Fresenius Medical Care AG (FMS) 2004 Q3 法說會逐字稿

We can proceed. I would also like to welcome all of you for the Fresenius Medical Care's third quarter and nine-month analyst meeting today. It is my duty to start with the forward-looking disclosures. So the cautionary language regarding forward-looking statements, the same language also applies to comments made on today's meeting. As always, you will be able to refer to even more details, actually, in our SEC filing coming up in the press release and in the end of the presentation, which we did in the past, we include a reconciliation of all the non-U.S. GAAP financial measures, and we compare that to the closest U.S. GAAP financial measures and we did that in compliance with Section 401 of the Sarbanes-Oxley.

Let me also point out for those that are participating via the Web, that you may ask questions during the Q&A session via the Internet, and you'll find all the procedures on our Internet page or in the Investor Relations Section.

Just for the procedures, please, if you ask questions later on in the Q&A, please say your name and your company. That's been very helpful for everybody participating via the Internet.

With us today is Ben Lipps, our chief executive officer for Fresenius Medical Care, and Larry Rosen, our chief financial officer, Fresenius Medical Care, and I think that's all from my side. Ben, the floor is yours.

Thank you, Oliver (ph). Again, a warm welcome to everyone. We're glad to have you with us today. I will cover the business updates for Q3 and the outlook for 2004. Larry will cover the financial for Q3 and the nine months.

Again, if you look at the figures for the quarter, we've had a very strong quarter. Our revenue has grown by $1.6 million in the quarter. This gives us a revenue growth of 12 percent actual currency, a 10-percent constant currency. Our operating earnings were $214 million, again, a 9-percent increase over 2003. Our net income was a record $102 million and 17 percent year-over-year growth.

Looking at the nine months numbers quickly, our revenue was $4.6 million, again, 13 percent actual currency growth; 10 percent constant currency growth. We had a net income of $294 million, up 24 percent for the year. So very strong 2004, a very strong third quarter and nine months. I'd like to take this time and congratulate and thank the employees of Fresenius Medical Care around the world, and especially the management board who is here with us today for the fine accomplishment. This, again, was a very strong and a good quarter.

Turning now to a breakdown of the revenue by quarter -- you can see that North America contributed about $1.07 billion in revenue. Again, a strong growth at 10 percent. International contributed $499 million -- couldn't find that last million, but we'll get it next quarter. And the leader there was Europe with a strong 20 percent actual currency growth and a very strong 10 percent constant currency growth.

Asia Pacific, again, I'll talk a little bit about it later. We saw a negative 9 percent constant currency growth. This is disappointing, but we believe that we've adjusted to the decreasing reimbursement, which was a national program, and we think that we are really going to move forward in an upward motion from here, and I'll talk a little bit more about it later.

If you look at Latin America, you can clearly see Latin America is a star at 24 percent constant currency growth. The team in Latin America has done a very good job, and we're having a very good year in Latin America.

Now let's focus on our dialysis services. On a worldwide basis, the dialysis services has done a very good job, solid performance. We had 13-percent growth in our worldwide dialysis services. In North America we had 11-percent growth in dialysis services. Again, that constitutes about 90 percent of our North American revenue, and it was driven primarily by continued increase in our reimbursement and continued increase in the number of patients that we treat.

Looking at our international dialysis services, you can see a very strong 22-percent growth in actual currency; 14 percent in constant currency. Again, that business now constitutes about 36 percent of our international business. So it's very impressive and doing quite well.

Looking at some other dialysis service metrics, you'll see that our organic growth on a worldwide basis was 7 percent, which is quite good. North America led with 7.4 percent, the international number of 4.4 percent is a little bit misleading. We did some consolidations this quarter. There's probably 200 basis points in there, and that is affecting -- our run rate really is closer to 6 percent in terms of our organic revenue growth in the international area. But, again, we've got enough clinics now we're in a position where we consolidate, we'd lose some, and we'd sell off those clinics just like in North America that are not performing. So we've got almost 375 clinics in that region.

If you look, then, at the organic growth, you'll see our organic same-store growth -- revenue treatment growth was 3.4 percent, 3.2 in North America, and 3.8 in the international. Again, the international is probably a couple of hundred basis points low. In the area of North America, it was a very difficult quarter for us. Our staff worked very long and hard coping with all the hurricanes that basically hit our coastal area and, essentially, we have a large number of clinics in that coastal area, and so it was very difficult. I believe we lost some treatments during this time. It's a little hard to pinpoint it at this point in time. If you do the calculations, I'm not quite sure that the 3.2 isn't close to market growth when you consider all of us had some difficulty there. But, by and large, if you look at our actual treatment growth, our revenue for treatment for North America, is $291, international is $119, and our growth in treatments -- we did 4.7 million treatments, 4.4 percent up from last year. So as you step back and look at this quarter, it was a difficult quarter for a number of reasons, but I think everyone did a very good job and, again, I'd like to compliment the staff in North America in the coastal regions that worked very, very hard to try to basically provide treatment to these patients when the hurricanes came through.

Now looking a little closer at the revenue per treatment -- we had a sequential growth of $2 from second quarter to third quarter, so we continue to see our revenue per treatment increase. Year-over-year, it's $12, but significantly, as we move from quarter-over-quarter, that's primarily all contracting. We have basically a very strong compliance program in terms of drug utilization, and this particular quarter, that extra $2 you see there is primarily all from contracting.

I would like to mention that we're continuing to see progress in that area. We are expecting to continue to see sequential growth, over time, but we have not lost focus on our quality. Over 94 percent of our patients are receiving the minimum or the minimum quality in terms of adequacy. This is a KT/V of a greater than1.2. So we're really quite pleased with our quality. We never basically lose sight of that, and I'm also very pleased that we continue to -- the trend here of increasing the revenue per treatment.

Now, looking at the products area -- we saw a 9-percent growth in actual currency and products worldwide. On constant currency, that was around 4 percent. In Europe, however, in the international, which constitutes -- products constitute about 64 percent of the business. We saw a very strong 13-percent growth at constant currency, 5 percent. Again, clearly, equal or above the market. In North America we saw 3-percent growth including sales to ourselves and essentially our net available external market, which is how we measure basically the business outside of our clinics. It was flat, but this was part of the design for this year. We have backed away from selling products that really have low margins, and we're just distributing, and we're focusing on those products that we produce -- like machines and dialyzers and peritoneal dialysis.

And so you can see in the next slide that the growth rate of those products basically either were equal to or exceeded the market. The growth of dialyzers and machines together has been running in the range of 4 percent to 5 percent. We believe the market is somewhere between 3 percent and 4 percent in terms of growth. Single use continues to move forward in North America. Our actual unit sales are in the range of 17 percent to 18 percent. We are seeing that the independent market now, not the chains, is basically very close to 50 percent single-use, and so we continue to see that trend, going forward. And our peritoneal dialysis has grown basically in the 1 percent to 8 percent, but we're seeing an actual growth in peritoneal dialysis this year, and we're quite pleased with it.

So -- the key products in North America that we're focusing on will continue to grow at or above the market.

Now I would like to bring up up to date a little bit on the Ultra Care program. We've talked about it for the last year or so and, again, I want to mention that a year ago I stood here, and we talked about a paper that we presented at ASN. That paper has now been peer-reviewed and is being published this month in "Nephrology, Dialysis, and Transplantation," in the November issue. We are quite pleased that, again, that it passed peer review and it is published. It's a very impressive journal and, obviously, the conclusions are very similar to what I presented to you last year, and that there is definitely a risk benefit to going from reuse to single use, or you could say it another way -- there's a benefit from going from reuse to single use, and that pretty much has been invalidated.

Now, I would like to talk a little bit more about the program, but before I get into that, we have seen a continued reduction in our mortality, or our risk of death. And interesting this year, our focus has been in certifying the clinics and what that encompasses, and I'll show you on the next slide is essentially teaching about 20,000 people all about the technology that we placed in the clinics, also talking very -- teaching them in terms of customer service and working on a complete Ultra Care technology, embedding it into and also Ultra Care concept embedding it into the clinic so we can provide the best therapy with the best technology. And so what has happened is we basically slowed down our de novos this year and, to give you some idea, with only 1.6 percent new de novos, we've actually, in our clinics, have growth about 3.7 percent. So we're getting a -- you can see a little attraction there from the Ultra Care program in our clinics.

Now, our main focus for 2004 is to essentially certify our clinics and make sure that we go through the training and we go through the testing afterwards -- they have to pass certification tests. We are about halfway through. We have 600 clinics that have now passed the certification. We hope, by the end of the year, that we will actually be able to get all 1,100 of the clinics certified for the year, and that will be a major accomplishment. But with that, then, we plan to, next year, start expanding our de novo clinics, and we would expect to continue and clearly achieve above-market growth in all of our same-store growth next year.

Now, some of the technology is still -- there's a difference between just installing it in the clinic and actually using it for patient care. Our access monitoring which we, by the end of the year, will actually be measuring access flows on over 25 percent of our patients, which is clearly 10,000 to 20,000 patients. We will be the only group that does this, but that technology is really quite exciting. (indiscernible) monitoring I've talked about ultrapure. So we still have some technology that we have in the clinics, but we have to basically work with the staff and everyone in put it into actual operation and use it for better care. So, the Ultra Care program, then, is on track to be completed this year, and next year it will be a major driver in the North American program.

Now, as far as our favorite topic, the MMA, what I did here is I can only tell you that I have only very limited information. All of the providers that met with CMS -- CMS has been very cordial about discussing the topic, and I assume everybody in the room must know what MMA is -- Medicare Modernization Act that was passed in 2003. But, at this point in time, I don't have anymore news for you except the overall buzz is that it will come out sometime in early November, and so that's basically all I can tell you. And, at this point in time, I'm showing you the same slide I showed you last time, because that's really the update I have, but we do expect this to come out sometime in the first half of November this year. And, again, we're still optimistic. We feel that basically everyone has made their points with CMS, and see where the dice fall.

Now let's turn to the international segment. Again, Europe is the star in this area. We continue to see above-market growth in both the products and the services. Our model of basically selling products or building clinics and dialyzing patients in Eastern Europe has been very successful. We now see that as a growth driver for us in the international market. We also reached a milestone of treating over 20,000 patients. This is, by far, the largest service provider in Europe. So we finally have reached the number-one position. And, as you look at our products growth, we clearly have had some strong products growth. We're particularly pleased with our products growth in Germany. We've had a 10-percent constant currency growth in products in Germany and, primarily, that's the business we're in here.

We have seen increased demand for our machines and our dialyzers. The machines are suffering a little bit from the economic situation around the world last year, and that seems to be correcting. There seem to be more people replacing their equipment. So, by and large, in the international area and in the European area, specifically, we've seen good, solid growth and, on top of that, the group has maintained their margins. There have been no erosion in margins year-over-year, and so this has been a very successful year-to-date for the European theater.

Now, Latin America also has done well. We've seen a 7-percent organic growth in terms of Latin America. Again, we're about 65-percent service-oriented in Latin America, so I think that was a good move that we made a few years ago. We have seen our margins turn around in Latin America. In fact, we've seen a 600-basis-point improvement this year. Again, they're not on the same level as Europe or basically other areas of the world, but they are essentially doing quite well. We have seen reimbursement increases in a couple of countries -- Venezuela, Argentina -- and our DSOs have dropped by 26 days. That's pretty significant when you think about it, over the last 12 months. And that, of course, leads to positive cash flow, which we had for the first nine months. So the Latin America team has been doing a good job. It's a small business, but it clearly is progressing quite well.

Now turning to Asia Pacific, we are managing a very difficult situation. We knew, coming into the year, there would be a reimbursement decrease. It's sort of a two-year phenomenon. In Japan, where they basically try to keep control of their healthcare costs, and so it's a national campaign to reduce healthcare costs by "x" amount every two years.

This was a little more than we expected this year in terms of the amount of the reduction, but we're working our way through it. I think that we are in process of advanced negotiations with our joint venture partner there; we think that will be successful. We basically have to change the structure in Japan in terms of how we are going forward there. We believe we've got that under control; understand what we have to do; and we think that we will basically be on that upward slope as we come out of this year and that this, hopefully, was the bottom of that slope.

Now, the good news is Europe, the U.S., and Latin America basically compensated for this this year and, again, we're dealing with about 3 percent of our revenue in the Japanese area, and so it doesn't drive the whole company, but it's a very important business for us at this point in time.

So we believe that we basically addressed that this year, and we've changed the organization, we're moving forward. Now, Asia Pacific outside of Japan has done very well as, I think, was mentioned here earlier, China is developing for us as a very interesting market. So we've done very well outside of Japan in the products area and the service area. In fact, we opened a demonstration clinic or, basically, a one-of-a-kind clinic in China this year. We were invited in. It's now treating 120 patients so it's sort of a role model for what we can do in China in terms of dialysis services. Now, it's just one clinic, but it is the beginning of, we think, some real activity there. So, basically, that's the Asia Pacific. It has been difficult, but I believe we're making progress. I believe we've passed through the bottom, and that we essentially will be going forward in a better position.

So as you look at the year, and the year, of course, is nine month, so far, but, so far, it looks like it's a solid year for us. We will basically -- are comfortable in the high single-digit growth. Now, that's after taking out the effect of FIN 46, and so even though you're seeing a 10-percent constant currency, you take that couple of percent out, we're still seeing 8-plus-percent growth in terms of the business. We do see for the nine months an increase in margin. Again, if you do the FIN 46 accounting effect, about 30 basis points on a like-for-like but, again, we see a slight margin uptick, and we're quite pleased. Our cash flow has been very, very good. Larry will talk about it later. We've had a number of programs where we reduce the days outstanding, and we've done a very fine job in terms of our cash flow this year, and that's around the world. What that leads to us that we've now achieved our leverage ratio, our target leverage ratio, again, that Larry will talk about. And so as you step back now and look at the going-forward position, we probably -- we've reached that target, and the leverage ratio will probably stay there, and that's going to give us basically more opportunity to invest in this business on a going-forward basis. So we'll be basically looking forward to that as we go into next year.

Now, of course, what this also says that we're going to have to increase our guidance again this quarter because it looks like we're going to come in closer to the high teens rather than the mid-teens. Now I know that's not bad news but, again, we weren't sure how the Japanese situation was going to play out for the year, and didn't know the other regions were going to make up for it. So, again, I'm very pleased to indicate that we are changing our guidance. I think it was in the release this morning. We'll keep the guidance -- Larry will talk a little more about it. We'll keep the revenue guidance, but we are going to up our net income guidance into the high teens.

So let me, at this point, turn it over to Larry, our CFO, who will give you some more data. Larry?

Thanks, Ben, and hello to everybody. I'd like to talk today about our results, our financial results for the quarter and the nine months. Also, our operating margin, development, and then our cash flow and balance sheet results. Finally, we'll look at our outlook for the full year in a little bit more detail.

So here is our P&L for the quarter, and you can see that we began, made substantial progress. Our revenues were up 12 percent, 10 percent in constant currency. Operating income of 9 percent over the same quarter last year. Our EBIT margin came in at 13.6 percent, so consistent with the quarters we've seen so far in 2004, a little bit below the similar quarter in 2003.

I'll talk a little bit more later about the margin trend, but there's two primary reasons why we see a little bit lower margin. One is the accounting change, FIN 46, and that accounts for about half of the difference, or 0.2 percent. And the other is Japan, the reimbursement cut that we've seen there has also accounted for a similar amount.

Just to remind people of what the accounting change is -- on April 1st of this year, we began a full consolidation of entities, which we owned less than 50 percent but which we, nevertheless, exercise management control and have the primary economic interest. So before we were equity-consolidating those entities, and so we had the income included in our operating income but no sales. So now we have the full amount of sales and income and kind of the double effect is they tend to be a little bit lower-margin businesses. So that's the effect of FIN 46, and you'll see that throughout the presentation.

Nevertheless, we still had a nice increase in operating income, and an even bigger increase in net income of 17 percent, reflecting the very good trend on interest expense that we've seen also in the first quarters of this year. And that goes back to our very good cash flow management and, therefore, our lower debt level, a little bit lower interest expense, on average, than we expected, and the conversion of part of our debt -- a minority part of our debt from fixed interest rates to variable interest rates -- so a really good trend there.

Now turning to the nine months, again, revenue up 10 percent in constant currency. Here, the EBIT margin comparison is a little bit more favorable. We're up 10 basis points on a reported basis and 30 basis points correcting, again, for FIN 46, where we would have been at 13.8 percent. So despite some of the difficulties that we've seen in Japan and Asia Pacific, we've had really excellent performance on a comparable basis for the year in North America, Europe, and Latin America.

Net income plus 24 percent and, again, here we see the good effect of the interest expense trend versus last year in addition to what's happening on the operating income.

Here I'd like to talk a little bit more about operating margins. And you see North America on the left side and international on the right side, and we have the three months. Let's look at North America first. For the three months, we got kind of solidly into the 14-percent range. Again, correcting for FIN 46 -- we would have been at 14.2 percent in North America for the third quarter. And for the nine months, so far, we're up 40 basis points on a reported basis and 50 basis points correcting for FIN 46. So, again, reaching into the 14-percent range, and it really confirms our long-held goal of being in the 14- to 15-percent range for North America and the company as a whole.

Now looking at international, we see for the three months the drop of about 100 basis points compared to Q3 of last year and, again, this goes back primarily to Japan and the reimbursement cut we saw in the second quarter also having an effect for the holiday shutdowns that we had in the third quarter, we normally take shutdowns in our plants in Europe in the third quarter in the summertime. This year we extended them a little bit. We were able to get a little bit better efficiency on our inventory management and, I think if you take a close look at our balance sheet, you'll see that our inventory trend is quite good as well. And so we took the opportunity to extend the shutdown by another few days and, of course, that affects our operating efficiencies and accounts for a minority of this decline in the operating margin.

On a full nine-month basis, you can see that we're slightly up by a comparable basis, excluding FIN 46 and flat on a reported basis of 14.9 percent.

So now turning to cash flow and the balance sheet and our leverage ratio, you can see that we've made further solid progress on our day sales outstanding, in particular, in North America, we were able to reduce, again, by three days, and we're really now among the industry leaders in the U.S. and quite proud of this performance. It's really been a solid sustained concentration on managing DSO, and we've seen the results of that hard work in this continuous reduction.

In international we've done well also. We've kind of stabilized in the low 120-days range and then, in total, for the company, we were able to reduce, on average, by one day. Each day is worth about $15 million of cash flow for us, and so, again, we stay concentrated on this. We feel like there is always room for additional improvement. We've reduced seven days in the last year, in total, for the company, and we think that's just a great performance. And that, of course, is reflected in our cash flow performance. Here is the third quarter, and you can see that the free cash flow at $161 million was another record in addition to the record that we had on revenues and also on EBIT. So a good part of this is working capital management again. So great -- quite a good trend on cash flow management, and if we look at the nine months, we see that we've just continued the trend already established during the first half. Our free cash flow at $417 million is excellent. It reflects the overall improvement in operating earnings that we've had, a very good working capital management, and then also kind of a selective approach to investment -- a disciplined approach to investment. So we've had the good cash flow results.

With the $343 million of cash flow after acquisitions, we've been able to reduce debt by over $200 million, so far, this year. Remember, that the 343 is also used for paying dividends, which we paid earlier in the year.

So I wanted to show some historical perspective, and what a sustained improvement in the cash flow management we've really had. If we go back here to the year 2000, and we look through 2002, you can see that our operating cash flow -- so the top line of the previous slides that I've shown, was in the 9-percent to 10-percent range. When we look at the full year of 2003, remember that we had a big, one-time effect in Q4, and that was -- those were some liquidity that we generated through some hedging gains in Q4 of last year. But if we look at a comparable basis, the first nine months of 2003 and then the first nine months of 2004, you can see that we're solidly in the 12-percent range. And we've really increased from a level of 9 percent to 10 percent to around 12 percent on a sustained basis, and we're very proud of that performance. And, again, it goes back to our operating income and our working capital management and, again, selective investment policy.

Now, here is something also that the company is very proud of. You've seen this in the FAG presentation, and here it is for Fresenius Medical Care -- we've reduced our leverage ratio, if you look down on the bottom right, to 2.34 at the end of Q3 from 2.76 at the end of last year. In the middle of the chart, you see the components of that decrease, and you can see, then, the more-than-$200-million of debt reduction that we've had.

Again, this is really exceeding the goal of 2.5 that we have established already for 2005. So here we are in Q3 of 2004, and we've already gone straight through the goal of 2.5. So something we're very proud of as a company, and we think it's been just a great performance. And to emphasize the point just a little bit further, we've got another new chart here showing, on the left side, the blue bars with the absolute amount of debt and then a line in that chart being the annualized EBITDA performance. And you can see that we're really working on both sides of the equation. We're increasing operating income, at the same time reducing debt. And that's what's driving down our leverage ratio so dramatically.

If you look on the right side now, you see that we were kind of stabilized around 2.9 or 3.0 for quite a long period of time -- 2000 to 2002 -- and that was really the period when we were making a lot of investment to establish our global network, expanding a lot in Latin America, also Asia Pacific, also parts of Europe, and we were spending a lot more. We also didn't have the kind of operating earnings that we're seeing now, and we really started to focus on working capital management around the 2002 timeframe, and it worked on it on a sustained business, continued concentration on that, and you see the benefit of it in the chart after 2002 -- continuous improvement in '03 and then further in 2004.

So as a last chart, I'd like to come back for the guidance that we have for the year. As Ben mentioned, our previous guidance on net income growth had been mid-teens. We've now increased that again to high teens. We've had 24 percent for the first nine months of the year, but we're also looking at a very strong Q4 of 2003. So we feel like high teens is going to be a good goal and an excellent performance for the full year, and we, again, confirm our capital expenditure and acquisition budget at, respectively, $250 million and $100 million.

I think we can now open up for questions. Hans, the first question.

I had three questions, if I may. Firstly, you've had a very positive development of your revenue for treatment, but one might argue not quite as positive as your close European competitor, and you commented that you have seen a major improvement coming from the contracting, which, I presume, is private, to pay a contract. What do you see to actually race your drug utilization or any plans to do that? Because, clearly, that has been a very significant driver for Gambro over the last year. That's my first question, and I'm saying that in the light of my understanding is that Gambro is really finding new ways to legitimately dispense drugs to their patients, which is what we haven't really seen forever in this industry.

Secondly, I just want to get a sense for what is happening in Japan when you talk about a reorganization -- if this relationship be a financial relationship with this company as a joint venture partner or what is the actual reorganization referring to? And if you could also remind us what the actual price reduction was, on average, for your product range in Japan.

And, thirdly, it's the question I have, but could you also refresh our memory when the actual payment to the W.R. Grace settlement trust is likely to take place? To my knowledge, this is certainly a year overdue compared to your original guidance about two years ago.

Thank you for the excellent questions. As far as the drug utilization, we have had a program of basically best practices in terms of drug utilization. We have clearly stayed with that. We were interested in seeing where the MMA falls in the next week or so. So at this point we're very comfortable where we are. Yes, it has some sort of penalties with respect to we're practicing what we preach but, at this point in time, that's where we are, because we believe they're best practices. Now, as far as this last quarter of sequential growth, that's primarily contracting because, as you monitor these with our program, you go through sort of little cycles, and this was a down cycle in terms of EPO (ph) utilization.

In terms of the Japanese situation, we basically saw between 10-percent and 20-percent reduction, depending on the model in the dialyzers in Japan. And, again, this is a two-year. We don't expect that to be quite severe two years from now, but we have looked at our selling techniques, we've looked at our joint venture. How do we essentially compensate for that and return to profitability? So those are the things that we've done in Japan. None of them are totally major, but they are coping with the price structure we expect to see in dialyzers on a going-forward basis.

As far as W.R. Grace -- again, our expectations would be sometime in 2006, but, again, there was some discussion about they were ready to advance their reorganization plan this fourth quarter and so if that happens it may be late 2005. So somewhere in that timeframe is our best guess today in terms of when that payment will be due.

Are there any -- there's no extra interest you would have to pay?

No. This was an excellent -- you know, I think back now, it seems like almost 10 years, but it really was an excellent agreement on our part. There is no interest, it's fixed, and, at this point in time, if they don't want to have us pay it for another 10 years, that's all right with us.

Could you give us your logic for -- if I understand you correctly, and this is my interpretation, what you're saying is that you don't necessarily want to raise drug utilization in anticipation of the MMA coming in next year because they may not be quite as favorable financially to you. Is this a consideration that you have in terms of your drug utilization? Or why would you be different than what Gambro is, where we see perhaps even a 20-percent increase in average drug utilization year-on-year for Medicare patients?

Well, again, we have a corporate integrity agreement, we have best practices, which we review every quarter with CMS and the OIG, and so they know exactly what we're doing, and we believe they're the best practices, and so we follow that. And if it turns out that there is a medical reason to change those practices, we will look at it, but, at this point in time, we'd be basically (technical difficulty).

And just one last question on that -- assuming that you would agree with your payor that there is a medical reason that can be justified of raising your drug utilization in a similar manner, how would that actually be rewarded under the new reimbursement system, in your opinion?

Well, again, we'd have to see the new reimbursement system and, again, we're no providing drugs for financial reward, we're providing them because they're necessary. And, at this point in time, I really believe I've been straightforward over the last three or four years, if this is a medically indicated drug, we'll give it, we'll monitor the utilization of it both on the high and the low, and that we've done. And I think the fact that there is always someone out there willing to subpoena you to look at what you're doing, always ends up being the most prudent to follow your practices. So I think we're at the right space at this point in time. If the government wants to basically provide a higher reimbursement to us in terms of the composite rate, we'll, of course, accept it. But, at this point in time, I don't know where that's going to end up. Everything we do, we follow DOKI (ph) standards, and we follow the programs.

(indiscernible) going a little bit in the same direction, but maybe phrasing it differently, you have a relatively low vitamin D usage PTH test equal usage, let's say. Let's assume now, always in respect to the subpoena, and we have heard so much about the rest of that, but also in respect to NMA -- could that turn out to be a kind of competitive advantage in the future in the sense, for example, that your competitors have weaker outcome data? If they have to cut back in equal usage, for example, or if they are limited in their financial competitiveness, or whatever on pricing issues in terms of that -- is that something you would expect?

The second question is about Ultra Care benefit -- honestly, I cannot see so much the benefit if you talk about same-store U.S. cove (ph), that's around 3.2 percent, but you had lower mortality going from 3.3 to 3.4 years. So that is already part of the same-store cove (ph) if I add that PPH (ph) is longer in your clinic. I don't see the big move into your clinics. When does that happen? Or is it more that patients still go to the neighborhood clinic independently what the concept is, independently that you claim that a mortality or outcomes or whatever.

Okay, let me discuss the Ultra Care, and then we'll go back to your other thought, which I have to think about a little bit. The one issue on the 3.2, as I mentioned, if you look at the providers -- the major providers and do the same-store calculation, it really turns out to be around 2.7 for this quarter, because I think one of the providers showed a negative 1 percent and a 3.2. So I don't think the 3.2 is indicative of, really, where the market is. But if you do the same calculations, we're still 10 percent to 15 percent above the market in terms of intake of patients with far less de novos. So I think that you'll see next year, after the certification, and as we start to grow de novos, you'll see us continue to exceed the market by 10 percent to 20 percent. Now, that doesn't show up as a lot of cash on a quarter-by-quarter basis, but it certainly does, over time, it adds up. So I think we're still, even today, showing the impact of the Ultra Care but the numbers are a little bit difficult to get our arms around for this quarter because of various things.

Could you accelerate that in the sense that you make advertisement and say, "This is Ultra Care. Come to our clinic," some things like that?

We just started the advertisements this quarter. In fact, it's in the -- some of the magazines, some of the trade journals. But our whole policy, and I agree with the team, is they have to train the caregives on what we are providing so that when someone says what's Ultra Care about, you can actually tell them, show them, and I visited the clinics that have been certified, and it's great. Everybody there knows exactly what it is, and so next year you'll see, with the certification completed, we'll increase the de novos, we met our leverage ratio, you'll see us just continue to step away. But, even today, I think we're growing in the in-center growth above the market okay.

Now, back to your other idea -- Andreas, you always come up with interesting ideas. I haven't thought about that one, so I can't really comment, but let me take it under advisement in terms of how you take this and turn it into a positive. I've really been looking at trying to make it go away as a negative, not the other way. So I'll study that over the weekend and give you a call. On Sunday, is that all right -- call you Sunday?

Any further questions? Yes.

So, Andreas, maybe I do just add one small thing on that last point -- the intent of MMA is to be neutral. So if your assumption is right, that we tend to be on the lower side of utilization, and the regulations do turn out to be neutral then, yes, mathematically, it could potentially have some positive effect for us versus others. But it remains to be seen, pending the final regulation.

While we are waiting for further questions, Ben, I think we have one from the Web.

Okay, from Dan Mahoney. The question is, "You are generating a lot of free cash. Given that you've reached your debt-to-EBITDA-to leverage ratio a year early, what are you going to do with the cash? Can we expected increased dividends or increased acquisitions?"

Basically -- we're on the Internet, right -- I see us using that as investment into our business, okay? Yes, we expect, next year, that we will invest more in the business than what we are this year. We are investing about $350 million, $250 million capex and $100 million of acquisitions. We clearly expect to exceed that next year.

Any further questions? I think Hans has a follow-up question.

Two follow-up questions -- the first one, the very impressive development you have in your working capital; in particular, the accounts receivable. Could you just talk a bit about what is it technically you are doing to sustain this fantastic development over such a long period of time? Because I sort of struggle to believe that chasing up the payors over a period of 18 months and phoning them up and trying to get them to pay is creating this tremendous development of such a long period of time, but just technically, I want to understand what you're doing there, and is there any sacrifice to asking your customers to pay much earlier?

I think the answer here is we concentrate on it a lot continuously and intensively, and we're talking to customers more. As soon as the customers are late, we're working on doing what we can to get the payment. Also, when we negotiate contracts now, again, we have the potential financial tradeoffs, but where we can, and it makes sense from a financial standpoint, we are building in shorter payment periods in our contracting.

I presume, then, the payor would have to pay less if they pay within a certain time period, is that the idea, for instance?

Usually, but not always, but sometimes. But there would always be in that benefit for us, otherwise we wouldn't try to negotiate a lower number of payment days.

And maybe you remember, I asked this last time, but you have 18-percent indicated volume growth, or single-use dialyzers, in the U.S., and this is the only figure you mention on that slide of U.S. dialysis products business where you talk about volumes. One could sense that we are talking about the less-impressive growth in the value of the sales of dialyzers. Could you comment on that -- what the actual selling price changes are in the single-use dialyzer business in the U.S. year-on-year?

Yes. As far as the U.S. single-use dialyzer is very satisfied because, remember, the pricing of the single-use is clearly not at the same level as the reuse dialyzer, and if you look at it, I also showed the combination of the dialysis in the machines, and we've got almost a 70-percent market share in machines. So there's always someone trying to relieve you of a little of that. And so we essentially are growing at above market at 5 percent in the revenue, but that didn't tell the whole story on the single-use, and that's why I threw in the unit sales on the reuse, because we continue to see more and more shifting, except for three -- except for, really, two groups now that continue to push for reuse dialyzers. We see a major trend almost everywhere else.

Just to clarify, you're talking about 18-percent increase in volumes, but could you give any indication -- do you have to provide price concessions to actually get customers to adopt this concept? One could imagine that, given the additional material costs for the single-use dialyzers and that one might actually see negative changes, average selling prices, on the single-use dialyzers, over time.

Well, there's really sort of two bands of dialyzer pricing. We're talking mainly the U.S. -- the two bands -- one of them if it's a reuse dialyzer, you're $15 to $20 because someone will just reuse it for the number of times they need. If you're talking single-use, you're down in the range of $10 or very high in the $9 to $10 range. So there's just basically two different prices, and we essentially are offering products at both of those prices, but in the $9 to $10, when you look at all the issues that are involved in the small, independent clinics to reuse dialyzers, it gets to be quite an attractive situation to go ahead and go to single-use in that $10 range or slightly sub $10.

And the 50-percent market share, I think you mentioned in the independent segment, does that refer to all those other clinics outside the four major providers? Is that how you define it?

Yes, that would be the independent clinics -- the non-four major providers.

Thank you.

Okay, I think we have a further question from (indiscernible).

(indiscernible) just three questions -- firstly, in the international area, your revenue for treatment declined by $3 sequentially. Actually, it's the first time since the last seven or eight quarters. What was the reason for that, as you especially mentioned some reimbursement increases? And, secondly, also in the service business but in the U.S., could you comment a bit on the cost per treatment? They were flat sequentially, but I think in the first half you had some -- let's call it "one-time costs," like pensions or bonus payments in that number. Are there any special items in the third quarter here as well, or is it you'll handle that, going forward?

And the third one -- an easy financial question on the minorities that turned negative, i.e., compared to previous quarters, it was a $1 million swing. Is this what happened -- is this going to be sustainable? Thanks.

I'll take the first one and give the other two to Larry. The revenue for treatment in the international is not a trend. It depends on the mix of countries. You know, we're dealing with 25 different countries that different reimbursement scenarios, and so what you're seeing is the growth year was basically in the range where the reimbursement in that particular area was less than the average. So this is not a trend down, this is a step function here, depending on the growth and what area that we're expanding in.

Okay, the other two questions, let me turn them over to Larry.

So on the cost-per-treatment in the U.S., there's really two main components if we look on a year-over-year basis. The increase has been about $9 a treatment, and most of that, more than half of it, is due to increases in personnel and fringe costs, and the rest is primarily an increase in ancillary costs.

There was a one-time impact in Q1 of this year. We did not have that in Q2 or Q3. We talked about staying at or around the $250 level. We were at $252 in Q3, and it's likely that we're going to stabilize around that level, at least through the end of the year.

On your question on minorities, we did have about a 1 million swing on minorities. That goes back primarily to our partnership in Japan. We have a legal entity, a joint venture, in which we own 70 percent and, again, due to the well-known reimbursement cut issues in Japan, that entity achieved a loss in Q3 and, therefore, we had the reduction in minority interest.

We have one or two more questions.

Let me take the next question from the Internet. The question is -- "The question on investment-grade status -- presumably the subpoena FMC has received will ultimately lead to a settlement and thus a net-debt increase. How will this impact your ability to become investment-grade and how will the uncertainty affect the discussions with rating agencies?" Again, I'd like to go back to the subpoena that we talked about. I think we had a conference call on it. Again, we're quite comfortable that there will not be a material issue for us. We operate under a corporate integrity agreement. All the questions that we're asked here really are about our status as far as a group providing ancillary drugs that were clearly in the right place at the right time on this. We have a corporate integrity agreement; we have basically a compliance program that is reviewed with the OIG on a quarterly basis, and we have external audits on a yearly basis. So I don't believe this will have any effect on our investment grade status or on our debt status in the foreseeable future.

The next question is -- "Does management anticipate a credit upgrade from the credit agencies imminently? If so, does management have ambitions for a higher credit rating than investment grade?" Larry, why don't I go ahead and give you that one.

(laughter)

Thanks, Ben.

Anytime.

We do have aspirations to be investment grade. We are in close contact with both rating agencies -- Moody's and Standard and Poor's. You know, we can't predict when or actually if we'll actually be upgraded to investment grade, but we certainly think that we've met one of the conditions that we talked to them about in the past, now getting close to 2.3 on the debt-to-EBITDA ratio, and now we've gone through our budget process, we'll be talking to them late in the year to talk about our budget for next year, and our long-term plan, and, again, I think it's a very positive development that the company has had in our long-term plan (technical difficulty) to us that the pre-conditions are therefore an upgrade to investment grade sometime in 2005.

In terms of aspirations to be even higher than investment grade, we really haven't discussed that too much. I can't imagine that we would aspire to be double A or triple A. Let's first work on getting to triple B minus.

Are there any further questions?