Fresenius Medical Care AG (FMS) 2003 Q2 法說會逐字稿

Welcome to the Fresenius Medical Care conference call. (CALLER INSTRUCTIONS). I would like to turn the conference over to Mr. Oliver Myer (ph), Senior Vice President of Investor Relations. Please go-ahead.

Okay, thanks. Good morning and good afternoon ladies and gentlemen. Welcome. Thank you for joining us for Fresenius Medical Care second quarter and first half year 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 website under the IR section. Let may also point out the conference is again broadcasted via the Web.

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. You will be able to research our SEC filings for more detail. In the press release, and at the end of our presentation which we use in the call we include a reconciliation of all the non U.S. GAAP measures used to the most comparable U.S. GAAP financial measures. In compliance with the section 401 of Sarbanes-Oxley we are providing you with a complete bridge for any non U.S. GAAP measures that we utilize and related to the nearest U.S. debt measure available. So please use this information and the measures we have used and how they relate to U.S. GAAP numbers.

With us today is Ben Lipps, Chief Executive Officer for Fresenius Medical Care. We have here Joseph Dinger (ph), the Senior Vice President for Corporate Accounting and Controlling and we have here Emanuele Gatti, the respective (indiscernible) member for Europe, Africa and the Middle East region. Ben will start to give you an update on the results for the second quarter and the first half of 2003 and give you a business updates so now let me turn over this call over to Ben Lipps, our Chief Executive Officer for Fresenius Medical Care. Ben?

Thank you Oliver. Before I start, I would like to say we had seen encouraging momentum in both North America and international during the second quarter. We're pleased with this development. We think our global renal (ph) franchise is extremely focused working towards improvements and we expect to continue our earnings improvement momentum.

The topics I will cover today are the business update, financial results for Q2 first half and the outlook.

Turning now to slide 4, let me go through some of the details. Our key accomplishments in Q2 are in the following area; first in services, our strategic initiatives of differentiation and being paid for quality are on track. Number two, we continue to see strong continued momentum in our worldwide product sales. Number three, in terms of reimbursement, in North America, CMS, the Centers for Medicare and Medicaid Services announced a new demonstration product for ESRD renal providers and we've seen reimbursement increases and improved quality being part of these increases in our international region. Fourth, one of the key issues for our business group is to improve our margins. We see that we have made improvements in second quarter. North America has improved its EBIT margin by 30 basis points, international by 70 basis points and we are on track for our full year target. Finally under cash flow, we continue to see strong operating and free cash flow and we achieved for second quarter again, a record 4 percentage medical care.

Turning now to the next slide, I would like to discuss the North American service business highlights. I believe it's important to keep you appraised of our UltraCare differentiated therapy concept. We clearly see North America continued cost benefits in our clinics. The 3 areas impacting this positive trend are one, our personal costs are flat year-over-year even though we kept pace or exceeded industry weight standards; two, our treatment costs are down year-over-year and sequentially and third, we see clearly, a good development in the reduction of our staff turnover in our clinics. We also saw an improvement in our same-store growth and our patient quality outcomes.

Turning next to slide 6, let me first focus on the revenue per treatment. Please recall in 2002, we provided you with a target range of 200 to $290 of revenue per treatment. Then earlier this year, we commented that in 2003, we see our target range in the range of 275 to $285 per treatment. We are operating within this range for the following reasons -- we're clearly following the new Medicare directives on minimizing drug wastage. We shifted our Medicare method to patients, PD (ph) patients to method one. We are now billing through service. This Medicare pricing creates a lower average revenue per treatment and thirdly, our drug usage compliance program causes normal swings as we monitor and take action in the high-end usage. We are now operating at the low end of this range but we expect upward movement during this year.

Let me also focus you on the cost per treatment shown on the right side of the graph. You'll see our general trend in terms of decreasing our cost per treatment is favorable and it reflects our success in our cost efficiency programs.

Turning now to slide 7,let me give you more insight into our same store treatment growth in North America. Our same store treatment growth improved to a level of 3.7 percent in Q2, which is a step in the right direction. We do target growing at 10 to 20 percent above the market and currently, we see this level in the 4 to 5 percent range. Our growth drivers are our UltraCare program and our new and more focused organization structure which was implemented in the second quarter of 2003. Again, a step in the right direction.

Let me comment further on our continued improvements in patient care, which can be seen on the next slide which is page 8. This mortality rate data reflects an implementation of our new data warehouse and clinical reporting system, which improves our tracking of patient data and their status. We measure yearly our last 12 month LTM mortalities starting with the first dialysis and following the patients through to 60 days after discharge. Other definitions for mortality exist, but we are looking for trends within our system, relative changes of our mortality to assess our clinical therapies. Please note that the June 30, 2002 mortality has been restated to reflect the results generated by this new database.

Having said that, let me point out the improvements we are seeing in patient care as measured in the last 12 months gross mortality under this improved system. We're pleased to report that we have seen improvements in quality outcomes and mortality. For example looking at our databases which consists of 80,000 patients we have seen a 100 basis improvement from Q2 2002 to Q2 2003 in the last 12 month mortality. The relative improvement is particularly striking in our diabetic patient population.

Turning now to slide 9, let me summarize where we will continue to focus in North America in our service business to achieve our full year targets and set the stage for 2004. First, we will maintain our cost efficiencies developed under Ultracare. Second, the infrastructure of our new screen blind (ph) organization, along with our center for professional and leadership development, provides a foundation for growth and cost accountability. Third, our Ultracare clinical level marketing program will be introduced in third quarter. With these improved outcomes and renewed focus we expect to improve our commercial payer contracts which have lagged the industry during the post OIG commercial litigation phase.

Turning now to slide 10 and talking about the products in North America, we continue to see strong acceptance of our -- in the net available external market of our Optiflux single use dialyzers. In fact, we are seeing a significant shift to single use in the rest of the market excluding large chains. We expect the single use shift to be paced by our achievement of full production capacity and our pricing structure, which is based on our expected financial returns for our dialyzer investment.

Continuing with some highlights on our products business North America, a quick look at slide 11 shows the strong market position of our new hemodialysis machine. The rate of shipments of this product clearly exceeds the market rate growth and our machines have been accepted quite well in the net available external market.

Turning now to slide 12, our continued focus on product introductions in the back half of 2003 and beyond is highlighted on this slide. We have an exciting pipeline of products which will increase clinical and integrated care therapy options. By focusing on our single use technology, we expect to extend the membrane characteristics and achieve new approaches to old dialysis problems such as improving the management of mineral metabolism. We also have additional features available for integrated care in the vascular access area and we will be introducing new peritoneal dialysis products which have been quite successful in the European theater.

Turning now to the international business and looking at slide 13, our same store treatment growth in international was 8 percent, clearly above the market. Again, we offer the same technology in our clinics in the international theater and we are quite pleased with the results. We received reimbursement increases in France, Turkey and Portugal. These range between 3 and 13 percent. Again, the quality of patient care has been a key factor in this increase.

I won't go over the information today, but we've seen improved outcomes also in our European theater in anemia management adequacy. We now have over 30,000 patients in the international clinics and we have a database system that will be presenting more information on towards the end of this year.

Turning now to products international, you can see this on page -- slide 14, page 14. The international segment products constitutes almost 70 percent of internationals revenue, so the success of these new products and our manufacturing technology is key to maintaining our leadership in the international segment. We continue to see growth above market. We had 6 percent constant currency growth for second quarter in our products area. In current currency, this is over 22 percent growth. We continue to outpace the market by 3 to 4 times with entries in R (ph) patients or patients using our PD (ph) products. We have introduced our FX dialyzers in Japan. We're off to a good start and with the acquisition of Fresenius agase (ph) absorber business from their hemocare division, we're expanding our position in acute dialysis and therapeutic paresis.

Now looking to the activities for the rest of the year, please turn to slide 15. You'll get some idea of the focus that we have in both the products and service area in the international. First of all, we will continue expansion of the production capability and yield improvements for our FX dialyzers. We're doubling the sales and production of these dialyzers on yearly basis in 2003 and 2004. We expect to be in the range of 13 million units per year as we exit 2004.

Clearly, as anyone knows, when you introduce a new product and new production technology there's also in need to focus on yield improvements. We're focusing and making extremely good progress in that area.

We will also continue to improve our operating efficiencies to balance any reimbursement pressures in Europe and AsiaPacific, such things as SG&A expense control, logistics improvements, also product standardization will be followed up.

Finally, we've seen the Middle East revenue trend reverse but we will continue to be vigilant to make sure that we get back to the level that we had prior to the conflict in the Middle East.

Now I would like to talk about reimbursement. Again, there is a number of positive aspects to reimbursement going on in the world. I won't comment on the discussion about the legislature -- legislative activity in North America other than to say it's either positive or neutral with respect to a reimbursement increase under the normal fee for service program. However, I would like to take a few minutes and comment about the CMS demonstration project which they announced for ESRD.

Fresenius Medical Care has positioned itself as the leader in renal disease management. We now have greater than 8500 years, patient years of experience in disease management through our joint venture affiliates. We've developed provider based disease management systems which leverage our clinical structure and data systems with systems that correlate claims cost based on improved quality. Both of our JV affiliates currently operate profitably. However I must say, they are not yet at the desired profitability level but we are focusing on that. So in summary, we welcome the opportunity presented by CMS and are engaged in studying CMS' objectives carefully. Clearly we will continue consider the cost benefits associated with this demonstrated project with a clear focus towards maintaining our overall corporate financial objectives.

Having said that, let me share with you key aspects of this proposal. Slide 17 is a quick summary. The CMS renal disease demonstration project provides 2 models, managed care/capitated model and the expanded dialysis bundle model. Risk sharing applies to both models. The surplus and deficit will be based on Medicare's total ESRD costs and contrary or different from the first demonstration program, we will continue billing the second -- for secondary coverage. Now, the payment for quality will reside in two places providing the same dialysis outcomes for less cost and achieving a reduction in Medicare's total ESRD patient cost through integrated care. Again, we are studying this proposal carefully, but we do welcome the initiative on the part of CMS to look at new ways to provide better care to the ESRD patients.

Turning now to the second portion of the agenda, the financials, I would like to discuss the Q2 and six months 2003 financials. If you turn to page 19, you'll see the revenue development which is on track for 2003 despite the temporary issues we have seen so far this year. In Q2, we achieved a 9 percent revenue growth in actual currency and a 4.5 percent revenue growth in constant currency. Revenue growth in North America was 3 percent and was affected by the items I described before. International achieved a 26 percent revenue growth in actual currency and a 9 percent revenue growth in constant currency. Very impressive.

Looking at Europe, which represents 72 percent of our international business, we maintained a strong constant currency revenue growth of 7 percent which is clearly above the market. Asia-Pacific achieved a sound 9 percent constant currency revenue growth, 15 percent in constant currency. With the introduction of the new FX dialyzers in Japan, we are in the process of establishing and modifying our distribution channels in Asia-Pacific and Japan. Consequently, the growth rate will be a little bit dampened here during the rest of this year but this is a move that we've had in the works for a number of years and we look forward to its results. The revenue growth in Latin America remains strong even though it is on a low basis at about 22 percent.

Turning now to slide 20, you'll see the revenue development we discussed it. The operating income in the second quarter grew by 8 percent. We have a very strong tailwind with the Euro appreciation, since the Euro zone is our most profitable region. We left the negative year over year territory and are on track to achieve our objectives for the year. The result is based on an EBIT margin improvement in North America of 40 basis points year-over-year and 30 basis points sequentially. The EBIT margin in internationals is below last year's margin mainly due to price pressures in Europe and establishing our own distribution system plus the other first quarter discussions that we had. However, we did make very strong progress in second quarter. We increased by 70 basis points, our margin by 70 basis points sequentially. Our net income for second quarter was $79 million, an increase of 7 percent compared to last year.

Turning now to slide 21, on slide 21 and 22, we will look at the half-year numbers. Again, slide 21 is based on U.S. GAAP. You'll see that essentially the operating income for the first half rose by 2 percent, net income by 8 percent. Looking at slide 22, you'll see an adjusted income where we adjusted it for the curtailment gain -- pension curtailment gain, the severance costs of last year and the cost to buy back the trust preferred. In that case, you'll see our operating EBIT margin grew by 4 percent for the quarter and clearly, we are on an upswing as we look at second quarter of 2003.

Turning now to slide 24, you'll see the international margin as I mentioned improved to 15 percent in second quarter. It's not yet in the targeted range of 16 percent but we are confident for the second half of the year, this is the average for the second half of the year, we will move back into the 16 percent range. The revenue growth is on track and margins are improving. In Latin America the picture is a little mixed. It's stable at a low level. We have seen positive development in Argentina, while there are some difficulties remaining in other countries. For the second half of the year we expect these trends to continue as we are focusing strongly on our increased dialyzer sales and the FX introduction in Japan.

Turning back to slide 23, I got ahead of myself a little bit here, I apologize. Turning back to slide 23, you will see the continued margin improvement in North America. Basically, you can see that we reached our low water point in the third quarter of 2002 and we've seen a steady increase from 2002 for the last 4 quarters. We just reached the bottom of our target range of 13.5 to 14.5 percent margin. We do feel that we will move into that margin -- into that target range during the last half of the year and our growth drivers as I mentioned before will be same store growth, maintaining our cost structure and basically further continued strong growth in the product area. We are comfortable that we will move into the target range in the back half of a year.

Turning now to page 25, I would like to talk about our day sales outstanding. Again we continue to see a positive development in this area. We've reduced our days outstanding from 95 days to 93. This is a very positive development. We are very proud of our initiatives. We've shown remarkable results. We continue to reduce the DSOs, improving our cash flow. Especially in North America, we reduced our DSOs by 3 days from 79 days to 76 days. Again in international, it's a very difficult environment but we maintained our DSOs at 136 days so we continue the trend in reduction of DSOs that has been in place for the last 24 months.

Turning now to slide 26, the cash flow development for the second quarter, we achieved record cash from operations and free cash flow and topped the already strong second quarter of 2002. Cash from operations were 175 million, which represents 13 percent of revenue. Our CAPEX was 37 million. You can see it is about 2 million less than the second quarter 2002 but it is below the run rate that is part of our guidance for the full year CAPEX spending around $220 million. This is mostly a phasing issue as we expect our CAPEX will increase in the second half of the year. And so as of now, our guidelines for the full year for CAPEX stay at $220 million.

Free cash flow we achieved free cash flow of approximately $138 million or 10 percent of revenue. Again, acquisitions came in at about 29 million. Two-thirds of that was the absorber business and our free cash flow came in at around $109 million, which was a record again for Fresenius Medical Care.

Looking at cash flow development for the full six months to summarize on slide 27, again with a strong cash flow for the first and second quarter we can report a significant improvement over the already high cash flows of the first six months of 2002. Cash from operations was $300 million, which represents 11 percent of revenue. Our CAPEX was 78 million and resulted in free cash flow of $222 million. Free cash flow increased by 44 percent, which represents a strong 8 percent of revenue. Having in mind our full year guidance of about $220 million of CAPEX, you can expect the higher CAPEX in the second half of the year and accordingly, our free cash flow will be somewhat lower during the second half of the year than it was the first half. However, our acquisitions will be in the range of 100 million and we expect it still to be a very strong free cash flow, cash flow year. Looking at the first half however, our free cash flow was $165 million, an increase of 45 percent.

Turning now to the financial ratio for first half of the year, this is on slide 28. I would like to focus on debt to EBITDA development. If you look at the bottom of the page you'll see our debt to EBITDA remained relatively constant at 3.1 times, similar to fourth-quarter 2002. As you look at the debt development, our debt actually increased by 44 million and as you can see, the items that are responsible for that with our strong cash flow are shown in the shaded area. We have about $700 million worth of non Dollar denominated debt and as the Euro appreciated against the U.S. Dollar from the end of 2002 to June 30, 2003, this was about 9 percent. This portion of the debt increased in dollars by about 62 million. The cash flow associated with the redemption of the class D preferred shares in March and renewal of our credit agreement have a onetime effect in character. We also paid the annual dividend in the second quarter of $108 million so all in all, you see the shaded area represent $197 million of increases in debt that either will not repeat the remainder of the year or are dependant on the currency development and we would expect with no dramatic change in rates, that our debt to EBITDA ratio for the remainder of the year will continue to improve even if we make a potential tax payment in Germany that is still under discussion with the tax authorities. Let me also point out the others worth 12 million is cash and it clearly has stayed within the Company.

Turning now to the outlook, you can find that on slide 30. We confirmed our financial outlook for 2003. We expect to achieve a revenue growth in the mid single digit constant currency. Capital expenditures and acquisitions for the first six months are in line with our guidance of 220 million and less than 100 million in acquisitions. Our net income is expected to be at the lower end of the range of high single to low double digits. The basis for this growth rate is the net income before the redemption costs of the trust preferred securities as last year prior -- presented last year prior to the changes in FAS 145. Basically what that is saying is these are based on a 302 million net income for 2002.

Based on the sequential improvement of the EBIT margin in the second quarter over the first quarter, and the operating improvements that we have underway which are increases in dialyzer sales which also result in seasonality, continued cost efficiency and revenue enhancements including an extra day of dialysis, we're confident that we will achieve our target for the full year 2003.

At this time, Oliver, I would like to open it for questions.

(CALLER INSTRUCTIONS). There are no questions, please continue.

Okay, I think at this point in time if there are no questions let me try one more time. Is there difficulty with the system in any way?

(CALLER INSTRUCTIONS). We are not experiencing any problems with the systems. (CALLER INSTRUCTIONS).

We appreciate it very much. I would like to mention there will be an analyst lunch in New York on Thursday, August 7 so if for some reason did not have questions today, you are certainly welcome to ask them there. We look forward to seeing you. It will be at the Astor Room at the International Barkley Hotel at 111 East 48th Street and it will start at 12 noon. Thank you very much for joining us this evening and have a good evening.

(CALLER INSTRUCTIONS).

(CONFERENCE CALL CONCLUDED)