Fresenius Medical Care AG (FMS) 2003 Q1 法說會逐字稿

Thank you for standing by and welcome to the Fresenius Medical Care conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time.

If you should require assistance during your call, please press zero then star and an operator will be happy to assist you offline. Just as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, the Senior Vice President of Investor Relations, Mr. Oliver Maier. Please go ahead, sir.

Great. Thank you.

Good morning and good afternoon, ladies and gentlemen. Welcome. Thank you for joining us for Fresenius Medical Care's first quarter 2003 conference call. By now you should have received a copy of this morning's press release.

The release and the presentation for this call, as always, is available on our Web site under the IR section. Let me also point out that the conference is again broadcasted via the Web.

With us today is Ben Lipps, Chief Executive Officer for Fresenius Medical Care; Mark Schneider, our CFO; Roberto Fuste, responsible Board member for our Asia Pacific Region; Emanuele Gatti, Board member responsible for Europe, Latin America; Rainer Runte, the responsible Board member for law and compliance.

Let me start with the forward-looking disclosures. The cautionary language regarding forward-looking statements as indicated in the press release. The same language also applies to comments made on today's conference call. And you will be able to refer to our SEC filing for more detail.

This time, additionally, the material used on this call contains certain non-U.S. GAAP financial measures which we believe provide useful information. These measures should be considered in addition to the prepared U.S. GAAP results.

In the press release and at the end of our presentation, which we use in the call, we included reconciliation of all the non-U.S. GAAP measures used to the most comparable U.S. GAAP financial measures.

Let me now turn over this call to Ben Lipps, our Chief Executive Officer for Fresenius Medical Care. Ben.

Thank you, Oliver. We'll cover today the business update. Mark Schneider will cover the financials and the outlook.

Before I start, I'd like to emphasize that, yes, we've had some disappointments -- or one disappointment this quarter. But I can tell you, we are absolutely enthusiastic about our business on a worldwide basis. It's quite solid. Everything that we have put in place on a worldwide basis is there and is performing very well.

So, with that as a start, let me go ahead and go through the details. Turning to page three ...

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-- are doing a great job and the underlying performance of that business is intact and, as you look at the impressive top line growth you'll come to that conclusion, also.

UltraCare. We continue to achieve operating efficiencies with UltraCare single use. Our year over year staffing costs have decreased in an environment where we have paid industry wage increases. Our retention has stabilized to improved. Clearly we find our staff enjoy working in clinics where they do not have to reprocess .

With respect to cost of treatment, if you look at our investor news you'll see that our cost for treatment has decreased also.

Now, with this solid cost structure and this unique therapy, we are focused on revenue growth, and like I said we see significant upside potential.

Turning to payer litigation. During the first quarter, we settled yet another 1996-related lawsuit. The Connecticut General Life Insurance Company Group, one of our important commercial payer groups settled with us. Clearly, I'd like to re-emphasize that that settlement provision is within the charge and that, more importantly it removed a conflict with one of our major payer groups and we, again, believe that this will be very helpful as we focus on our growth programs.

Turning to free cash flow, we again achieved in Q1 a very strong free cash flow and Mark will talk about that a little more in the presentation.

Let's turn now to page 4 and look at our revenue growth by segment. Our total revenues were on track and in line with our target and our outlook for 2003. As you recall, we commented that our target revenue growth constant currency would be in the mid single digits. Our revenue growth for first quarter 2003 was 7 percent currency adjusted, 10 percent in current currency.

North America grew at 4 percent, Internation grew at an impressive 14 percent constant currency, even with the slowdown of shipments to the Middle East, where we have a major market share and thus it had an influence on our margins.

Looking at Europe alone, they contributed again a very strong 11 percent constant currency growth, again, more than twice the market. Let's turn now to page 5 and look at the revenue by business unit.

North America: Dialysis care revenue increased by 5 percent to 824 million dollars. Now, just to open a parenthesis, our same store growth was impacted by about 20 basis points, due to our strong market position in the snow belt, which lived up to its name this year. We had a number of patients who missed their scheduled treatments and we dialyzed them later for longer times to make up for it.

Our dialysis product revenue increased in sales, including sales to our clinic by five percent to $190 million. Now, as we create efficiencies with UltraCare, we will see a stabilization of the internal sales and the true measure of our product growth will be reflected in our net available external market performance. Growth in the available external market in Q1 was 6.2 percent year over year and clearly above market rate.

Turning now to international. Dialysis care revenue increased by 19 percent constant currency, driven by growth in all of our major areas, double digit. Dialysis products revenue, including the sales to our own clinics, increased by 12 percent, again double the market and we saw very strong momentum for both our hemodialysis and peritoneal dialysis products in the international area.

Turning now to page six. I'll give you a little flavor on the products area. Again, our global presence with our Fresenius Polysulfone dialyzer continues to grow with the market demand. In fact, this will be a very significant year since we will produce and sell more than 50 million Polysulfone dialyzers this year.

In the international area, we did see machine shipments in first quarter constrained by low capital availability and, of course, political uncertainty. But the team has found a way to compensate and we feel very comfortable that we will compensate for these loss-fails because it's very difficult to predict when the capital will be free. However, in North America, our growth in machine unit shipments was 9.2 percent and our market share of install base has exceeded 66 percent or two-thirds of the install base. As I mentioned, our peritoneal dialysis products, on a worldwide basis, we saw a very significant 19 percent increase in shipments and sales during the first quarter of this year.

So, in summary, we feel very comfortable around the world with our products and we're very excited that we have made the moves with respect to being able to produce in these regions so over time we can compensate for lasting currency shifts, which have been very significant during the first quarter of this year.

Next, slide seven. Now, in North America, our operations are on an upward momentum and we have been able to increase our performance in Q1 with respect to our operating margin by 20 basis points. Now, this doesn't seem like much, but sequentially, there were less days in Q1 2003 versus Q4 2002. So it was a major test of our upward momentum. And again, I mentioned that our labor costs for treatment have decrease year over year, but I'd like to mention also that our staff retention has stabilized and in many places improved. So we're quite convinced that we're on the upward track and it's a matter of basically time, we will get there.

Again, product sales in first quarter were strong and even though we predicted and we've targeted our EBIT range in the 13.5 to 14.5 range for the average for the year, the 13.2 of first quarter clearly points that we will be in that range. And even though it in itself is not in the range, if you correct for the days as we see the rest of the year, we have expectations and we're committed to be in that range for the year.

Turning now to page eight, I'd like to talk about our revenue per treatment performance for first quarter. On the surface, our revenue per treatment in the first quarter 2003 was $278 per treatment, including laboratory, compared to $284 per treatment last year. Now, the changes in revenue per treatment for Q1 are in the expected range. As you recall, we commented last -- actually, early this year at our fourth quarter presentation, that we would be making some internal changes this year, and that it would provide a range, expected range, of revenue per treatment to drop from the $280 to $290 to the range of $275 to $285.

What we have elected to do -- we have changed the billing from products to patient care for the services provided to some Medicare peritoneal dialysis patients. Previously, products would bill Medicare for some of the services under method two and patient care would bill for additional services under method one. This duplicate work can no longer be justified, and now all of the patient care billing is through the services department or patient care group.

Now, these additional Medicare patients, which will now be included in the revenue per treatment calculation because they are Medicare, lowers the average. And that's part of the lowering of the average that you see here. Now, the second change was a change that we made to comply with new CMS regulations on vitamin D and Zemplar, which took effect in the first of January, 2003. Effectively, what these changes do is reduce the minimum billing increment for Zemplar but also provide rules for reentry of partially used vials. We switched to the same process, similar to the one we use for EPO and rather than billing at the higher increments that were accepted in the past, we now bill at the increments that we provide, smaller increments.

Now, during Q1 and Q2, we expect to have some inefficiencies here in terms of achieving a balance in terms of EBIT, but over Q3 and Q4 it will basically reach a balance. However, the net impact of all of these changes in first quarter was less than $1 million. So we do not see these as having any major impact or impact on our actual EBIT.

Turning now to page nine, I'll give you a brief overview of the UltraCare program. Clearly, we are quite pleased with it. It continues to perform scientifically and medically, as we expected. In fact, we are targeting a journal publication and of course independent review of the mortality data is required for this publication. We do continue to see improved medical outcomes that verify our earlier trends.

We are now moving into a phase where we will provide more information to the nephrologists and to the patients. We're doing this through trade journal advertising and we're also doing this through information days with our physicians and our patients.

Now, clearly, in addition to that, all of the activities are on a local basis and we have developed a center for leadership and professional development. And we will provide training to our 1,300 clinical managers, administrators, area managers in both customer service skills and ultra care therapy.

So, we again believe that we will achieve our goals for growth and at the same time we feel that ultra care will provide the additional strength that we need here to differentiate ourselves from the other clinical providers.

Now, turning to page 10. As I mentioned, our international operations are temporarily below our target margin. They were clearly impacted by the slowdown of new orders from the Middle East and the delay in shipping orders.

We again believe that this will recover; however, I must remind you that the major conflict occurred during second quarter so we may -- basically it may be towards the end of second quarter before we see the recovery.

Latin America -- the situation in Argentina has improved; however, we've seen some difficulties in Brazil, Colombia and Venezuela. And our startup costs in Mexico, which we planned on essentially, we are increasing our presence of Peritoneal Dialysis in Mexico and doing an excellent job.

So, those areas we're in the process. We're pleased that Argentina's stabilized and is doing well. And those other areas will require management attention and we are clearly working in that area.

Now, in the area of Europe we have seen very strong growth. But as I mentioned, in some of the lower margin areas and so we again expect that if you look at where we will be, we expect to return to our target range of 16-plus percent EBIT margin. And I'd like to remind you that the International is an above average growth region and is the margin driver.

So, we're very comfortable this is temporary. And we're very comfortable that our management team will correct any issues. Again, these are not corrections as much as these are outside influences that we will cope with as we have in the past.

Now, in summary, our North American operation is showing encouraging improvement. Products business is growing above market. The Dialysis Care cost structure's in place and we now are focusing on top line growth.

In the International area, as I mentioned, we have a very strong market presence. We're very comfortable with all of our products and we will totally cope with the temporary issues that we see at this point.

And finally, we, as I mentioned, continue to manage our financial house such that we are continuing to perform with very strong free cash flow.

So, at this point, I'd like to turn it over to Mark Schneider.

Thank you, Ben, and a warm welcome to our call participants today.

I would like to take you through the key figures for Q1 2003. And then as part of the CFO update section, I'd like to talk about Sarbanes-Oxley and some of our corporate governance initiatives. And finally, I'd like to comment on our financial outlook for the remainder of this year.

As we turn to slides 12 and 13, before we get into the details of the financial highlights of Q1, let me explain to you one particular challenge that applies here to the first quarter and the year over year development in this first quarter. There are basically two changes that we need to account for and both adjustments that refer to the first quarter 2002. One is the early redemption of trust preferred securities that happened in January 2002. As you know, we early redeemed 360 million dollars of trust-preferred securities at the time. There were early redemption costs of 21 million dollars pre-tax, or 12 million dollars after tax, and the US-GAAP rules at the time required us to classify those as extraordinary.

The US-GAAP rules have changed. FAS 145 is now in place, and as part of that we're not looking back required to count the basically as part of ordinary income, which has the effect of reducing net income for the first quarter 2002 by 12 million dollars after tax.

The second item is that we did benefit in the first quarter of 2002 from a one-time item of 6.3 million dollars. As some of you may recall, we had a pension curtailment gain of slightly north of 30 million dollars, which was partially upset by severance payments as part as of our workforce reduction. So then the net benefit was 6.3 million dollars.

What I was trying do on these two slides, then, is to give you basically the picture as it relates year over year strictly in accordance with the US-GAAP. First let's slide 12. And then, on the following slide I will try to give you my closest approximation to what a like for like comparison would look like.

So basically, I think Ben already commented on the net revenue picture. It looks very encouraging. 10 percent growth in actual currency, 7 percent growth in constant currency. If you then look at the US-GAAP picture, you have a slightly negative year over year development, -3 percent in actual currency, -7 percent in constant currency. I would like to point out that as we look at our operating plan for the remainder of the year that even in accordance strictly with US-GAAP we do expect firmly to get back to part of the year over year developments on EBIT for the three following quarters.

Net income, then, because net income for the first quarter 2002 gets reduced by 12 million dollars as a result of the earlier redemption, we have a positive development in actual currency of +10 percent. The net income for the first quarter 2003, as you can see, is seventy million dollars and on 96.2 million shares that translates into earnings per share of 72 cents.

The next slide, then, page 13, as I mentioned is our closest approximation for this like for like comparison. So basically, what we do is we do include the trust-preferred security redemption but then we do correct for the one time benefit of the first quarter 2002, and with that picture you see a slight positive year over year development in operating income plus 1 percent in actual currency, however, still -4 percent in constant currency and then on net income ever so slightly a negative development, -2 percent, down from 71 million dollars to 70 million dollars.

I think it's important that the operating income and the operating margin at 30 percent is mostly effected by the decrease in international. I think Ben pointed this out. When it comes to North America we'll make good profits in spite of the fact that we had . International, however, some of you recall that last year we'd given you a target EBIT margin range of 16-18 percent. In this quarter, we only achieved 40.3 percent as a result of some of the factors that have been described, and that was really mainly the reason why our total company operating margin then fell slightly short of expectations.

If your point of reference international in this quarter performed in the target range of 16 to 18 percent, our total company EBIT margin would have been between 13-and-a-half and 14 percent and then very much pointed towards the range that we attempted this year.

With that, I'd like to turn to page 14 and the development of day sales outstanding and then, following that, cash flow. I think on both of these we have a very, very positive feature to report and I think we're all very proud that our initiatives have certainly taken hold when it comes to reducing DSO and pushing operating and free cash flow. As you can see here, our improvements in this first quarter are really happening across the board. In North America, we reduced DSO by two days, from 81 days to 79 days. In international, in this very, very difficult and challenging and choppy international environment, we nonetheless reduced DSO from 137 to 136 days. Total reduction then by one day from 96 to 95 days. And let me remind you that at the present level of AR, a one-day reduction is about 13 to $14 million cash.

Moving onto slide 15, the cash flow development for this first quarter. We achieved record operating and free cash flow for a first quarter of the company. As you know, typically on cash flow of the first quarter shows slight weakness when it comes to cash flow, but I think this time we really came in very strong. We achieved an operating cash flow margin of 9.6 percent and came to $125 million. That's a 78 percent increase from the first quarter of 2002. Our cap ex came in at $41 million. You see that it's $9 million below the number for first quarter 2002 and it's also slightly below the run rate that's part of our guidance for the full year cap ex spending of about $220 million. That's mostly a phasing issue, basically as the get started and completed. And so, as of now, I would still think that the total guidance, total year guidance of 220 is applicable.

Free cash flow - we achieved a free cash flow margin of 6.5 percent. It came to $84 million and that's basically a fourfold increase from the free cash flow number for the first quarter 2002. Acquisitions came in at $28 million. About half of that is North America. Half is international. So pretty much the same split that we were running at for 2002. There, if you annualize it, we have slightly our spending rate. We know that our target for the year is about $100 million and we will still stick to that. As it just happened in some of the deals were somewhat . Free cash flow after acquisitions then came to $56 million and that's more than a fivefold increase from free cash flow after acquisitions in the first quarter of 2002.

With that, I'd like to move to our financial ratio and, in particular, the debt to EBITDA development, which is described in slide 16. If you move to the bottom of the page, you'd see that our debt to EBITDA remained roughly constant at about 3.1 times from Q4 2002 to the end of Q1 2003 now. As you look at the debt development, basically debt increase by about $12 million from $2,833,000,000 to $2,845,000,000. And have then outlined the items that are responsible for that. The shaded area, in particular, lists those items that are either one time in nature or that are influenced simply by currency translation.

As you know, we have about $700 million in dual-denominated debt. As the euro increased in its spot rate from quarter end 2002 in Q4 to the first quarter in 2003 by about 3.8 percent, that debt got pushed up by about $27. We would our Class D preference shares in March and had a cash outflow of $9 million associated with that. And then also, as you remember, we did put in our new credit agreement in February this year, and while the pieces related to that do get amortized over the time of the agreement, nonetheless, in the quarter that you conclude the deal you have cash flow in the full amount, and that was $17 million.

So, all in all you have in that shaded area about $53 million that either are one-time in nature or translation related. And if you account for that, then basically, our debt for the quarter would have been reduced by about $41 million, rather than going up by 12. Let me also point out that the others provision beneath the shaded area of $15 million, is mostly an increase in our cash position. So that's also money that's still within the company.

With that, I'd like to move to the update section and talk briefly about Sarbanes-Oxley and our corporate governance activities. Obviously, the Sarbanes-Oxley legislation is a key challenge for a lot of foreign filers in the U.S. As a company, I think, we're very much in support of all the measures that are necessary after some of the corporate scandals and corporate malfeasance last year to restore public trust in major corporations. So we embraced this very early on and started to provide what we can. It's our expectation and now our anticipation that we're trying to comply with Sarbanes-Oxley to the full level that applies to domestic U.S. firms.

As you know, Sarbanes-Oxley does grant certain waivers and certain to foreign filers. We only take those in those cases when there's an absolute conflict with German corporate law. But in all the other ones, where it's optional, we totally try to comply with the domestic U.S. standard. And to give you a good example, the SEC will start typing the reporting timelines after a quarter and after year end, starting from 2004. And we expect to fully comply with those shorter timelines, because we believe that a lot of the rules that are embedded in Sarbanes-Oxley really point to the future. And we want to be complying with this and basically staying ahead of the curve.

One of the outflows of Sarbanes-Oxley is also included in the attachment of this presentation. Oliver already mentioned this. Regulation D has arrived. This is section 401 of Sarbanes-Oxley, and it basically requires us to provide you with a complete for any non-U.S. GAAP measure that we utilize and sort of relate that to the nearest U.S. GAAP measure that's available. And you might want to check this out just to see which measures we have used and how they relate to U.S. GAAP numbers.

Again, as Oliver mentioned, we believe there is good reason for using the non-U.S. GAAP measures that we have elected to use, and we will certainly continue to do that going forward.

We've also established an audit committee in this first quarter of 2003. This is to be in compliance with section 301 of Sarbanes-Oxley. We did have very good interaction between our supervisor report and the auditors before that, and now basically it was just the step of formalizing that relationship and putting it formally into the audit committee requirements. We appointed three members of our supervisory board to this Audit Committee. It is headed by and then the two members are and .

All three of them, if you look at the SEC definition of the requirements for an international expert, was qualified to act as a financial expert.

Finally, I'd to point out that we have created a corporate governance update section under the Investor Relations heading on our Web page. Right now what you will find in there is our compliance statement with the German Corporate Governance codex.

It also has a live update sections for directors dealings in our stock. And also the articles of association of Fresenius Medical Care. We will continue to update this section and basically keep you informed about all the corporate governance and Sarbanes-Oxley steps that we're taking.

With that I'd like to turn to the last slide of our presentation -- slide 18. And as I go into this, let me clearly point out the header for this slide. We confirm our financial outlook for 2003. And I think on revenue probes you've seen that we are clearly in the range required.

We have given a single digit revenue probe target in constant currency and before acquisition. We came in at 4.5 percent on that measure, so that's before acquisitions and in constant currency. That's including the impact from the Middle East and Latin America.

And some of these issues are receding now over time and towards the second half of the year we clearly expect to be smack on when it comes to our revenue growth target.

On that income probe, our target was to be in the high single digits to low double digits range. Having seen now some of the impact from Q1 on our operating margin, we expect to be at the lower end of that range, albeit we do confirm the range.

Capital expenditure and acquisition are basically staying at the levels that we had targeted for the year and that also applied for the operating plan last year -- $220 million for capital expenditure about. And then less than $100 million for acquisitions. No change on that front.

Finishing up the presentation, let me point out two things. One is in the Q4 conference call we discussed two potential cash outflow items. One is related to the trade settlement and the payment of $115 million.

The other one was a potential German tax issue that I had mentioned at that time. We mentioned that it could be anywhere between zero and up to $150 million. I just wanted to point out that on both of these items since we last spoke there has been no new development.

So, there's no new intelligence when it comes to the time line of the outflow or to the expected result in balance. I would expect as of this point that there is certainly no cash outflow in the second quarter of this year on both items. And that basically on both items we're talking between the second half of this year or potentially 2004 and up to 2005. As you know, in particular, on the German -- I'm sorry, on the trade settlement issue there is no interest penalty involved here for any delays so delays are certainly not a problem when it comes to Fresenius Medical Care.

Finally, on the personal front I just wanted to point out that this is my last quarterly conference call as the CFO of this Company. I wanted to say that I very much enjoyed working with you over the last year and a half.

And I also very much enjoyed and I was very honored and very proud to be part of this management team here. I think we made tremendous progress in working through a lot of issues as we basically worked through some of the pre-'96 merger related topics and also put the significant single use strategy in place that I will believe will give this C company benefits for many years to come. I very much enjoyed being part of the team we're working here with, and also, in my new capacity very much look forward to continuing to working with them.

I'd like to mention to you that we're recruiting for a successor in the CFO slot right now and we'll very much put an emphasis on trying to keep the interruption after May 28th when I do switch from Fresenius Medical Care to at a minimum. And certainly in that time, but also going forward later on, I will continue to work very closely with this management team and with Ben to insure that the financial initiatives that we have started here certainly do continue, and that the positive company developments will continue as well.

So with that, thank you very much for your attention, and I think we're ready to Q&A.

Yes, great. Thanks Mark, thanks Ben for the presentation. And, I think we can start with the Q&A.

Thank you. Ladies and gentleman, if you wish to ask a question please press the 1 on your touchtone phone. You will hear a tone indication you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers.

And one moment for our first question and...

...that question comes from the line of Andreas Schmidt of Merrill Lynch. Please go ahead.

Yes, hello, Andreas Schmidt from Merrill Lynch. First question is on the margin targets you have for the full year. That would require a quite strong uptake in the second half, maybe specifically in Q4. I checked a rough calculation, it would mean at least 14 percent US margin and 17 percent international margin. Would that be the basis for next year or is there anything for markets or whatever that you would say this -- it should be lower in '04 or can we see further increases thereafter?

The second question is on product sales. You and also Gambro, for example, blame quite aggressive pricing environment. Where does this pricing pressure come from and who is the bad guy? If I look into your performance, your product sales internationally were up 12 percent currency adjusted, which is extremely strong. Usually the price aggressive one wins the market share. So, are you the one depressing prices and being part of the short term problem?

And final question is on your clinical performance. If I look on the details in the press release it was really a very, very strong improvement in whatever you look at it except for hospital base. Your urea reductional , you know, whatever. I would assume that this is of switching to single use dialyzers. So first, is that true, and second question is how are you going to market this dramatic benefit? You talked about mortality and you want to have independent review of mortality data but that is also very strong data, and how can you protect that against the argument from competitors who surely say "Look, 80 -- for example, 80 percent of your urea reduction is enough if you go from 84 to 88 this doesn't change anything for the patient." How do you tackle that? Because I think that it's a long term drive off your performance of your sales and growth.

Thanks a lot.

Actually, this is Mark. Let me handle the margin question first and then I'll hand it to Ben for the other questions you have. I guess for the margin, the basis here for confirming the guidance is really that, on international, I think when it comes to the second quarter, as been mentioned, we still see some of the trouble. We're now already, basically, in early May. Most of those facilities, as Ben pointed out, really did take place in the Middle East in April so they were second quarter issues.

So I think we will still see some impact to the second quarter margin and I would expect that there's a good chance that the second quarter margin will again fall below the 16 to 18 percent range that we have pointed out. Nonetheless, the international business is not permanently impacted. This is a temporary phenomenon. And so, the basis then for this guidance is that, in the second half of the year, the international business does return to the 16 to 18 percent target range. And we're confident that it will do that.

On the U.S., you're quite right. Once you correct for the four-dialysis base less in the first quarter, it was a significant improvement when it comes to the - to the underlying operating strength of that business. And correcting for these days, you're smack into the EBIT margin range that we had pointed out for the North American business alone that we wanted to achieve as a full-year average in 2003. And that is 13-and-a-half to 14-and-a-half percent.

And so, basically, the assumption is that now in the second quarter and then through the fourth quarter, with the dialysis day issue removed, that the North American company will continue to stay in that range and basically make steady progress within that range and basically as the average of these three remaining quarters, based around the midpoint of that 13-and-a-half to 14-and-a-half range. These items, in particular, would be basically sufficient then to confirm the lower half of the net income range that we have pointed out.

But the question is a little bit for '04, for example. Would you expect a higher band of margins if you start already a higher level, let's say, at the end of the year. Or is there anything in market speaking against increasing margins beyond the 2003 level?

I would still like to have a little bit more time to consider what a proper margin target is going to be for 2004. When it comes to Q4 and when it comes to the remainder of the year, I don't think there's a lot of opportunity here to get beyond and higher than the margin range we pointed out. But staying in there is sufficient as long we into this. And that is the challenge for the second quarter and I believe the first quarter operating performance of the North American business has shown that we can do that. And then, for the international business, it is basically sufficient to stay in the second half of the year in that 16 to 18 percent range, provided that, obviously, the second quarter is not worse from what we've seen now in the first quarter. But I also don't expect that.

OK.

And - looking at the other questions, we are not the pricing predator, however there are some shifts in reimbursement in Germany that I think everyone had to respond to. And, of course, that's a significant market for us. What we have done is we have continued to expand our market share in those regions of Europe and around the world that don't carry the same margins as the central European area. And that's why you've seen our growth. But clearly, I don't believe, under any circumstances, we would be labeled as that. And again, remember salesmen always talk about this. But the answer is our market share is growing and we're quite comfortable with our products.

So you haven't gained market share in - on expensive prices, let's say.

No, not with all the emphasis we get from Europe today on EBIT margins.

OK.

Moving to the clinical outcomes, we're quite pleased with what we're seeing. I never expect to get everyone in the world to agree, and that's always reencouraging to me because you have a chance then to be really in a major correct way. We've seen a lot of improvement in our urea reduction. We clearly have seen with single use. You don't lose the performance you lose with re-use, and it's clearly there. And we also have a program, though, on hemoglobin, where we monitor the high and the low end and we target it. So our hemoglobin percentages above 11 are at the low end, but that's because of our compliance and our reading of the CMS regulations.

Now, as far as the single-use marketing, clearly, our intention here is to be able to convey this information to people. We will be coming with a publication, but I can tell you that over time, we want our people to understand it, and at a local level, we want them interfacing with the doctor's, the physicians. So we are going to train our entire staff on this and we think this is as significant -- most significant activity since EPO was introduced in 1990.

Now, that's my opinion. It may not be shared by everyone, but time will tell. And I think, does that then sort of answer the questions of how we intend to go forward with single-use? We're there and we're basically are very proud to be there and we think it's a great think.

Great. Thanks.

Thank you.

Thanks.

Thank you, and our next question comes from the line of Hans Bostrom of Goldman Sachs. Please go ahead.

Good morning gentlemen. I had three questions. First, to follow up on Andrea's question regarding the margin improvement. I would like some more clarity as to what factors that you have listed here, Middle East, Latin America, Europe, that will not be present in the second half. Which ones of these are really going to improve. That's my first question.

Secondly, could you also give us an idea of how your revenue per treatment will be developing over the year. You did provide some comments earlier that you are in a strong position to improve that revenue per treatment, and I'd like to understand when and how and why that will happen. And lastly, could you also give us an update on the phasing of financial costs for the full year, for the second, third and fourth quarter with regards to any changes in borrowing costs during this year.

Thank you.

Mark will take margin improvement. I'll do the revenue per treatment. Mark will come back and take the phasing.

Great. Hans, I think on the margin, and focusing on international exclusively, we do expect that most of these items are really starting to correct themselves this quarter, either because these externalities that we talked about get removed or because the company is now successful in adjusting to it. You know, when these changes happen, if you feel that they are of a more permanent nature, I think you want to react internally.

It typically takes you a few weeks or months to basically go through that adjustment. But then even some of these external factors don't change, you still have a chance to basically restore your margin. Now, specifically, when you think about the Middle East, clearly I think that situation is starting to recover and we're not talking only about Iraq. But we're also talking about some of the neighboring countries where we saw that basically investment appetite came close to zero. We had trouble finding shipping for some of the orders we wanted to fill, and all of this of course is now slowly is returning back to normal. A major threat has basically been removed from the Middle East, and we see that recovery coming.

Latin America -- the Mexican issue that Ben described clearly is a startup related issue that sort of automatically corrects itself. It's a very modern and competitive facility we have there. But size-wise it is not a facility where you would see, basically, a protracted startup pace that's going to bother us for the entire year.

So, clearly, there again, I think towards the second half of the year we certainly do expect to see improvement. This is one of several Peritoneal Dialysis facilities we have started up very successfully. So, I think on that one we firmly do know what we're doing and I think we have reason to be confident that this improvement will take hold.

When it comes to pricing pressure in Europe and also some of the challenges in the Far East, I think those are areas where internally we did take the necessary steps to react. And also, I think, where over time we would see that market probe in itself in spite of some of the reimbursement changes, will basically lead to sufficient demand.

So, all in all, I think we do have good reasons to be confident that that margin internationally will return to the 16 to 18 percent range. International -- this is clearly a temporary problem. And one of the reasons why you may see it more pronounced with our company is clearly that we do have a fairly large international footprint that does cover basically all of these areas and has market leading positions in all of these areas. Ben.

Thank you, Mark. I think this -- let me say for 2003 we've indicated our target range is between and . And again, it moves around quarter by quarter on the revenue for treatment.

Our focus for the year starting -- and we've already initiated it -- would be on the commercial area. We have a disadvantageous mix of Medicare patients. Or you could look at it the other way -- we have opportunities for growth in the commercial patients.

With the resolution of these legal issues, we feel that we can basically be more successful in contracting. And of course we have additional offerings as far as what we can offer the payers.

So, we expect to see the benefit of this mainly in 2004 and going forward. But this year we'll operate in that to range and those are the areas of focus that we will followup on.

And this is Mark again. Just to come back on the interest. Interest spending, then, for the first quarter was $53.7 million. And based on the dividends that we had announced, which of course is a cash flow item in the second quarter.

And based on the operating plans for the business I would expect that interest spending, then, for the following quarters is going to stay in that $53 to $56 million range each quarter coming in for a total of about $220 million for the year.

Thank you very much.

Thank you. And our next question is from the line of Holger Blum of Deutsche Bank. Please go ahead.

Yes, it's Holger Blum from Deutsche Bank. And my question is to the single use dialyzer. You indicated that you have the cost structure in place.

Are you actually on a inclement patient-wise on a cost neutral basis or do you see further scope to get more out or to have further production efficiency gains? And maybe you can quantify it because I think last year you indicated additional costs of around $6.00 to treatment. What's the current status on that?

And the second question would come back once again to the margin. As a rough estimate, if you had all, let's say, kind of factors or factors that you have already under control, what kind of EBIT margins would you have to in the first quarter?

And then, when, basically, when for the full year the outlook, I guess you keep the 14-15, or, let's say 14 percent EBIT margin range? Just as a confirmation. Thanks.

Why don't you do the margin first and I'll come back to the...

Holger, this is Mark and just to comment on the margin again, I think the -- for me, the fairest measure for the first quarter would have been an Internation business that is performing exactly in that range that we have kept for long periods of time in the past and that we certainly expect to return to and as I mentioned in the presentation that would have pointed them to a Q1 EBIT margin, depending on where exactly it would have come out between 13.5 and 14 percent of the total company, and that would have put us on a good way then towards -- with more dialysis days in North America .

And the remainder of the year towards getting into that 14 to 15 percent EBIT margin territory that we talked about as a full year average that we wanted to be in. Now, with a first quarter now , I think the effect is going to be that we're just going to be on a full year average basis at the very, very lower edge of that 14 to 15 percent EBIT margin as a full year average, just because the first quarter unfortunately counts toward that average just as any other quarter but, nonetheless being there, then, would be sufficient to confirm also, as we said, the lower part of the range when it comes to the net income growth of the high single digits, low double digits.

Holger, this is Ben. Talking, referring back to single use. Our objective last year was to reach cost neutrality and set the stage for future years 2004 and forward to where we could increase efficiency of our clinical operations even more with single use or without reuse. So, our goal in 2003 is basically has been achieved from a cost standpoint. Our focus will now move toward potentially our growth and our revenue for treatment growth. So there won't be much additional planned or accomplished this year other than maintaining what we've accomplished.

Next year, we will be looking at ways to balance additional costs of drugs and things like this with the program. So, right now we've accomplished our first phase goal, we'll plan to stay there through most of the year, and as we exit the year we will then have plans for the following year. So this is a long term opportunity for us that balances the other rising costs.

OK, but basically, in Q1 you already , or you just had a somewhat higher level compared to the re-use strategy which you cannot change at this stage?

We're cost neutral and if you look at it, our -- from last year, our total costs have dropped almost 2.4 percent, actually, 2.6 percent year over year and sequentially 2.4 so that's really quite impressive in an environment where labor costs are going up 5-10 percent and energy's going up, really, everything else is going up, so we've accomplished our goal and maybe slightly exceeded it at this point.

OK, thanks.

Thank you, and our next question is from the line of of Smith Barney. Please go ahead.

Good afternoon. Yes, from Smith Barney. Your U.S. competitors mentioned last winter in their quarter results that a number of states were starting to lower or Medicaid reimbursement. Can you maybe give us an update on that and - or still give us an idea of percentage of your earnings are generated by Medicaid. And which states are done so far in educating this into a continual in your guidance.

Then have you seen any increase in medical malpractice insurance premiums and what do you expect for next year? And also, I've noted that your level of net debt remained stable in the first quarter. Should we expect the - this level of net debt to remain for the full year? And then, lastly, on the product side, can you maybe - sorry for my ignorance - but on page 20 on the - in the attachment two our your presentation, there was something called - you referred to method that speak of your external dialysis product sense. Can you explain to me what DC is, please? Thank you.

Basically, I think the other competitors or the other companies clearly pointed to an issue in the industry as well as all health care. And there are pressure on the states in the Medicare budgets. We are not - there are four states in particular where that pressure is more intense because they essentially paid above Medicare. Our presence in those states is minimal and we do expect to see pressure in this area, primarily in 2004, but our entire Medicaid business is probably less than five percent. In the service side and then it gets diluted further by product. So it is clearly a concern. We're following it. We're working on it, but it won't be a major - it's not a major threat.

Now, with respect to medical malpractice, we're self-insured and so therefore the premiums are not - basically, they depend on our performance. We have done very well in the last three or four years with all of the technology that we have to continue to decrease these - the cost. So this is one area that we feel quite comfortable that we're managing to our quality systems and through the various activities that we have in place, including single use. So that's not an issue for us at this point. Net debt - and then I'll come back to product.

Yes. On debt, I think the target clearly is over the medium term to reduce the debt figure. And as a part of our Q4 conference call, we talked about that goal of coming investment by the year 2005, which basically would necessitate a debt to EBITDA ratio of about two point five. The way it goes is that, basically, the second quarter will be another one where you have a significant cash outflow item. That's our dividend, which gets paid annually only and that is basically right after the annual general meeting. So the second quarter is another quarter where I wouldn't expect a significant debt reduction.

But then third and fourth quarter, if you look at the continued strong upward cash flow performance, most of the acquisition spending done and at cap ex and then basically no extraordinary cash items - that should be the necessary requisites to have some significant debt reduction. When it comes to page 20 and, I think, it's attachment two and our net available external market sales, this is a measure that we came up with last year. We were looking, basically, as a vertically integrated company to find a good and true measure for how our product business is performing. And basically the three areas that we correct for is the sales to other vertically integrated dialysis companies, and obviously the industry experts, if you know there's only one. That is basically a sales -- or those sales, when they happen, are more occasional in character and we didn't feel that they reflect the true underlying performance of our sales force, but rather the specific product requirements that this company may have.

We then have a correction for sales that are sold to a leasing company but leased back to our own clinics. And there again, while it counts to be an external sale, it's clearly machines that are being used in our own clinics, and therefore we felt they should be taken out from that sales figure. And then the third item is the method two. That is basically the billing mechanism that Ben referred to for PD patients that we now discontinue in the products business. And so this item is well needed to be reflected in the correction. So, with this figure, net available external market sales that's also described in our filings, we believe that it gives a truer picture of how the product business is performing in the market that is not influenced either by ourselves or by the other vertically integrated companies.

OK, thank you. And can I ask a follow up question on the product side? Do what extent did your product business benefit from the fire that took place at Gambro factory in Italy. Because I guess it impacted positively your international sales.

Very, very -- we say zero. We saw no effect on that.

OK. Thank you.

Thank you, and our next question is from the line of Peter Spengler of DZ Bank. Please go ahead.

Hello, Peter Spengler, DZ Bank. On your outlook 2003, is it based on the lower 2002 net income according to new U.S. GAAP, or on the higher 2002 net income according to the old U.S. GAAP law.

It's based on the high figure. It's based on $302 million net income.

OK, thanks.

Thank you. And our next question is from the line of of Deutsche Bank. Please go ahead.

Hey guys, just a couple of questions. I guess the first is this. In the U.S., if the single-use dialyzer costs have basically been run out of the system and the revenue per treatment is going to be somewhat flat from where it is for the rest of the year, I guess that leaves in terms of the revenue growth -- in terms of revenue growth, an increase in the same-store treatment rate. I see this quarter it was down a little bit and maybe the one short day accounted for that. But to make up some of the difference, to meet your projection, I think that same-store treatment growth number is going to have to increase fairly significantly.

Do you kind of have a feeling of where that's going to go in terms of a high and how soon? And maybe just next quarter, where should we think about seeing that?

Thanks, Peter. As I mentioned, our actual run-rate same-store is closer to around three-five, which is basically consistent with where we were in fourth quarter. We do see an opportunity to increase the revenue per treatment. I gave you a range. That range has a $10 bandwidth on it, and so there clearly is opportunity we feel there. But at the same time, our expectations in looking at our -- what we call run rates -- we would expect to be above the market during the year and exit the market -- exit the year closer to about 20 -- 10 to -- 15 to 20 percent above market is our target.

So, we really have two ways to grow that. One of them is on the treatment. And the other one is on the revenue, which we do in that bandwidth have an opportunity to grow -- with the low end of the bandwidth.

And on the treatment side -- expect to exit the year, I guess in total, 10 to 15 percent above the average?

Well, we would expect -- our goal would be to grow above the market and it's our guess the market's around four percent. So, we would expect to leave the year between four and five percent same store growth.

OK. Thanks much.

Thank you. Ladies and gentlemen, if there are any additional questions or comments, please press the one on your touch-tone phone at this time.

At this time we're going to go to the line of Liz Mitchell of UBS. Please go ahead.

Just a few short questions. First of all, do you consider five percent to be high single digit? Secondly, in terms of the Euro weakness, did that have any impact on your margins? And if so were you able to pass on any of the prices into U.S. dollars over the period?

Thirdly, could you -- you said that your market share in the Middle East was very high. Could you give an indication of what that is and what the Middle East is as a percentage of your sales, please?

Let me take the guidance related question. When it comes to revenue at the mid-single digits, we interpret that as four to six percent. And I think we used a similar measure last year and sort of came in within that targeted range.

And so, the mid-point, then, of that four to six percent would be five percent. And I think what I was trying to point out is that in the first quarter alone with the Mid-East impact we've seen, we came in at 4.5 percent constant currency pre-acquisitions.

And with some of the Mid-East obstacles removed, we should then clearly head more towards the middle or upper end of that range, but still for the full year expect to remain inside of that mid-single digit range.

So, in terms of high single digits, that's between seven and nine?

When it comes to net income and the guidance we've given for net income, what we've said is high single digit to low double-digit. And that I would interpret as an eight to 12 percent range.

OK.

With respect to the Middle East, we don't feel we should share with you the exact revenue. But we can tell you that in our machine business and in our dialyzer business, which is our strength, we have over 50 percent market share. So, it is a significant area for us and we have a significant position.

OK. Is it larger than Latin America in terms of sales or similar?

Is it bigger than this and smaller that? Let me comment that I'd really prefer not to go into that at this point in time.

OK.

But I guess I can -- let's not go there because I don't want to get into talking about regional business revenues.

The thing is you had stated what Latin America was.

Yes, Latin America's no problem.

You said it was ...

... that out. But we do not breakout and put Europe, Africa, Middle East and everything together. We've not broken that down in terms of revenue ...

And the impact of on weakness on margins -- whether you've been able to pass on anything in prices.

Liz, I'm not sure I fully understood the question. Can you repeat that? On the currency?

mitchell In terms of the weaker U.S. dollar, and in terms of those products that you're producing out of Europe and exporting. Have you been able to -- and exporting into the States. Have you been able to increase prices or have you -- has there been any impact on your margins generally?

Basically we have a couple of different effects here that are related to currency, and some of them also kind of mutually offset, if you will. Generally, of course, a stronger euro and a weaker dollar helps us because the non-US and euro-land denominated revenues and EBIT, basically, once you translate them into dollars have a greater weight. Offsetting against that, you basically, when it comes to product shipments that are built in euros, you do have some related currency losses. For example, when you ship into countries where you can't hedge for the currency or you simply have people who sell to outside distributors who refrain from buying because in euros the purchase for them gets to be very expensive.

So, we have a couple of positive and negative effects here but, I think, generally, when it comes to our internal shipments we're very well protected when it comes to hedging and those hedge contracts have been always kept up in the past and they're basically going forward on a rolling basis. So, from that, I expect significant adverse effects for the remainder of the year.

One other point, Liz, is that we have mentioned in the past that we have dispersed our manufacturing sites and we buy very little from the euro-land for the U.S. and in the same way we have plants in Japan. So, we try to approach this from two standpoints and we're dispersed manufacturing-wise around the world and that's certainly helped.

OK, great. Thanks very much.

Thank you. And, our next question is from the line of Janus Capital. Please go ahead.

Hi. Good morning, gentlemen. Most of my questions have been answered. I guess, while I have you on the phone though, a quick housekeeping. I'm just curious -- I'm a little confused on your net interest expense that you reported. What the huge difference is here. Because if I look back onto your quarterly report from Q1 of '02 I see 53 million in net interest expense whereas here you've got it as 72.

Basically that would be the effect that relates to the early retention of the trust-preferred securities. As I mentioned in Q1 2002, we were required to count for this 20 million dollar pre-tax or 12 million dollar after tax item as an extraordinary. That was how US-GAAP at the time was and required us to do.

Now, even if you look back, the way you need to account for this is to basically account for it as a part of operating income, and so, basically, on top of the 53.7 million interest expense you then have on top, basically, the cost.

OK, alright. Thank you.

Thank you. And our next question is from the line of of . Please go ahead.

Hello. You mentioned that your operating margins in North America increased sequentially to 13.2 percent despite a lower number of dialysis days. He -- margin in the quarter -- first quarter of 2002 was 14.2 percent, so as far as I understand, it was just lower because you had a lower number of dialysis days. Could you adjust this figure or could you tell us -- and how far the operating margin increased the first quarter over last year when you make it comparable?

Mark, why don't you?

Yes, basically I think what we need to separate here is the sequential perspective as we look at Q1 versus Q4 and also versus Q3 of 2002. I think we reached a low part of our margin around Q3 2002 with some of these impacts and then basically started to accelerate from that low point and have continued accelerating, especially when you correct for the number of dialysis days. But as you're specifically trying to reconcile now the North American EBIT margin towards Q1 2002, I think there are several other items that come into play.

You basically have at the time when we have the 14.2 EBIT margin in Q1 2002, there was the impact from the pension curtailment gain that closed at the time of our pension plan, and that was basically an 0.7 percent item. We have suffered from somewhat lower margins on some of our ancillary and pharmacy products. We have however also achieved other operating improvements and some of our cost savings have taken better hold. And then also you had a change when it comes to the amortization expense, because some of the amortization items that date back to our 1996 acquisition of National Medical Care, and they have in particular have the so-called patient relationships ran out, and that is also a 70 basis point item.

So, basically, as you work from a 14.2 percent margin in Q1 2002 and add 70 basis points for the run out amortization, 40 basis points for the operating improvement, and then subtract around a percent to a percent and a half for some of the lower ancillary margins and pharmacy margins, and subtract the 70 basis points for the pension curtailment gain, you get to the 13.2 percent that we now show for the first quarter 2003.

So you have reached 13.2 percent. Is that right? When you adjust all these factors in Q1 2002.

No, with these factors, I'm coming to 13.2 percent for Q1 2003, which is our North American margin.

I see, but the adjusted rate of 13.5 percent in Q1 2002. So I cannot understand why you have increased your operating margin.

What adjusted rate are you referring to?

I'm referring to the adjusted rate after pension curtailment gain and severances and adjusted for one-time items international. And then you had an item about minus four million you mentioned. So you reach an EBIT, since you adjusted for one-time items, of 168 million that relates to 13.5 percent operating margin. And in Q1 2002. But in Q1 2003, it was 13.2 percent. But you said that you increased the margin sequentially. Could you give us a hint in how far you have increased the margin sequentially?

I think there's a bit of confusion here around the word sequentially.

Yes.

When we say that we increased our margin sequentially, what we're trying to express is that Q1 of 2003 is better than Q4 of 2002 ...

I see.

That margin has improved by 20 basis points, in light of the fact that we have -- in spite of the fact that you have four dialysis days less.

Now I understand. Yes. Thank you.

What I was trying to reconcile for you was basically year over year development.

Yes, yes, yes.

... the items I mentioned.

And you are also talking about pricing pressure in Central Europe, so I guess that depends on this data on healthcare systems, especially in Germany. Can you give us a hint about the average price cut, for example in Germany, or in other European countries?

I think for that question, Emanuele Gatti, board manager responsible for European area will give you a discussion of it.

OK, thank you.

Hi, Emanuele here. Yes, we refer specifically to Germany as a major contributor for margin increase in what we call Central Europe. And the reason for that is of course the pressure that there is on the investment system in Germany. As you know, we do not operate clinics in Germany. Before, we were talking about product pricing pressure that comes from a reimbursement decrease that has been implemented last year as a per in July next year and were following the next two years as a consequence of that decision.

Before we have to adapt to the market situation, and we are reacting of course with cost-cuttings in our organization, as has been mentioned before, and also in kind of mix change in order to recuperate our profitability in the next quarters of the .

Thank you, Emanuele.

Thank you. And our next question comes from the line of of . Please go ahead.

Hey, just further on that margin pressure on Germany. What exactly are the cuts that have been forced by the government on reimbursement, a, and, b, can you talk a bit about negotiations, I guess, for Epogen pricing for starting '04.

Yes, I'll take the EPO pricing. Generally, that activity starts in the summer for '04. It's not started at this point. And as far as the European -- as far as the German pricing pressure that Emanuele talked about, it's basically a shift and a lowering of reimbursement per treatment over the next two years. But again, it's a very favorable reimbursement, so believe, as Emanuele said, we can certainly cope with it with cost reduction activities and with our manufacturing base in terms of cost of products.

So we wanted to point it out, but it's not a -- anything actually unusual, and we certainly are maintaining our position there.

And what kind of expectations do you have with regard to the Epogen negotiations at this point in time?

We just don't comment on those, and I can't give you any flavor on that at this point.

OK.

Thank you.

Thank you. And ladies and gentlemen, we have time for one more question. And that question is from the line of Markus Kramer from Oppenheim.

Hello, it's Markus Kramer from Oppenheim. I've just one question. I think you made it very clear that the EBIT margin is going to improve in the international business.

I fully understood this. What I do not understand is how you can come up with a growth -- there is a currency impact on the international business, clearly of just about 26 percent. And the EBIT margin only increasing by 2.6 percent because the effects you stated as reasons -- at least two of them -- in my view do not contribute to a top line growth.

If you do not have shipments to the East that would not have an impact on the top line and therefore there would be no EBIT impact. And the same with the currency impact from Latin America. It should also be leveled out at least, but it does not explain the huge difference because if I look at that figure then I would assume that a pricing pressure in Europe is really dramatic.

I think we need to separate -- this is Mark. I think we need to separate the Middle East from Latin America when it comes to some of the pressures we talked about.

The Middle East for us is a distributor based business. So, we're basically talking about shipments mostly from our German facilities to the Middle East that either happen or don't happen. And depending on that you either capture the growth margin that's associated with those sales or you don't.

The Latin American business -- I know a lot attention has been put to that business as part of our discussion last year. Most of this is a fairly self-contained business with local manufacturing plus with a fairly large service component that happens under our name.

And so the problems that we talked about with Latin America are really more local, homemade problems and not problems that are associated with shipments that are basically done from the German facilities to there. So, the impact here when it comes to revenue is a very different one.

And basically, with the Middle East you have the impact that you're missing some revenue and you're missing the associated growth margin. And then with Latin America you basically have a business that is generating most of its revenue locally, but it's basically because of some homemade problems or because of the startup costs in Mexico. It just doesn't do it as profitably as planned, but it is a profitable business.

Yes, but you did -- I did not make myself clear, because I do not understand the difference between a high top line growth and the low or virtually no EBIT growth. Because, again, what you said is that if you do not shipments you do not have the top line and you do not capture the gross margin.

And so, that would not explain the difference. It would just explain why your revenue growth was lower than you would have expected or had before.

I think we need to be careful here on top line, especially when we look at actual currency, because a lot of this is clearly currency translation fueled. Basically, as you convert these numbers into dollars.

But that also happens to most of your cost base. And so, from that point of view, especially when you look at actual currency, it's very easy to get distracted just by the fact that the Euro has appreciated so much.

I think one other point, Mark has covered are various issues -- is clearly, as I mentioned, we've had a high margin business in the Middle East. And of course, our sales have expanded in lower margin areas.

So, you have a balance also come from that. So, there's four or five issues here, but it's not a price pressure issue around the European area other than basically Germany.

So I think -- does that explain it? There are four or five issues explaining this, but that's how you can talk about top line effecting the margin, depending on where sales are, OK?

OK, so what you basically say is that the high margin business harmed the EBIT margin so significantly that you only came up with 2.8 percent. Because if you translate the European -- the margin you generated in the European Union, you would have quite a dramatic top line EBIT impact as well on a currency basis.

It's a contributing factor, it's certainly not the entire factor. Maybe, Mark, you want to amplify on that, but it's basically a contributing factor, not all the factors, so we wanted to point that out to you.

I think as you try to understand the different factors here, it is important to separate basically the close profit impact from a shipment or distributor-based business like the Middle East from areas where we are basically present with our local indigenous production or service areas like Germany, where we have production, or like Latin America where basically we have production and service. So impacts to EBIT there sort of carry a less traumatic weight than a totally missing sale as we witnessed with the Middle East, where, basically, all shipments came to a halt and the revenue number was impacted traumatically.

But what would you say -- what you say now means that we have largely no EBIT -- you don't have any EBIT margin in Europe because you got some top line growth from Europe I guess, and this isn't reflected in the EBIT figure. But the key question for me is "Are you able to show an improvement in the EBIT figure in Q2 this year?" I mean, that is the key issue for me, whether -- how to handle your stock.

Let me just point out that again, we do still have a fairly healthy EBIT margin international. It is 40.3 percent, as such is very challenged quarter. It continues to be a fairly significant EBIT contributor and above-average EBIT contributor to the entire company. And that's building on something we always said, that in addition to a very successful local domestic North American business, we have an above average international option here that has higher than market growth and basically higher than company average EBIT, and even in a challenged quarter like this, that continues. Now...

Yes, but the challenges concerning the price pressure -- I mean, the reimbursement Germany won't be reversed. It will stay like that. So how are you going to be able to achieve this state of -- it's not that you don't have any EBIT it's just the EBIT increase which is not visible at the moment. So how are you able to increase the profitability in transitional business in Q2?

If you listened...

the basis for the guidance is that we expect to return to the 16-18 percent range in the second half of the year, so, in Q3 and Q4. In Q2, because a lot of the problems that we mentioned still persisted basically in April, we will still continue to see some sort of impact, although you are quite right, there is also a chance we have just already see signs of improvement in Q2. But, again, the commitment here to the 16-18 percent EBIT margin range is one that we did make for Q3 and Q4. And if you look at why this improvement happened, it is a mix of the situation either reverting itself, which happened hopefully in the Middle East, and so sales will basically continue to start up again there, or, as Emanuele pointed out, basically the company adjusting to the new environment which we're busily doing right now in the Central European market, so that even on a somewhat more depressed level when it comes to revenue, we continue to deliver above average EBIT margins.

So, it will depend on the situation, you either adjust to it or in some other cases, you basically expect to have the situation itself improve, which clearly, it will apply to the Middle East.

And at this point in time we clearly made the decision to adjust to a in operation and what we're saying is that we're committed to be there to the back half of the year and at this point in time we're making progress. So, really, I think we've covered this in great detail with you that this is temporary and we have things in position that will take care of this issue.

Alright then. Thank you very much.

Thanks.

Thank you. And, at this point I will turn the process back over to Mr. Maier for closing remarks.

OK, thank you very much everybody for participating. I think that was a relatively long call. If you should have any more remaining questions please give me a call. Thank you very much.

Thank you very much, bye bye.

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