Fresenius Medical Care AG (FMS) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Fresenius Medical Care third quarter conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Oliver Myer, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning and good afternoon ladies and gentlemen. I would like to welcome all of you. Thank you for joining us for Fresenius Medical Care's third quarter and nine month 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, are available on our website under the IR section. Let me also point out that the conference is again broadcast via the Web.

Let me now 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 refer to our SEC filings for more detail. In the press release at the end of our presentation, (indiscernible) we include a reconciliation of all 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 such nearest U.S. GAAP measures 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 Emanuelle Gatti, board member responsible for Europe, Africa, Middle East; Roberto (indiscernible) board member responsible for Asia-Pacific; Larry Rosen, our new Chief Financial Officer; and Ben Lipps, Chief Executive Officer of Fresenius Medical Care, who will brief you on the results for Q3 and the nine months of 2003 and give you a business update. So that is my part. Let me now turn it over this call to Ben Lipps, our Chief Executive Officer.

Thank you. And again, welcome everyone, or good morning. I will cover a business update, financials third quarter nine months, and then we'll discuss the financial outlook.

Turning now to page 3, I would like to comment that we had a very strong quarter. It's very gratifying to see that our global strategy is providing successful results. We continued to see strong worldwide product growth. We are on track for our full year targets with improving margins in both regions, and we had very strong record operating and free cash flow.

Turning now to page 4, I will give you a little bit of highlights for the quarter. Revenue grew by 10 percent in actual currency, 7 percent constant currency. Our EBIT, or operating income, increased by 18 percent. Operating margin, 14 percent. Net income improved by 25 percent. Free cash flow improved by 81 percent and represented around 11 percent of our revenue.

Turning now to page 5, you'll see a breakdown of the revenue growth by segment. Revenue was $1.4 billion. North America contributed $978 million with a growth of three percent. International $432 million, with a strong growth of 28 percent in actual currency, 16 percent in constant currency. Looking further at the international segment, you'll see that Europe accounted for around 21 percent of the 31 percent, or $300 million, 30 percent actual currency growth, 15 percent constant currency. Asia-Pacific, 8 percent constant currency. And Latin America, 39 percent constant currency. Again, good strong growth in the international region.

Turning now to page 6, we will look at the regions in terms of products and service growth. North America in the service area grew at 5 percent, clearly above market. North America products sold to the external markets, the net available external market grew at 4 percent, which again was just about half market. Looking at international, you can see that the service business grew by 35 percent in actual currency, 22 constant, and the products business, 24 and 13. Again, a very strong growth in the products and the service international. Worldwide service 8 percent, actual 7 percent, constant products 14 percent to actual 8 percent constant. So again, we are pleased with the revenue growth in the segment in the third quarter of 2003.

Turning now to page 7, you'll get a view of the revenue and operating margin, or the operating results for the worldwide company broken into segments. We are very pleased that we have well-balanced global franchise, or you can see that North America produced 69 percent of the revenue, 69 percent of the operating profit. International produced 31 percent of the revenue and a stronger 34 percent of the operating profit, which covered the 3 percent corporate costs that, basically, we have in our global structure. Again, as far as the international growth, or international revenue, 31 percent for international. Europe accounts for 21 percent, Asia-Pacific 6 and Latin America 4 percent of the worldwide revenue.

Turning now to page 8, and focusing on North American service. We are very pleased that our UltraCare program and the team in North America are showing strong same-store treatment growth. We had same-store treatment growth for the quarter of 4 percent and it continues growing. We also saw our revenue per treatment enhance this quarter to $279 per treatment.

If you turn to page 9, you'll get a little more insight into these two metrics. You can see that our same-store treatment growth has improved from the first quarter of 3.3 percent. We are now in the target range of 4 to 5 percent, and again, we are quite pleased with the progress in this area. We have a target of growing between 10 and 20 percent above market. Clearly, the market, we believe, is somewhere between 3.8 and 4 percent, so we are getting into that range. Looking over at the revenue per treatment. As I mentioned earlier in the quarter, because of our best pharma practices program, we clearly moved our range down this year by $5. We have moved back up into the middle of that range, between 2.75 and 2.85, and we are showing good strong progress in that area. Again, most of that driver is coming from our renewed focus on the commercial contracts.

Turning to slide 10. We talked last year about UltraCare and a number of programs technically that were involved in the UltraCare program. I would like to indicate that the team now has taken it to one higher level of commitment. They've developed a very strong program which includes both innovative technology, individualized patient care, clinical leadership and customer service. This program is being rolled out to all 1100 clinics. Very positively embraced by our staff and our patients, and if you look at slide 10, you'll see some of the training programs that are now being provided to our clinics, giving us this very unique program with respect to patient care.

Turning now to page 11. As you recall in prior quarters, some of our preliminary retrospective data (indiscernible) compare a single use and re-use showed advantages for single use. And I have been asked a number of times for updates, so I would like to show you on slide 11 a brief synopsis of a paper that will be presented at the ASN, or American Society of Nethology (ph) in November in San Diego. It's a scientific study that presents the results, looking at single use versus dialyzer reuse. This study represents 2 distinct analyses of the data from our 71,000 patients. As we converted from reuse to single use, clearly making a one-dimensional change. We again see clearly a reduction in the hazard ratio, or the risk of death being statistically significant at 120 days after conversion. So this is very powerful, one-of-a-kind data that with this degree of statistically significance, and it clearly shows that the conclusion of the study is that the use of new synthetic membrane dialyzers with each treatment appears associated with a survival advantage per patients, compared to the use of dialyzers that have been clinically reprocessed. So again, I thought I would sure that with you. We're very pleased to see that the results continue to verify what we saw last year.

Turning now to page 12, and looking at the North American products. As I had mentioned, we're growing in the net available external market slightly above the market. If you look at the first three quarters, we are growing about five percent. Hemodialysis products are growing at five. PD is about two percent; however, we believe that the (indiscernible) dialysis is more flat, and so we are growing slightly above current yield. But our overall growth in the five percent range. We continue to see strong growth of our single use Optiflex dialyzers.

Turning now to slide 13. I would like to talk a little bit about international and specifically, Europe. As you'll see a little later on, the margins in international have continued to improve. So we are getting very close back to target. Europe is on target, and Europe is a very interesting strong region for us. It consists of a number of countries which also have a number of product mixes. And so on slide 13, I was giving you just a little bit of an example of the diversity we see here in Europe, and how we are well-positioned in both the products and the services to continue to grow this market. For instance, if you look at Germany, it's about a 97 percent product market. Long-term supply contracts were very strong there. If you look at the UK, it's a mixed market. Tender business for both products and services. And finally, if you look at Hungary, it's essentially privatization of the dialysis clinics have been completed. So it's primarily a 90-plus percent service business. We clearly have a situation in the European markets where the service business complements the products business.

If you turn to page 14, you'll see that we believe that Fresenius Medical Care is the best positioned in Europe to address the distinctly different markets. We expect and are continuing to gain market share, and we also see an opportunity to maintain our margins and to continue to grow our free cash flow. The reason for this is we have the complete product line. We've got a pipeline of products, and we are now the largest provider of dialysis care in Europe. And we operate in all the key countries. So Europe is doing very well. They've handled the issues that we've seen, in terms of price attrition in Germany. It's moving along quite well.

Turning now to, Asia-Pacific. In Asia-Pacific, we're continuing to strengthen our product leadership there. We're converting to our own sales and marketing force in Japan, Taiwan, and Central China. We are converting to our own sales and sales and marketing force in Japan, Taiwan and Central China. These are all good strong markets for us. If you look on slide 15, you'll see that on a unit basis, we have through the first three quarters of 2003, grown our dialyzer business and our (indiscernible) PD business by in excess of 20 percent. So again, we see an opportunity to continue to expand in this excellent parts market. We've made the investments, we now are shifting more and more to our own sales program, and we see Asia-Pacific being a strong market. Again, if you look at international, Asia-Pacific is very close to target and doing quite well.

That gives you a flavor of the segments and the regions within the segments. I would like to now go to the financials and talk about Q3 and nine months. If you turn to slide 17, you'll see the key figures for the third quarter. As I mentioned before, the revenue was 1.4 billion. Operating income 197 million. Again, up about 18 percent from third quarter 2002. However, I do want to mention that in (inaudible) quarter 2002, that was the quarter in which we accelerated the single use program in the U.S., and that was really the low watermark, in terms of EBIT margin. So essentially, that does influence, then, the percent growth, but we did have a very strong quarter under any measures. Net income, 87 million. Again, on target for our commitment for the year.

Looking at the nine month figures, again, I would like to just focus on the operating income, or EBIT. We have 550 million of operating income through the nine months. Again, on an 8 percent growth for the year. Net income at 237. And so we clearly are in our target range for the year. And at this point in time, we expect to have a strong fourth quarter and complete our target for the year.

However, I would like to now turn to slide 19 -- give you a little more color on the margins by quarter. As you can see on slide 19, the U.S. hit a low watermark at third quarter 2002, and has steadily increased in third quarter 2003. Was in the mid range of the target of 13.5 to 14.5. If you look at international, as I mentioned earlier in the year, we had some issues at the beginning of the year. We clearly have improved. For the third quarter, we are at 15.5 EBIT margin. That's up 50 basis points from second quarter. It's still about 50 basis points off of what our target was; however, two of the major regions are performing well, and we believe that we will still touch very close to the 16 -- between the 15.5 to 16. But the units are running quite well. We've seen improvement. The main drivers for this increase -- product sales, same store growth, revenue growth per treatment and leverage of our SG&A. We have been very focused on our SG&A and our expenses during the past year, as always, and we've seen a 70 basis points improvement in SG&A.

Turning now to page 20, talking about days sales outstanding. Again, we continue to see an improvement in the DSO in North America. There has been an impressive three days drop during the third quarter. From second quarter 2003, we're at around 73 days. This includes both the service business and the products business. We also, if you look at international, we went up a day. But it is in a very difficult environment, and if you look at it year-over-year, we've actually improved by four days. So we're quite pleased with the overall performance of the Company. We did drop to 92 days at the end of third quarter 2003 for the entire company. That, obviously, along with the operating profits, continued to drive our free cash flow.

And you'll see now on slide 21, that the net cash provided by operations or operating cash flow was $203 million in the third quarter. Sorting down to free cash flow before acquisitions and dividends, we were at a record 152 million for the quarter. And so we clearly had a strong quarter, in terms of continued free cash flow. And we also saw that our CAPEX was pretty much in line. We will come close to the 220 million this year that we discussed. And acquisitions were very close, in the 20 to 25 million range per quarter.

However, it's even more impressive if you turn to slide 22, which shows the nine month results. We've seen a 27 percent improvement in cash from operations for 2003 versus 2002. 500 million of cash from operations. CAPEX is a little light, but it's essentially in the same range; however, if you look at free cash flow through the nine months, you've got a 57 percent increase to $374 million. We had a very strong year last year, and for the whole year, we did $349 million. So we've actually passed that (inaudible) as of third quarter this year. And again, free cash flow after acquisitions were up about 80 percent, 78 percent. So again, our program, in terms of managing our assets and our focus on revenue and free cash flow, continues to pay dividends.

Turning now to slide 23. You'll see a financial ratio slide. Basically, from December 31, 2002, we've reduced our debt about $71 million; however, we do have debt both in Euro and in dollars. And during that time, because of the strengthening Euro, we actually had an upward valuation of our Euro debt by $86 million. So we've, again, had a strong performance. The number to look at is the debt to EBITDA down in the right hand quarter. We broke below 3 this quarter. We are at 2.9, and so we are targeted over the next couple three years to get near the 2.5. And I think we are making progress in that direction. So anyhow, that gives you a feeling of where we are at this point in terms of the debt to EBITDA ratio.

Moving now to the financial outlook, page 25. Again, it's unchanged for 2003. Mid-single digit constant currency growth. CAPEX, we will stay and be slightly under the 220 million. Acquisitions, we will stay at the 100 million. Our net income will grow between the range of high single digit, low double digit. We clearly are not -- we will give our 2004 guidance in February, after the year end numbers. But at this point time, we see no clouds on the horizon that would lead us to believe that we can't continue this growth or this performance into the future. But we will give you specific guidance in February, after the numbers close.

I think at this point, that's the presentation. Oliver, we ought to open it for questions.

Yes. We can start with the Q&A, please.

(OPERATOR INSTRUCTIONS). Henry Reichoff (ph), Deutsche Bank.

It's (indiscernible) for Henry. Great quarter. I just wanted to know a couple of questions. The timing for the (indiscernible) settlement and the German tax issue -- do you have that by any chance?

The German tax issue looks like it will be sometime in 2004. The race issue, if you read some of the latest press, it sounds like it's clearly going to be 2005 and beyond. A couple of them said they never want to come out of bankruptcy, so I don't know. We are saying 2005 and beyond for that one.

Great. (indiscernible) next question, with the operations pretty much working out (indiscernible) you talk about your leverage now hitting below 3 times. I know you talk about your acquisitions for '03 are going to be 100 million, but do you see yourself perhaps doing a sizable acquisition in 2004, 2005? To that end, I know you talk about 2.5 times leverage ratio. Would you be more comfortable going up again, leveraging yourself up for a sizable acquisition?

Let me reverse that. Yes, if the proper acquisition after 2005 occurred -- and really when I say proper it will be something probably large in the international area -- we will clearly take advantage of that opportunity. However, between -- during 2004, 2005, we have our strategy in position, and quite frankly, we can return the best shareholder value by staying on that strategy and cutting our debt or cutting our interest expense. Right now, 2004/2005, we clearly stay on the strategy. If something happens beyond that, we will absolutely be there.

(OPERATOR INSTRUCTIONS). Daniel Mahoney, Morgan Stanley.

I have a couple of questions on revenue per treatment. Can you talk a little bit about where you think that could go over the next couple of quarters? Particularly, what the drivers are for winning some of those commercial contracts? For instance, is the UltraCare program important (indiscernible) going in front of these people and winning the deals? Also, could you give us a little bit of color, because a number of your competitors have been talking about how their revenues per treatment are a lot higher. Can you give us some idea of how we should compare on an apples to apples basis perhaps some of the U.S. (indiscernible) (indiscernible)?

Let me try to address those. Again, the revenue per treatment; again, I mentioned that we are what I would call best pharma practices. So we made some moves in first quarter in some of the waste billing that we thought were right. And clearly that's the way we operate the company. That dropped our same-store by about 5 to $6, with another change on that, too. So I've indicated that as we go through this year, we'll operate between 285 or 275 and 285. We clearly will, I think, move into the higher section of that number, between 280 and 285 (indiscernible) we go through the year. I can't really give you quarter by quarter expectations. It's clearly a focus with us. As I mentioned in the past, we had a number of legal activities going on after the OIG settlement. Those are pretty much behind us. So we will focus and we will see revenue per treatment growth. We are very encouraged by the other revenue per treatment numbers we see. It's obviously just more opportunity for us, and so we would like to again encourage everybody in that area. Our cost per treatment, we actually had a reduction in our personnel cost per treatment year-over-year. So we feel we are very well positioned to get maximum value out of any traditional revenue. As far as what are the selling tactics? I can't go into that, but it's a combination of quality, a number of things, (indiscernible) playing field being leveled more and more for us with all this legal stuff getting behind us. So we are encouraged -- we're also encouraged by the success the other players in the market are having, too.

A quick follow-up on cost. I think I saw that there was a comment on the wire that (indiscernible) pricing next year should be increasing by about the 3.9 percent sort of level. Could you give us an idea of where you think overall costs will rise on a 12 month basis, or what you think you can do?

Let me qualify that. Again, wire services pick up part of the thing. The question was asked were there any price increases while you had your two-year contract. Remember, we had a two-year fixed contract for 2002 and 2003. And the answer is yes, there was one price increase of 3.9 percent during that time. And I mentioned that due to the good working relationship that our team has with Amgen and a number of situation -- competitive situations, we would expect to ameliorate most of that price increase for 2004 and going forward. So that was slightly out of context, but yes, there was a price increase. We think our team with Amgen will ameliorate most of it. As far as our costs, the main cost we look at is our labor cost. And again, we've seen another quarter where year-over-year, it's decreased. We think we have with single use a number of efficiencies that the group is putting into place. So we think that our costs are not going to rise at the same level as the industry, and we're pleased with that going forward. I can't give you the exact number at this point, but in February we will give you our guidance for the year.

Rich Caltrenbond, J. P. Morgan.

I had a quick question in terms of the products growth outside the U.S.. I'm wondering if you saw a catch-up effect from the Iraq war?

No. We've seen a return to levels, except for Iraq itself, but we have not seen the catch-up effect that is noticeable. Again, that's our best feeling at the time.

Can (indiscernible) ask another question? On the (indiscernible) business that you bought from Fresenius Group, can you just (indiscernible) talk a little bit, how did it perform (indiscernible) in which division that made most of their revenue growth into?

Yes, this was the absorber business, and that was a second quarter acquisition. We are just in the process of assimilating that. It's a very small business, less than $20 million. So it's not significant. Primarily, it's in Europe and North America. Our main interest there is looking at some opportunities in (indiscernible) long-term, so it's not a significant business for us at this point.

Laura Alden, Trilogy.

My question was related to acquisitions. You've got approximately 20 to 25 million per quarter in acquisitions. What do you expect to see for the remainder of 2003 in that area?

I believe we are at about 79 for the three quarters. So we will come very close to the 100. Another 20 million (indiscernible) the last quarter.

But with respect to that, what type of acquisition are you looking? Are you thinking U.S., or where?

Generally, the 100 million is split about 50-50, and these are primarily dialysis clinics in the regions where we see some opportunities. So it's a limited program that we use basically to increase our franchises in certain geographic areas.

Laurence McGrath, Pioneer Investments.

You mentioned (indiscernible) Europe as seeing some price erosion this year. And I'm just wondering, where specifically was that? Who was driving it or what was driving it, and has it been stabilized?

Yes. I tried to indicate that when we talked about Europe, that the team here has done a good job. I have Emanuelle Gatti with me, so I am going to him to answer it. But the original discussion was with respect to some of the German health care reform, and how the manual took care of it. Manual, do you want to take that one?

Historically, our most important market was Germany. This importance is decreasing with the years, and we are now more and more (indiscernible) into regions where we can combine the product and the provider business together, using the synergies of an integrated company. (indiscernible) Germany is for us a -- it's been a focus, but less important than in the past. How we coped with the dramatic price increase into the market in Germany, I think this was a combination of a product mix change and a substantial SG&A reduction. The product mix change I am talking about is we have sorted our (indiscernible) strategy, and we've pushed dramatically (indiscernible) both in combination with the good marketing that our division in the U.S. is doing. Using this (indiscernible) experience of a single use (indiscernible) in Europe, we could gain additional market share, and the (indiscernible) we have a substantial decrease in market price altogether in the (indiscernible) group, we have 0.5 percent (indiscernible)

That gave you an idea of how we handled it. And again, the clinical data out of the U.S. is very powerful when you look at 71,000. Right now, Europe is operating pretty much at target and we're quite pleased.

If I may, a second question on the U.S. The commercial payer, the commercial contracts, how often do they come up for renewal or for tender and are there any particularly big contracts coming up for review in the next three to six months?

They're pretty uniform throughout the year, in terms of their timing. Quite frankly, we don't have any one contract that we would like to talk about, or multiple contracts, at this point in time. So -- there's always contracts coming up and they're pretty linear as you go through year.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Are there any closing remarks?

Yes. Again, thank you for joining us. We will be in New York on Thursday, Nov. 6 at the Spelman room for a luncheon at 12.15. If you find yourself in New York and would like to join us, we would be pleased to see you there. Again, thanks for the interest in the company. Again, I would like to indicate that the team, including all the employees of the Company, have worked very hard this year. And we are very thrilled with the strategy we have in place, and it's bearing fruit. Thank you very much.

Thank you.

Thank you for participating in today's conference. You may now disconnect.