coordination opportunities in Australia, and you'll see later in the presentation that's working quite well.

Now moving to Slide 6 -- or Slide 7. You can see as we normally have laid this out for you, you see clinic growth at 5%, patients at 4% and treatments at 4%. I'm very proud and I'd like to say thank you to our employees at Fresenius Kidney Care because we were able to maintain our 5 diamond star status at 99.96% of our in-center and home hemodialysis programs. And for those of you that know me, I would just simply round that up to 100%. But I'm very proud of the work these people are doing. This is the U.S.-focused activity, but I can assure you that if you look at our clinic activities in the other regions, they do very well. They just have not set up a program like this yet.

Looking at Slide 8 at our quality outcomes. I think the thing I'll point out today is if you drop down and look at days in the hospital per patient year, we're seeing progress in North America, 10.7% down to 10.2%. EMEA as well as Asia Pacific and I'd say flat to slightly up in Latin America. So continuing to try to get our patients out of the hospital or keep them out of the hospital as best we can.

Turning to Slide 9 for the full year update. Q4 was a solid performance for us. We did achieve and I'd say beat in some cases, our revised full year guidance, that's a better feel because it's not the guidance that we wanted, but the fact that we had to revise it and yet we were able to achieve it and exceeded a little bit, we take some comfort in that.

As we'll talk about later in the presentation, our GEP II activities are ahead of schedule. You've seen that we are proposing a 10% dividend increase, I'll talk a little more about that later. And obviously, the big news that came across my phone at 2:00 a.m. this morning, German time, was that we will be closing the NxStage book of business. We'll close this transaction sometime in the next couple of days. We found out last night that it's been approved, so we have a little work to do. But we'll get that closed and we'll be communicating with you after that's taken place.

If we can turn to Slide 10, looking at the revised full year guidance quickly. I'll just ask you to look at the reddish boxes on the right side of the page, where you can see revenue on the comparable basis, growth in constant currency at 4%, a slight beat to the guidance we gave you, and the same for net income. You've had these figures for a while, so I won't read them to you, but we are pleased with that performance.

Looking at the fourth quarter specifically, again we see strong results there. Revenue, obviously, in North America was impacted by Sound and IFRS 15 implementation. We had some other income impacts that we've listed for you throughout the year with the divestiture of the ballot and FCPA. But all in all, we think it's a good story and we're pleased that we're able to deliver results slightly ahead of the revised guidance.

Coming to Slide 12. I think the key thing here is would you just take a moment and look at the trend lines. This was the first time that we had given you this slide back last quarter. And I'm very pleased when you look at where we are, I'm not going to go through each of these, but the lines are going in the right direction. Everybody's making progress. Things look better. I would highlight for you the same market treatment growth for the group at 3.2% and North America at 3%.

Looking at Slide 13 on the organic growth. Everybody contributed to this. They're the ins and outs in North America, I'm not going to go through those again. But I'm particularly pleased with what we saw in Asia Pacific and Latin America in terms of their organic growth. So every region is contributing.

Now if we look at Q4 services on Slide 14, I will direct my comments to the last 2 columns on the right. We've talked about North America and the special impacts there. EMEA, the growth was driven by same market treatment growth and acquisitions along with some organic growth. Asia Pacific did very well. And I would also point out if you look at the Care Coordination in the quarter in Asia Pacific, you can see where they are progressing as well.

Turning to products, which I think was a concern for a number of people in the last quarter's call. Q4 products did very well. We're very pleased with what you're seeing here. You can see on the Dialysis Product side, growth at 6% constant currency, organic growth at 7%. And I won't read these to you. You can see every region did well, particularly North America, Asia Pacific, we're doing quite strong. And on the right, you can see the various product lines that they're in. In the sake of time and getting to your questions, I'm not going to walk you through each of those, they're there for your review.

Turning to Slide 16. Again, we will be proposing at the AGM on May 16, a 10% increase in our dividend, taking us from EUR 1.06 to EUR 1.17. I'm proud to say this is the 22nd consecutive dividend increase that we've proposed.

And the share buyback, we've made it clear to you we're looking to buy up to EUR 1 billion of shares. We'll do that over the next 2 years. For those of you that had the opportunity to meet with Mike and I and Dominik back in September, I think I would just said you we were listening and we do continue to listen.

What will we focus on in 2019? Looking at Slide 17. We will continue to focus on resolving some of the identified operational issues we talked about last quarter. We are going to invest around EUR 100 million in 2019 for cost optimization. I won't go into the details there. I'm sure you'll have questions and we'll be delighted to answer those for you in the Q&A. But the key point here is this will be accretive to net income in 2020. And obviously, you've seen that in our 2020 guidance that we've given you.

We're doing a good job in GEP II. We can talk about that a little later. Obviously, one of the largest things we'll be dealing with is the closure of NxStage and integrating them into Fresenius Medical Care.

So that's the conclusion of my prepared remarks. I hope you could understand me. It's February, and yes, I have a cold from being on an airplane incessantly. We're only in the first 2 months of the year. So hopefully, you could understand me. And with that, I'll turn it over to Mike.

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

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Thanks, Rice, and hi, everybody. I'll keep things also moving given our time constraint. So I'm on Chart 19, just a quick look at the full year 2018. You see that the adjustments we've been making to get to comparable revenue all year long, so I won't belabor that. In the blue section, it indicates what we believe we've achieved operationally, which is 4% constant currency growth, which exceeded our revised guidance from the fourth quarter.

Turning to the next page, Page 20. You see the 2 views of net income, which also, I think, you're all very familiar with the adjustments we've made both to get to a comparable basis for earnings and then an adjusted or what I call the operational effects. So we did land 2018 with 14% constant currency growth in comparable earnings and 4% content currency growth on a fully adjusted operational basis, both of which exceeded the guidance that we provided in the fourth quarter.

Then taking a very quick look at Q4, you see the comparable figures adjusted in the same consistent way, 7% constant currency top line growth on Page 21. And then on Page 22, you see 9% net income growth on a comparable basis and 4% on an adjusted basis with all the adjustments, which we can review again if necessary as we go through the Q&A.

So now taking the time on the regional margin profile. I would just remind everybody that these numbers are on an as-reported basis. So this is literally -- yes, as you look at the face of the P&L and what you see in the statistical tables that we produced with the earnings release. So for North America, you can see that income was down EUR 116 million to EUR 492 million. On a constant currency basis, the margin was 16.5%. The operating income includes lower compensation expense, margin benefit due to the adoption of IFRS 15, some nonrecurring gains from fixed asset and investment sales in 2017, and additional impacts related to the gains from the divestitures of Care Coordination activities as we progress through the year. We also, in the fourth quarter, had about a EUR 12 million cost associated with the ballot initiative.

On the Dialysis business, the operating margins were 18.5%. These margins declined as well due to the sales of some investments that a discontinuation of non-IFRS accounting policy, increased accruals for potential settlements related to the GranuFlo matter in terms of state's actions on billing. You have the inclusion of the calcimimetics into the bundle, which affected the margins on the pharmacy or Care Coordination side of the business -- affected the margins on the dialysis side of the business negatively, excuse me, we had the offset in Care Coordination.

On the revenue per treatment side, I would say that we -- the revenue per treatment, excluding calcimimetics, was very consistent with the guidance that I've indicated for the full year being slightly down. And on the cost per treatment side, similarly, the actuals, excluding calcimimetics, were consistent with the guidance that I gave several times being slightly up.

On the Care Coordination side, as I mentioned a moment ago, you've got the shift of calcimimetics into the dialysis business that had a favorable effect on our pharmacy margins, lower bad debt. It had the divestiture of the Care Coordination activities. You also had the gain from the sale of Shiel in 2017's results, and we did have an adjustment in the fourth quarter related to the ESCO revenue recognition.

For Q4 in terms of the regional marginal profiles, just quickly going down the page. You can see that in EMEA, the margins decreased to 14.4%. This was driven by a charge that we took in the fourth quarter related to the intangible assets for XENIOS that was partly offset by the release of accruals. We also had the release of accruals in 2017 related to some favorable court settlements related to value-added taxes. But that's at least, a few points explains the higher margins that you see in 2017.

As we reported towards the back half of the year, we did see higher personnel costs in certain countries in the services side of the business in EMEA. And we had unfavorable foreign currency transaction effects. These were partly offset by an improvement in costs related to the management board change we had in the region, some decreased compensation expense, lower development costs related to V4 and the impact of 1 additional dialysis day in 2018.

In Asia Pacific, you can see the operating margins improved to 18.8% and earnings improved about EUR 10 million. The increased margin was driven just by favorable impacts associated with business growth. Comp expense was down. This was partly offset by unfavorable foreign currency transaction effects, the headwind that we faced during 2018 and a small reimbursement rate decrease in Japan as well as an adjustment to our lease receivable in Korea.

Care Coordination margins in the region increased from 19.8% to 21.8%, due broadly in association with the different Care Coordination businesses we have across the region.

Latin America income declined, as you can see, to EUR 5 million. Our margins also showing a dramatic effect. Not surprisingly, this is largely associated with the hyperinflation effect that we talked about in Q3 relative to Argentina. For the full year, I had indicated that we expected something on the order of the same impact in Q4 that we saw in Q3, which would have been about EUR 17 million on an after-tax basis. It came in a little bit better than that. So the total year effect is about EUR 32 million. So pretty much in line with what I had indicated.

It's not on the page, but corporate cost decreased by EUR 222 million. This is obviously largely because we took a EUR 200 million charge for the FCPA in the fourth quarter of 2017. So you did have a modest reduction in corporate costs in the fourth quarter from roughly EUR 89 million to EUR 67 million, and this was broadly due to slightly more favorable results in our R&D organization, in our GMQ organization and some favorably in corporate cost associated with variable comp.

Turning to the next page, looking at cash flows. Cash flows, nice performance in the fourth quarter, 16.2% of revenues. This is essentially due to a favorable development with regard to our day sales outstanding and trade receivables. We had a 2-day improvement in the fourth quarter this year versus Q3 versus a 1 day erosion in DSO Q4 in 2017. So you have a 3-day improvement in DSO. And we had lower tax payments in the U.S. driven by the lower tax rate in The United States.

Capital expenditures, when you look at the full year, essentially consistent with what our expectations were. Strong free cash flow both for the quarter at just under EUR 400 million and just over EUR 1 billion for full year 2018.

Our ratings have not changed with regard to our credit, and we continue to delever as the year progressed, finishing the year at 1.8x debt-to-EBITDA.

Turning to the next page and touching on our Global Efficiency Program, you saw with our release this morning that we did report favorable results with regard to our expectations for 2018. We had anticipated about a 10% level of sustained savings coming out of 2018. We're reporting about 15% for the year. We also took a look at our programs and are comfortable increasing the low end of the range from EUR 100 million to EUR 150 million. So the range is narrowed and improved in that context in terms of what we expect over the course of 2019 and 2020. And we'll just continue to manage through this program trying to drive efficiencies through the programs that we introduced as a point of GEP II.

So turning to Page 27 and what we've tried to do here is, since we had given you preliminary indicative guidance in December, is benchmark what we're doing relative to our outlook for 2019 in the context of that preliminary indicative guidance. Keeping in mind that, that was early December, we have not closed the books. So you can see very broadly if you take the midpoint of what we had indicated in December, we outperformed that a bit in the fourth quarter. So we would say the adjusted basis for 2019 is EUR 16.026 billion. And when you look at the right-hand side of the page, the midpoint was EUR 1.357 billion. You see that we outperformed slightly about 2% for the fourth quarter of last year, and you see that we have now adjusted our preliminary indicative guidance by the U.S. ballot initiative. This was done essentially because we have had over the years a number of matters that we treated differently between Fresenius Medical Care and the parent company, FSC. We decided to harmonize the framework as it relates to some of these differences, and so we simply adopted the FSC framework with regard to how they treated the ballot initiatives in their base period and took the guidance down by 40%. That gives you an adjusted basis for 2019 of about EUR 1.341 billion, slightly lower than what we had indicated in terms of the midpoint for 20% in early December.

Keep in mind that when you're looking at that and you're thinking about 2019, what we also had not indicated that we would we doing a share buyback at that time. So 2019 has obviously been influenced in terms of the cost associated with executing a share buyback.

So now turning to Page 28 and taking a look at the outlook. We're indicating our outlook and our targets for 2019. Revenue growth of 3% to 7%. We have broadened the range of bit from what we traditionally do. We historically have used a 3-point range. We've broadened it to a 4-point range to just put perhaps a bit more conservatism in light of our experience in 2018. And net income growth, we had said that broadly flat in mid-December. We'd now just essentially articulated a range for 2019 of minus 2 to plus 2 for 2019. And on the right-hand side again, you see the base against that -- against which it should be measured.

And then 2020, self-explanatory, mid- to high-single digits both in terms of revenue and net income. The targets for '19 and '20 are in constant currency and the base have been adjusted in order to make the business performance comparable. So thinking in terms of any FCPA-related charges, this does not include the implementation of IFRS 16, the leasing standard. We adjusted the base for the contribution Sound made both to revenues and earnings in the first half of 2018. We have taken out the gains and losses associated with Care Coordination activities. And similar to the adjustment we made for the ballot initiative in 2018, we have also adopted the framework used by FSC in terms of onetime costs that are incurred. So we've talked about the fact that we have a cost optimization program. We anticipate that will be a cost of about $100 million in 2019. And that onetime cost is outside the guidance that's indicated on this page.

And all of this is, given that the NxStage acquisition had not closed by the time we give guidance, the targets exclude the effect of NxStage, which, as Rice mentioned, we'll be coming back when we close and finding some additional information on that.

So I think in the interest of taking your questions, that's the end of my prepared remarks. And I'll turn the call back to Dominik.

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

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So thank you, Rice, thank you, Mike, for the presentation. I'm happy to open the Q&A for more insights now. Hailey, can you open the Q&A, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Line of Veronika Dubajova of Goldman Sachs.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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I will limit it to 2. My first one is, I was hoping you could comment a bit on the mix development that you saw in the North America dialysis business in the fourth quarter? Clearly, this is a negative surprise for you in Q3. I'm wondering to what extent you saw a stabilization or improvement in that trend? And since we are on that topic, maybe Mike, you can communicate also your expectations for revenues per treatment for the U.S. for 2019? My second question is on same-store growth or frankly market growth in the U.S. Your large competitor last week made some cautious comments about slowing growth in the U.S. I would love to get your thoughts on whether that's something you are seeing and thinking about and how we should be thinking that the tailwinds and headwinds to volume growth in the U.S. going forward?

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

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Veronika, it's Rice. I'd say what, I think I'll let Mike handle the first question and then I'll take number two.

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

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Okay. That's fine. We're good. Veronika, yep. So in terms of mix development, we said that relative to the commercial mix, as we discussed it in Q3, that we saw this as 3- to 4-quarter effort to get this back on track to where we felt it would be appropriate. And we typically don't comment on the small basis point changes. But what we can say in the fourth quarter is we did see things moving in the right direction on mix, so we did see some improvement. But as we expected, it would be slow and build momentum as we go through the year.

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

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Small bps, yes.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [6]

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Yes. And then relative to guidance on revenue per treatment for 2019, I would say, again, I would do this kind of excluding Sensipar, I think that makes sense from the way we handled 2018. And I would say that broadly, revenue per treatment will be flat to may be slightly down in 2019. And I would anticipate your question, Veronika, with regard to cost per treatment at the same time to save you the trouble of getting back in the queue. And I'd say, consistent with what I'd indicated in 2017, I would see cost per treatment as flat to slightly up. So you do see some compression there, which not surprisingly is why we're undertaking GEP II and the cost optimization program amongst other things.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [7]

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Veronika, it's Rice. So I was made aware that Kent seemed to indicate he felt it was slowing. We're not actually seeing that. I want to give you a reference that I think will be helpful for you to kind of make up your own mind, but there's an article that just published on Friday, the 15th of February, by Keith McCullough and it was in The Journal of American -- The Journal of the American Society of Nephrology. And what it really shows is prevalence of incident rate and prevalence rate. And this is a graph that goes from 1980 all the way to 2030. But if we focus our sales from 2015 out to 2030, essentially what he's saying is and I'm just going to give you the snippet, his words not mine. But a recent study indicates that population changes in age and race distribution, obesity and diabetes prevalence and ESRD survival are going to resolve in an 11% to 18% increase in the crude incident rate from 2015 to 2030. So where we clearly understand that you may get a quarter where things look like they've slowed down. If you look at this on the long term and you look at the long-term trend, we just don't believe it's sustainable that you're going to see the slowdown. We think it's going to completely continue to go the other way. And so we're in a little bit different place. In all fairness, this article came out, I think, today after they've done their call, timing is everything, but that would be my take on this, Veronika.

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Operator [8]

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

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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 [9]

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I have 2, please. The first would be on the home side. Obviously, you guys are expecting a large penetration increase and that as a proportion of your case over time. And I'm just curious, long term where you see the reimbursement structure for that business heading, mostly because it seems reasonably generously at the moment relative to the cost they're providing care within the home? So that would be the first question. And then the second question, I hate to be boring and bring it up, but AB290 in California. I mean, if you're uncomfortable commenting sort of directly on the bill, that's fair enough, maybe you could give us some stats, maybe the proportion of your patients sat within California? I mean, I think we'll have estimates of that, but it'd be helpful just to get a little bit of color on that, that would be great?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [10]

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Sure, Patrick, it's Rice. I'll take both of those. So on home penetration, and yes, it's going to increase, no doubt. Where does reimbursement go? Yes, it's true that generally the costs are lower, and we've talked about that before because there's less labor. But here's what I would say, as we look at growing this book of business and giving patients more of a chance or choice as to where they want to go, there is a lot of discussion and dialogue coming out of CMMI in D.C., basically saying we have to change the way we pay for this. We have to do things differently. So I would actually talk to you about going the other way. I am not as worried about reimbursement cuts as much as I think. If we can truly show home population that has better outcomes, less hospital days, and we can show that that's meaningful, repeatable data then I think there's an opportunity that we can have discussions about saving the government money, what do we do about differential reimbursement, can we get more for training, can we do more to continue to get this momentum to move forward, if you will. So I am in no way negative on where we are. Now will this happen in 2 years? Absolutely not. We need to bring a body of data, no different than we brought in the ESCO program and other things that we've done. But if anybody's going to bring it forward, we're going to do it. And I think we have to be open to what I'm hearing coming out of CMMI, that they want to look at different ways for us being paid and how can we really try to create more opportunities for these patients to be better served. So I think we'll all have to stay tuned on that. On AB290, can't say we were surprised that, that came about. I don't think I have anything new to say relative to, I think we made a comment last year about what we thought the impact of that would be to us. I think the more important thing to know is that we are spending time in the legislature in California. We're going to continue to educate them to make sure they understand the ins and outs and what this kind of bill would mean and we're going to try to work to find a way to get our story across as well. So I think it's a little early to say much more than that, Patrick.

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Operator [11]

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The next question is from the line of Tom Jones of Berenberg.

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Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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I had 2 questions. The first, probably one from Mike. I just wanted to circle back on your comments regarding your expectations for revenue per treatment in 2019. Clearly, we got a much healthier Medicare rate increase this year. And with you guiding to flat to slightly down, that would imply that you expect commercial revenue treatment to be down. I was just wondering, is that all related to the year-on-year decline in mix that you're seeing? Or do you actually expect some year-on-year declines in like-for-like pricing on the commercial side? And if so, may be some color on why that might be? And then the second question, maybe a slightly bigger picture one for Rice, you did mention it, but I often think it doesn't get the attention it deserves, but the half a day per patient improvement you saw in the U.S. in hospitalization, it doesn't sound like much to the casual observer. But across your 200,000-plus patients, that's 100,000 days a year less in hospitals, equivalent to 274 years for a single patient. That's a huge, huge system-wide saving given that the ESRD patients are the cheapest in hospitals. How much of that do you think you can -- you are currently kind of capturing through ESCO programs, risk-sharing programs that kind of saying, where do you think that number could go? And what do you -- what would you like to do or how would you see that sort of trend developing for you to get -- keep a bit more of the savings that you're clearly making for the system on those kind of improvements and hospitalization rates?

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

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You go ahead with the first one.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [14]

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Yes, on revenue per treatment, it does reflect our best judgment in terms of both what the outcome might be with regard to mix, not in terms of the absolute value of mix but just the relative value of contractual rates within the mix. And then I think importantly, we nailed down the national contracts in Q4 '17 and over the course of '18. We know exactly where we stand on those, but we do see some headwinds with regard to potentially the regional and state level contracts that we need to negotiate bilaterally as we go through 2019. So that's reflected in our guidance.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [15]

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Some of what we normally get down in fourth quarter, Tom, is still, as Mike says, in the year, if you will, so we're working through that. On your big picture, yes, I mean, it's a nice drop. What I would say is 1 quarter does not a trend make. But I think what's interesting when you look at what we see in the ESCO population, keeping in mind that that's 40,000, 45,000 versus 180,000 or whatever patients in the Medicare or Medicaid book that are in the ESCOs, we're seeing a couple of bps down in the ESCO program. So I'm convinced that we are going to be able to bend this curve, if you will, on the hospital days. But Tom, I think for us to do it repeatedly quarter-after-quarter, it will take some time. I think your math holds, what's going to be exciting to me is when we get to the place where we can grow the ESCO program, we convert it to the Patients Act, if you will. We get enough patients, enough critical mass on this, we're going to be able to start to make a real dent. I'm not jumping up and down on one quarter, but this is a 10-year love affair for me that we're on to try to get this to where we're going. And so when you see it in the general population, if you will, it does make me feel good, but it's got to be more than just a quarter. If you go back last year, I think in one of the quarters we dropped a little bit and it didn't hold. So it's a little early to say we struck gold, but we're going to keep mining, I'll leave it that way.

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Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Sure. And just one quick follow-up, seeing as you mentioned it, the Patients Act. I mean, any change in the tone in the Washington post the midterms? Or do you still pretty positive on something potentially happening on that at some point, assuming you can get tacked on to a decent-sized carrier bill?

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

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So we're still optimistic and we're still pushing hard. Sometimes the harder we push, some knucklehead in D.C. does something that just kind of confuses everybody and makes them go nuts. So we've got to find a quiet moment, if there is such a thing, to keep pushing this, but we're up to the task. We're going to keep pushing on it.

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Operator [18]

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

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Edward Nicholas Ridley-Day, Redburn (Europe) Limited, Research Division - Research Analyst [19]

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First of all, follow-up on the Care Coordination margin and the -- sort of the adjustment you made in the fourth quarter, if you could quantify that it would be helpful? And I understand, we stalled on the ESCO program. How we should think about profitability for Care Coordination in North America for 2019? That would be my first question. And just on EMEA, should we really be thinking about further incremental deterioration in personnel costs in 2019? Or do you feel it may be stabilizing?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [20]

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Yes. Just broadly speaking, with regard to Q4, I would say that when I look at globally the margins in Care Coordination, in particular adjusting for the impact that our exchange rate has because we had a gain associated with a number of Care Coordination activities. And as we've seen there's noise that comes through in Q3 and Q4 relative to the change in the exchange rate. So when you adjust for that and, in particular, when you take out the first half of '17, the Sound business -- first half the Sound business, you get to about a 9% margin for Care Coordination on a global basis. So that, to kind of reflect back on where we were in the third quarter. So of an adjusted 2017 base, taking Sound out and taking out the noise associated with FX on that gain, you get to about 9%. And in the fourth quarter, I think relative to the ESCOs, which I mentioned, it just took a little bit more of a conservative view with regard to what our expectations are because the reconciliation of that program has been postponed by several months with the government.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [21]

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Ed, it's Rice, on the EMEA personnel cost. What we saw in the third quarter was we have been given increases in Hungary kind of government mandated, if you will. We also decided to take some, I'd say, more of a market approach in Romania to our nursing staff. We had given some raises there, and then we also had some inflation to deal with in the U.K. What I would say is when we look in general within EMEA, we look at labor inflation somewhere around 3%. Now 2 of these, in the Hungary and the U.K., we sort of had to do. Romania, we thought it was the right thing to do. I think we budgeted merit increases appropriately for 2019. Not to say that if a country comes back and really dictates that we need to do something else, we'll have to follow that. But we'll try to find a way to manage that as best we can. But I don't think we're seeing a trend that will convince me we can't manage this process.

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

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And Ed, coming back to your last -- the third part of your first question, Care Coordination margins for 2019, I would say high single to low double digits.

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Operator [23]

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

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [24]

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I had a question regarding your lease liabilities, please. Since your capitalized lease value at EUR 4.2 billion, quite high value considering that your outstanding nominal lease commitments were EUR 4.5 billion last year. So from that follows a couple of questions. What is the discount rate you've used to capitalize the lease -- operating leases? And secondly, have you been including a lot of embedded leases in your liability calculation? Or has there been a considerable increase in leases facilities over the year? And thirdly, a question regarding your relatively mature lease portfolio, where another 2/3 of leases are due to come to the term over the next 5 years. Should we be concerned that rents on the facilities that you might have to renew are going to come at a much higher level given that relative maturity?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [25]

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Hans, it's Mike. The discount rates actually are driven by what's in the individual leases. So it's all over the map because this is a global effort we've undertaken. So I can't give you a specific rate. The change over the course of the year, particularly I guess, if you're looking at 2018 versus 2019, the complexity of IFRS 16 goes far beyond what we used to do in the past, which is just to accumulate lease payment schedules off book, if you will. So we've been at this for quite some time. I don't think we've had any dramatic change in the extent to which we lease meaningful assets around the world. So I wouldn't attribute any particular change in behavior over the course of 2018 or that we anticipate a significant change in behavior in 2019 on that. The biggest part of this liability actually relates to the fact that it's -- there's a very vibrant leasing market, particularly in The United States. So mostly this comes from the fact that our clinics are mostly leased in the U.S. And so those leases, I'd say, run -- and I'm going to look to my folks here, but I'd say 5 to 10 years as a ballpark for maturities. But to your point, we've done our best to give everyone an estimate, and by the way, this is on Page 36 of the material that we distributed. That's where those numbers have come from. We've done our best to give you some indication as to anticipate the impact will be of IFRS 16. There are estimates involved in terms of what we think the renewal rates will be around the world. So there will be a little bit of volatility as we all get used to what the requirements of IFRS 16 are going to be as we go forward.

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Hans Bjorn Eskil Bostrom, Crédit Suisse AG, Research Division - Research Analyst [26]

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When do you think you might provide some form of pro forma data for 2018? Would you be able to give that on a quarterly basis?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [27]

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No, I think what we'll do is we'll probably try to give you an estimate on what 2019 would look like if we continue to apply the old standard. That -- both of those have some complexity to them, but I think giving you some indication as to what the numbers would look like on a pro forma basis with the old standard as we progress through '19 would be a better indicator than trying to go the other way and recreate an IFRS 16 database for 2018.

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Operator [28]

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The next question is from the line of Gunnar Romer of Deutsche Bank.

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Gunnar Romer, Deutsche Bank AG, Research Division - Research Analyst [29]

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Gunnar Romer, Deutsche Bank. Let me start with a couple of housekeeping questions from me, please. On the share buyback program, can you confirm that you will be canceling the shares and by when? And then secondly, I was wondering whether you can give us some guidance on corporate cost, the financial result and the tax rate in 2019 according to your model? And then also more of a housekeeping question, on the NxStage closing, I see that you're very confident to close in the next couple of days. I was wondering whether and when you would update your guidance for 2019, including the effects of NxStage? Then coming to the operations, I figured there was a comment on higher-than-expected implicit price concessions in today's release. And I was wondering whether that also explains some of the outlook for flat-to-slightly down revenue per treatment in 2019. So any comments around these higher-than-expected implicit price concessions would be very helpful? And then last but not least, thank you very much for the margin guidance on Care Coordination, can you also help us understand where you would expect to see the revenues for the business based on the current business in 2019?

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [30]

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So Gunnar, we're going to take your first 2. We're really trying to limit people to 2 because there's a whole bunch of other people in queue. So Mike, go ahead.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [31]

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So yes, we'll buy the shares under the safe harbor for EU, which essentially would require either cancellation of reservation for compensation program. So it's our intention to cancel the shares. We tend to do that once a year just in terms of efficiency. So I would imagine you'd see one cancellation at some point in time over the course of 2019 and one over the course of 2020. In terms of corporate cost, I would estimate probably looking at corporate cost excluding any FCPA charges on the order of about, let's say, EUR 370 million to EUR 380 million, that is up from where we landed, obviously, in 2018. And I would say that the increase is essentially a split between -- and by FCPA charges, I mean anything associated with settling with the U.S. government. So it's roughly split between the investments we're making in global R&D, a little bit of manufacturing and then the balance in, what we call, core corporate, which is the investments we've made in HR. We're bringing on a new global HR system, some corporate compliance and corporate legal, that's now deployed on a worldwide basis.

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

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Yes, Gunnar, it's Rice, on the NxStage. So at this point, we do anticipate we'll close in a couple of days. And then very soon thereafter, we'll give you guys an update on the impact of NxStage. But I would like to be clear. So the guidance we have given you for this year is the guidance. And then we'll give you the impact of NxStage, but we're not going to reissue guidance. We just think that's not a good way to do this. But we'll make it clear to you what the impacts are and we're going to stick to what we've already issued. We just think it's simpler, cleaner, easier way to go.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [33]

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And I'm going to give you a bonus round because someone else will ask. Tax rate between 24% and 26% for '19. And I think some folks thought they heard you ask about interest, I'd say interest is going to be, let's say, in EUR 230 million to EUR 240 million range for the year. Okay. I think we got most of them, yes.

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Gunnar Romer, Deutsche Bank AG, Research Division - Research Analyst [34]

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Any chance you can comment on the price concession?

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [35]

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There's no change in the business model. Nothing significant that I'd attribute in terms of change here, yes.

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Operator [36]

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The next question is from the line of David Adlington of JPMorgan.

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David James Adlington, JP Morgan Chase & Co, Research Division - Head of Medical Technology and Services Equity Research [37]

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Firstly, just on phasing maybe for the year. I think you sort of pointed towards the second half acceleration, maybe you just give us some specific color both on the top line and on the cost on that side? And then secondly, just on -- another IFRS 16 question, I'm afraid. I think you pointed toward a EUR 50 million net income headwinds for '19. Just given the sort of time issues, I think that's probably largely driven by -- does that mean we get a tailwind in '20?

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

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Okay. Yes, in terms of first half, second half, I would say just very broadly, with the overall guidance we've given and with the cost optimization program and the GEP II expectations, that's what we expect year-over-year, the first half will be a little bit weaker than the second half. We also have 1 less dialysis day in the first half, which we took up in Q3 in 2019 in the U.S., which has an impact. And your second question on the lease liability, the effects you're seeing in terms of the EUR 50 million is really twofold, not to get too technical on the bookkeeping, but IFRS 16 requires the interest method of amortizing your lease liability. So in early period of adoption, no matter what adoption method you chose, your interest expense will be higher in the earlier years because you're applying an interest rate against the full value of the discounted lease obligation. So that's why you see a spike in the interest that exceeds the EBIT. The second reason is we did have a sale-leaseback program in the U.S., where we were able to recognize revenue and earnings associated with the machines. The machines were sold through a third-party leasing organization and then leased back for the services business. So we did have an opportunity to recognize earnings associated with that program in the U.S., and that will no longer qualify under the IFRS 16 accounting, as it did under the prior U.S. GAAP and IFRS accounting. So that's also reflected in the change in net income of EUR 50 million. So interest method on the lease liability and dropping the revenue and earnings recognition on the sale/lease program in the U.S.

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Operator [39]

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

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Oliver Metzger, Commerzbank AG, Research Division - Analyst [40]

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The first one is on Q4. The last quarter has been better than thought it's result also the higher comparable base in 2018. I'm a little bit surprised that the business experienced such -- in the high volatility, you've announced the upside, that's the provided range from early December was not big enough. This time, it worked out for you quite positive. But could you share with us how you prevent that, in particular after the last autumn, these high expectations come to us as a surprise even -- or in particular as your company's lauded for being just, so high it depends? And my second question is on the health care products in Europe. After some weaker or only slow-going quarters, the business turned quite positive in the low single-digit territory. Could you give us an outlook whether you see this recovery rather as product-driven recovery or a more, let's say, market-related recovery?

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

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So on your first question, Oliver, and I appreciate we were able to report some good news in the fourth quarter. We had said 2, 3, we came in at 4. The -- we did end up having in a number of the regions a stronger performance. I would say, as we mentioned a couple of times, we did adjust variable compensation in the fourth quarter because the earnings have not turned out for the year as we had guided or hope they would. Secondly, I think in particularly when you look at Asia, where we're seeing some significant currency headwinds that started to turn a bit in the fourth quarter into a tailwind. So I think those are probably the good operational performance in a number of regions and then supplemented with some variable comp and currency tailwind in Asia for why things came in a little bit better, 1% over the high end of the range. And the other way, we frankly have compensated for that a bit. When you look at 2019, as I mentioned, we've gone from a 3-point to a 4-point range in 2019.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [42]

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Yes. And Oliver, when you look at health care products for EMEA, I would say that it's just a lot of hard work. I think we were able to catch a break in a couple of places where we earlier in the year had anticipated would be shipping products as part of tenders. It didn't come. In the fourth quarter, it came. But I'd say generally on both of your questions, when you have a management team that feels like they disappointed and we, obviously, did, people get real serious about figuring out how to turn the corner as quickly as they can. And I think we had some good news, as Mike said, but I wouldn't -- I just would not takeaway from the fact of just really good hard work and trying to do everything possible to begin to turn the corner, if you will. That's not always successful, but it did go our way in the fourth quarter and we're pleased that we were able to do that.

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Dominik Heger, Fresenius Medical Care AG & Co. KGaA - Senior VP, Head of IR & Corporate Communications [43]

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Okay. So that was almost perfect words to end the call. We did run out of time. So thank you for everyone for your great questions. I hope we did answer them as good as we could. And thank you and goodbye to all of you.

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Robert Maurice Powell, Fresenius Medical Care AG & Co. KGaA - Chairman of the Mgmt Board & CEO of Fresenius Medical Care Mgmt AG [44]

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Thank you, folks. Take care.

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Michael Brosnan, Fresenius Medical Care AG & Co. KGaA - CFO & Member of the Mgmt Board at Fresenius Medical Care Mgmt AG [45]

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Bye-bye.

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Operator [46]

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