Fresenius Medical Care AG (FMS) 2005 Q2 法說會逐字稿

Attention, please. I would also like to welcome you. Good afternoon, everybody here, for Fresenius Medical Care's second quarter and first-half year conference call and analyst meeting. The release and the presentation, as always, is available via the Web. My job is also mention the Safe Harbor statement at the beginning. This presentation today includes certain forward-looking statements. Actual results could differ materially from those included in the forward-looking statements due to various risk factors and uncertainties that are mentioned in detail in the Safe Harbor statement, which is within your presentation as the second slide here. These and other risks mentioned there in detail, and uncertainties are detailed in the Company's reports filed with the SEC Exchange Commission and the German Exchange Commission, Deutsche Börse. Please refer to these SEC filings.

Concerning our Q2 2005 release and the press release and at the end of our presentation as you have it in front of you, which we use today, we included reconciliations of all the U.S. non-GAAP measures used to the most comparable U.S. GAAP financial measures. Please use these measures in compliance with the Section 401 of Sarbanes-Oxley.

Let me also point out that those that are participating via the audio lines today, please note that during the presentation everybody is in a listen-only mode. And we open up for questions after we have handled all the questions here with the audience.

So with us today is Ben Lipps, Chief Executive Officer of Fresenius Medical Care. I can cut short the introduction. And Larry Rosen, the Chief Financial Officer. That is all from my end. Ben, the floor is yours.

Thank you Oliver, and welcome, everyone. We are pleased to have you with us this afternoon. Basically, I will cover the business update, and Larry Rosen will cover the financials for Q2 and for the first half-year. And then as Oliver said, we will open it for questions and answers at that time.

Now, before I start, I would like to say that we had an excellent quarter. I think you have seen that this morning. I am very pleased with the results. And the good part about it is that in each of the regions of the world, we actually were growing above market. So this was organic, driven, and it was excellent results for the quarter.

You can see on the first slide here that our revenue for the quarter was about 1.7 billion, up about 8% over last year in actual currency, or 6% in constant currency. Our net income was up 15% to $116 million. So again, a good quarter. Larry will give you far more details into the financial picture on his part of the program.

I would like to talk a little bit about our strategic projects. Again, we have two significant strategic projects. With respect to the acquisition of RCG, we are making very good progress, although we are in the early stages, so it is a little hard to measure that progress on a day by day or week by week basis. We have received our second request from the FTC. It was expected. We are in the process of filling out -- basically supplying the information.

We have had three senior executives from RCG agree to join us after close. We are very pleased with that. They add significant experience and talent to our management team in North America, which we believe also is world-class. And this helps also in the integration process. We have 12 teams developing integration plans. It is going very smoothly. Good camaraderie, good working together, I think all of us have clear financial goals that we have and we have clear patient care goals. So this is going very well.

We are still optimistic that we will close this transaction in the fourth quarter of 2005. So at this point, I can only report that we are on track as we see it at this point.

Turning to our second major project, which actually is two projects within one, and this is what we call moving to the one share class. And of course, within that project, there is changing this legal structure of Fresenius Medical Care to a KGaA, and then secondly, converting the preference shares to ordinary shares under that new structure.

We have cleared a number of legal SEC hurdles so that we could actually send out the invitation for the extraordinary general meeting, which is scheduled for August 30th of this year. And again, we are very pleased we have been able to stay on the schedule we set for ourselves in May. And we also are pleased to see the positive reaction we are getting from shareholders on these projects as we have basically road shows and one-on-one discussions.

So we are very comfortable at this time that we are on the right track with these two projects. I am particularly gratified by the fact that our operations continue to move along excellently while we are actually involved in two very major projects, three very major projects.

Moving to the next slide, I will give you a little insight into the revenue for first half. Basically, we are running along the same path that we work for first quarter. And what we have by basically the first half -- our total revenue is around US$3.3 billion. That is up about 9% in actual currency, or 7% in constant currency. North America has turned in 2.2 billion revenue -- again, up over 7% year-over-year. And again, the organic growth in North America is 6.5%, which we are quite proud of. And North America is actually performing very well.

Now, the contribution to that growth is coming from both the dialysis services and from the products and hospital group in North America. So it is fairly well balanced.

In the international region, we turned in a revenue of about $1.07 billion. Again, very strong actual currency growth of around 13%; constant currency, 7%. Looking at Europe, we saw the same numbers -- 13 and 7. But when we look at the actual market growth in Europe, this is clearly above the market, so the European theater continues to do very well in terms of growth and also in terms of profitability. So we are very pleased with the activity in the European group as well as the North American.

Turning now to Asia-Pacific, you can see that we grew at 3% in actual currency and minus 2% in constant currency. Again, that is driven pretty much by the issues that we had in Japan, which we believe we have handled, and we will seek the situation improve there because of the current -- because of the reimbursement change last April. But I would like to point out the Asia-Pacific outside of Japan is growing at a 12% constant currency rate or a 19% actual currency. So the rest of Asia-Pacific is doing very well and growing quite well.

And of course, if you look at Latin America, it too is around 122 million in sales. It is a sizable operation. It is growing at -- you can see for the half-year 19% in constant currency. It gets a little bit of the boost from the FIN 46 which I talked about all last year, but we essentially don't have that anymore. That accounting change was completed as of April 1st.

If you look at the actual organic growth in Latin America, it is an impressive 12%. So we see both of those regions growing very well. They are small, but they are growing well. But North America and Europe are basically carrying about 90% of the business at this time.

Now, let's look at the service business on a global basis. And I will look at Q2 for the service business. Essentially, what we see is in the worldwide global service business, we are growing at 6%. And it is basically the same, either constant or actual currency.

Again, if you look at North America, you can see that our service business is growing at 5%. The market is probably growing at about 3%. So what we are looking at here -- and there are very few, if any, acquisitions in this number. So our organic growth, then, in the service business in North America is around 5%. And we are quite pleased -- and this is organic revenue growth. We are pleased with that. It is clearly coming from increases in reimbursement and from increases in the number of patients that we treat.

We also passed a milestone in North America this quarter. We ended up with a revenue in the service business of $1 billion for one quarter. So that is the first time that we ever, in the service business, passed the $1 billion mark in one quarter.

Turning now to international, you can see that our actual increase in international service business was around 13%. And if you look at it in constant currency it was 7%, which we believe is again above the market and quite impressive. So basically, our service business, then, organically has done very well so far this year and is growing, we believe, at or above the market.

To take a little better -- closer look at the actual organic growth and the metrics that make up the organic growth in the service business, we will turn now to slide 8. And what you see on slide 8 is basically at the top of slide 8, you will see what we call the organic growth -- revenue growth. And you will see that globally, we are growing at about 6%. North America is growing at 5. And international is growing at an impressive 12% -- around 12%. That comes from the 7% growth that we are seeing in the same-store growth in the international area. And again, we see that basically that is clearly above market. And we are quite pleased with the continued growth in our international service group.

If you look at the bottom of this slide, you'll see that we performed in this quarter almost 1.5 million treatments in international. So we clearly have a very large business of about 450 clinics. And it is performing very well.

If you look at the U.S. operation, you'll see that we essentially had a same-store growth of around 3.3%. But that includes acutes and PD -- peritoneal dialysis, as well as in center. And as far as measuring the effective UltraCare, which is clearly in center, we had a 3.6. And again, we are growing clearly above the market, which we are estimating somewhere in the 3.0 range. And you can also see, then, that we have tacked on basically a couple percent in terms of revenue increase.

And if you to the bottom, then, you'll see that our revenue per treatment in North America is around 290 -- basically $94 a treatment. Internationally, we are up to $131. That is, in actual currency, a 7% increase in the international year-over-year. So we are also seeing opportunities to continue to basically get improvement in terms of reimbursement in the international area.

So by and large, we are quite pleased with momentum in our service business on a global basis, and both major regions are performing at or above the market.

Now, taking a little closer look at the U.S. operations in terms of revenue per treatment, on the next slide, which is slide 9, you can see that we have a nice, steady growth in terms of our revenue per treatment. We finished the second quarter at $294 per treatment. That is up about $5 from last year.

And as we proceeded through and projected this year in terms of revenue per treatment, we said we thought we would operate in the 1.5 to 2% increase. And again, that is basically more than that in the commercial side. And we got a Medicare increase this year. So you can see this will calculate out around 1.7%. So we are right in that corridor that we expected, and we think we can continue essentially to stay in that corridor.

Now I do want to mention then -- if you look at our investor news, and you look at the back page, you will see the medical quality comparisons. I will not highlight them now, but we are in the service of taking care of some very sick individuals. And this is a lifesaving therapy. And if you look at our actual quality measures, they are very good. And we have actually reduced our hospital-based hospital days one day this past year. And we continue to see improvement in our mortality.

So we are doing all the right things from a quality standpoint of basically the treatment. And at the same time, we are essentially accomplishing our financial goals. So we are quite pleased with what we see, then, in the U.S. service business.

Now, turning to the product business on a worldwide basis, Q2 was a very good quarter for us. The total revenue for products grew at 9% in actual currency and 6% in constant currency. That is actually above market. We look at the market on a global basis (ph) (technical difficulty) growing probably around 4% in terms of actual revenue. So that was a very good quarter for us.

In addition, we saw our external growth actually be in the range of 11%. So we did a very good job increasing our market share around the world this year with our products. And if you look particularly at the international area, you will see that they grew by 11% in actual currency and 6% in constant. So again, it was a good, solid performance in the international area.

The actual star goes to the U.S. area this time. Essentially, the U.S. area grew at 6%. If you looked at the external business in the U.S., it was clearly double-digit, which we haven't seen for awhile. And part of that, I will show you later, was just basically our products have been very well accepted, not only in the international but in also in the U.S.

So we clearly feel -- I feel very comfortable that our third generation products are being accepted around the world, and we saw a very good product quarter. I don't expect that quarter to continue. I expect us to grow somewhere in the 6% range, which is still above the market. But we had a very good quarter in second quarter.

Now, let me talk a little bit about why we saw that, and just a little more information in terms of highlights. If you look at slide 11, you'll see some bullet points here in terms of highlights. If you look at Q2 in North America, we had one of the best quarters ever in hemodialysis machine sales, especially the external customers. And I think if you saw some of the announcements, you probably understand that by now. And we (ph) had a 30% increase in our sales year-over-year for hemodialysis machines.

Secondly, we continue to see strong momentum towards single use. We had a 26% increase in our single use dialyser business year-over-year. And we are now up to -- about 55% of the independent market is on single use. So again, both of those two products drove the performance in second quarter for North American products business.

We have a couple more launches of products this year, basically this note here of Optiflux E-beam. What it is -- it's the Optiflux dialyser that we will now sterilize using E-beam rather than EtO. So it is basically an advance on the products we have. The reason for that is that it will save the amount of rinsing solution that you need in preparing the dialyser for use. So it is a cost-saving aspect for the clinic. So we think that it will be well-received.

We also have a product being approved or hopefully will be approved, we believe it will, for the home market. In this is our 2008K modified for the home business. Now clearly, I personally believe the home business is a very limited market. When I say home hemodialysis, I think it is a limited market. There are maybe 1500 patients to 2000 patients on that market. But it is a market that we clearly -- if there is an interest for physicians to send the patients home, we will clearly have a product for that.

So the product business, then, had a very good quarter. And I think that it is probably -- they will drop back into the 6% range. But they had a great quarter. And they are doing very well with the dialysers and with machines.

Turning to the service, I want to point out -- as I mentioned, the continue revenue increase, 1.7% -- excellent performance by the group. Steady every year, 1.5 to 2%. We talked about the in center. The one thing I didn't talk about -- the group has done a very good job of what I call cost management. You could see our cost in terms of per treatment only went up 0.7%. That is very significant when you look at health-care costs and a number of other activities that drive costs up.

And the final point I wanted to add here is, about three years ago the service group came up with a new concept of opening our clinics up at night and actually dialyzing, having patients who want to come in, sleep overnight, and dialyzing in our clinics. And the reason for that is you can actually have a very long dialysis -- in other words, you could have a six-hour dialysis. So when you look at some fairly large patients, 100 kilos plus, rather than go to four treatments a week, there was an opportunity for them to dialyze overnight.

So we set up some pilots. And basically, everyone liked it. The nurses liked it. A lot of people who would like to work during the day actually looked at this as an advantage. And I would like to say that the team in North America now has over 500 patients on this therapy. And it is growing about 20% a year. So this is another alternative basically to treat patients and give them an opportunity.

Now, it is obviously quite attractive for us, because those facilities just sit there and are not used at night. So anyhow, that is what we call in-center nocturnal dialysis. And so right now, I believe we are the leader in that area. And so right now, I believe we are the leader in that area, and we are seeing -- we have about 500 patients and it is growing rapidly.

So those are the activities. Very pleased, then, with the activity in North America this past quarter. And I think that basically, everything that needed to get done got done, even though there were many, many meetings on -- integration meetings and basically interactions with RCG, which were all very positive during the quarter.

Now, turning to highlights for Europe. Again, Europe continues to have exceptional growth and very strong profitability. It is our premier area. One of the things that I mentioned in the past is -- okay, what is driving the growth? And one of the growth drivers in the European theater is our FX dialyser. On a unit basis, we have seen an increase of 30% year-over-year. Our peritoneal dialysis products are doing very well. We have introduced them into the U.S. Also, they are doing very well in the European theater. We are seeing addition of patients around 11%, which is way above the market -- quite pleased.

But I think the major accomplishment and another major accomplishment during this quarter was we launched the next generation of hemodialysis machines. This is the 5008. And if you happened to attend the EDTA, I think you would have seen it firsthand. This machine has many advantages and features.

But also, in addition to all those advantages and features, it offers a complete menu of all of the latest and what we project over the next 10 years will be the advanced therapies hemodialysis filtration (ph), a number of therapies that we think will basically find their way into the dialysis field.

In addition, in developing this, Dr. Gotti (ph) led the development of this product. We also looked at everywhere in the world, we are having a nursing shortage. We keep growing the number of patients, but we are not generating enough nurses to balance what we need. So we have to find ways to reduce essentially the labor. So this machine has a number of ease-of-use opportunities -- features designed into it that are really unique. So we think that it basically is also -- the features are driven by the market, and also by the therapy.

Now, the thing that is the most exciting is that we have actually had this machine for two years in our own clinics and running them. And this is the first time I have ever seen the launch of a machine where we had over 200,000 treatments on the machine when we brought it to market. And so I think this is -- and that is why you will see this is a very successful launch, because essentially we worked out the development of bugs come with the development of all new machines. And this one starting out with 200,000 treatments behind it, which is very significant.

So we have had a very good quarter in Europe in the products area. And not only that, we have launched the next generation hemodialysis machine during this quarter.

Now turning to the service aspects of the European theater, this -- we look at basically real opportunities for growth in Eastern Europe and North America in the service areas, and all of Europe. To give you some idea of why we do that, if you look at basically slide 12, you will see that the organic growth in the European theater is around 14% in terms of organic revenue growth in the service area. Now one of our star areas is Eastern Europe, and it is closer to 17%. But this is a very significant number. And this is what is carrying the 11% that I showed you on the international theater.

We have also seen a positive environment now. It is now not easy. These things take a lot of time, a lot of work, a lot of discussion of quality. But we have seen a reimbursement situation that appears to either be neutral or positive. And we have seen some reimbursement increases in three countries.

So by and large, we are very pleased with our activities in the European theater. We also believe that we are on the right model in the European theater of combining service and products. And so this was a good quarter for us. But it is one was one that we think is just one of many to come.

So in summary then, we saw a strong quarter. Our organic growth was 6%. It is clearly, we believe, above the market. We are developing revenue per treatment in both of the theaters. Bottom-line basically was at 15% and Larry will talk more about some of the other operating financial performance. And our cash flow was solid. Larry will talk about that.

But by and large, as we looked at the end of this quarter, we felt that we probably needed to upgrade our net income guidance from low double digit to 12 to 15%. And that is what was discussed by Mark and Stefan (ph) earlier today.

So we feel that we are probably safe in doing that. And we feel that we are in pretty good space as far as being able to not only do the strategic projects, but to also basically meet our commitments in terms of our ongoing financial performance.

So I think this point, I would like to turn it over to Larry, and he will take you through the numbers.

Thanks, Ben, and hello to everyone. I am very pleased to be able to report such a good set of results today for Q2 and for the first half of the year. I think it further validates that we are really on the right track with our strategy.

So let's take a look at some of the financial details. First, the P&L for Q2. As Ben discussed, reported revenue was up 8% in Q2, 6% in constant currency, just in line with our guidance of 6 to 9%. Our EBIT was up 12%, and I think it is encouraging that we are getting leveraged down through the P&L, and that our operating income and also our net income is increasing more than the revenue increase. It shows that we are able to get some leverage on our cost base, on our fixed costs, and able to increase margins, which we have clearly done here in Q2, and are now delivering on our promise and forecast to be able to show some incremental and continuing operating margin increases.

We have also said in the past that we wanted to be in the 14 to 15% range here in Q2. We are at 14.2%, and at 14% for the first half. So we are starting to get into that range. We feel like there is more perspective for continuing incremental improvement, and that is exactly our plan.

Net income was up 15%, and in addition to the very good operating performance, we also had very good continued performance on our financials and our interest expense.

Now, looking at the whole first half, it looks quite similar to Q2. We had 7% constant currency growth, again, right in the middle of our 6 to 9% range; an increase of 40 basis points on our operating margins; and good leverage down through the P&L with 17% net income growth for the first half.

I would like to spend some time on this chart, because I think it is important to understand what is driving our operating margin performance. Let's take a look first at North America. Here, we were flat in the first half -- the whole first half, with 13.7%. We still had the drag of the FIN 46 comparison in Q1. And you can see in Q2, we have made some incremental improvement, and are now at the 14% level.

And there is a number of contributing factors. First, on the positive side, we have an increasing revenue per treatment by around 2%. Part of that is due to improvements in contracting on the private side. And then we had the 1.6% increase coming from the MMA legislation on the Medicare side.

We have been able to improve margins because we have had very good control on our costs. Included in our performance with 2% revenue per treatment growth is only around 1% or less than 1% cost per treatment growth. So that is contributing to help margins.

We also had very good manufacturing efficiencies. As we have increased volumes in the U.S., as Ben has showed, the increases in the key products that we have had were able to get some economies of scale in our manufacturing plants, and that has also helped out our margins.

On the other side, there are some negative factors. We have had higher fuel and delivery costs, higher insurance costs, and some higher benefit costs, primarily health care in North America. So all in all, some incremental improvement, and we expect that to continue into the future.

On the international side, the results were a little bit more dramatic -- 160 basis point improvement in Q2, 90 basis points for the whole first half.

Ben mentioned the reimbursement increases that we have had in Turkey, in France and in Portugal. Also in Europe, the plants are performing very well. We are getting very good manufacturing efficiencies, in particular at our large plants in Germany. We have had a little bit lower bad debt expense in Europe, in the international sector. And we have had a little bit of tailwind, especially in Q2, from currency.

Offsetting factors were some minor restructuring costs that we had in Japan in order to reduce the workforce in Q2, and also a minor reimbursement cut in Taiwan. All in all, an excellent performance, a dramatic increase in operating margins in the international sector.

With that, let's turn to the balance sheet and our cash flow development, another subject that I would like to spend some time on. Here first is the DSO performance, and you can see we have gone down another day in Q2 of this year. And this brings us really to industry-leading levels. 65 days in the U.S., I think, is the lowest reported figure that we have seen from the major chains. And 123 days, given the mix of countries and businesses that we have in international, is just in line. And we think it is also leading what we take into account the mix of countries.

As predicted, we continue to make incremental improvement, and we have talked about one to two days per year. And we think we are just on that track. Improvement is less dramatic than we have seen in the past years, in particular 2004 and 2003, and I would like to you to keep that in mind as we talk on the next chart about our cash flow development.

For the first six months, you can see on this chart, of this year, we are down one day in DSO. And as we compare that to our performance last year, you can see that we were down about three days. Each day is worth about $15 to $17 million. And so three days really contributed heavily for our cash flow performance in '04. And we are still having a good performance, but what we do the cash flow comparison, it looks less impressive.

Now let's talk specifically about some of the factors affecting cash flow. If you remember in the first half, we talked about the onetime tax payment in the U.S., a little bit more than $40 million. In Q2, we had primarily timing issues. But they were just that -- only timing issues.

We had, for example, a decrease in accrued taxes payable. That was one of the bigger timing factors that we saw in Q2. We also had a little bit of an increase in inventories in advance of the summer shutdowns. And since the business is growing so well, we built a little bit more inventory than we did in past years.

Then we talked about the lower rate of improvement in DSO's. So we improved by one day, but last year we improved by three days. So when you do the comparison with the previous year, you get a slightly negative effect. Overall though, the underlying solid performance on cash flow continues notwithstanding these timing and onetime effects that we have.

To develop that point maybe a little bit more on this chart, if you look at the operating cash flow, the 268 million that we have had in the first half is around 8% of sales. And if you recall, last year we showed a couple of analyses were we were running at about 12% of sales. And a lot of that was driven by the very fast reduction in DSO that we had last year. Now that that is slowing down a bit, we can expect really to come back to the more 10% range.

Due to timing issues, I think we will see some variation around the 10%, and we see that in the first half of this year with 8%. But I think 10%, maybe a little bit more, is kind of a normalized operating cash flow that you can think about for our business and that we target for our business.

Looking at CapEx and acquisitions, we had almost exactly the same levels as we did last year. But in contrast to last year, we plan to accelerate significantly our spending in the second half of the year. And I will talk a little bit more about that later.

Let's look first, though, at our balance sheet and leverage ratio. We were able to reduce debt a further 100 million in the first half. We had some help from currency translation on our Euro debt. But still, it was down about 100 million. And our leverage ratio is now below 2.1.

Our EBITDA impressed coverage is approaching 7. It is around 6.8. So we are really on the level of on investment-grade Company. And I think if we didn't have the RCG acquisition and the debt financing associated with that coming up, we would have a good chance to be investment-grade in the near-term.

And I think what it demonstrates and gives some perspective that over the next years, with the RCG acquisition, we are going to be able to deleverage quickly. This is a business that generates predictable and high levels of cash flow. And it is exactly our plan to have high leverage at the point of acquisition of RCG, but then deleverage quickly. And I think you'll see steady and continuous progress year after year on that basis.

Let's turn to guidance. All of the guidance that we will talk about is pre-RCG acquisition, and also before the onetime costs that we have started to talk about this quarter related to the KGaA transformation and the conversion offer for preferred stock. We have estimated that that is about $10 million. And again, this guidance is before those onetime costs.

Our original guidance on revenue was 6 to 9%. In the first half, we have had a result of 7% constant currency, and we confirm the 6 to 9% guidance for the full year. Net income -- we are upgrading the guidance from low double digit, given the 17% growth that we have had in the first half and what we now know and think about the second half, to a level of 12 to 15%.

CapEx -- we are confirming guidance at 350 to 400. Even though we have only spent about 100 in the first half, we know of the projects and we clearly are going to accelerate spending on CapEx in the second half. The same holds true for acquisitions, where we have only spent 50 million in the first half, but we are reducing the full year guidance to 150 to 200 million.

So we will spend more in the second half, but not quite as much as we originally expected. Some of that has to do with RCG, where there is some markets where via the RCG acquisition, we really don't need to be as aggressive in acquisitions. So that is the main reason for the reduction in the acquisition forecast.

Now to wrap up, Q2 -- it was a great quarter. I think the Company, the Board, the employees are very proud of the accomplishments that we have had in Q2 and for the whole first half. We are growing clearly above market. We have got very strong net income growth. And it is a great industry.

As far as the acquisition, RCG is and continues to be highly profitable company, and has an excellent fit with FMC, in particular in North America in terms of the geographic fit, in terms of the patient mix. And we are very excited about closing that acquisition. We expect to have the two remaining approvals for that, the shareholder approval of the RCG shareholders, and their meeting is scheduled for August 24th; and the FTC approval, leading to a closing potentially in Q4 of this year.

Then we have the KGaA transformation project and the conversion of the preference shares. As Ben said, we have scheduled our extraordinary AGM for August 30th. And we expect to have both initiatives approved by the shareholders so that we could have a tender offer on the preferred shares sometime in the fourth quarter.

So that ends my presentation. Thank you for your attention, and I think we will open the floor now for Q&A.

Yes. Who might have the first question, please?

I expected you, Andreas (ph), actually. But no? Okay. No questions? Here (technical difficulty) Groschke.

Alexander Groschke again. Just a minor question about the timetable. If all goes well with the RCG acquisition, will you consolidate RCG already in Q4 of this year, or will it be in the next year anyway?

I anticipate that if we would have the closing in Q4 we would consolidate the remaining part of Q4, and then the balance sheet at the end of the year.

Holger Blum from Deutsche Bank. Could you update us on the current reimbursement discussion in the U.S. about the reimbursement of drugs, and maybe provide an outlook for next year, whether you see any chance for another composite (ph) rate increase, or whether we will have to wait until early next year when we might see a decision there by Congress?

I will take that. There are really sort of three activities in Congress right now. One of them is the pharmaceutical reimbursement that I will talk about from the MMA. The second one is that there is the HMA, the EPO which is still being discussed by CMS. And then finally, there is a bill that has been sponsored -- two bills, one in the Senate and one in the House, that are being sponsored by about 90 representatives in the House and about 11 or 12 senators, but growing -- getting momentum growth.

That particular bill, if it finds a vehicle, would lead to basically a slight overhaul of the reimbursement, looking at an opportunity to have an annual update and also a number of CKD programs. So that one is the new legislative package that is moving through. I cannot predict whether that will be successful, but we certainly are seeing momentum in that area.

Now moving backwards to the EPO HMA, we essentially have as an industry responded to it. We have got indications that CMS has listened to our comments on -- basically this is the hematocrit monitoring advisory. And so we believe that win that comes out, that will reflect essentially the input that industry has had. But we think that might come out by the end of the year, but we don't know.

And the latest one, as you know in the MMA, the medical active last year, of 2003, basically they have a program in there where in 2006, CMS can look at ways of reimbursing, essentially, the separately billable drugs. And they have come out with a proposal just earlier this week, at least it was on the net.

Basically as we start to look at that large proposal, we are very confident that both Congress and CMS intends it to be neutral. But as we see the first proposal come out, they are moving to ASP plus 6, which is a fairly common way in which drugs are reimbursed in the U.S.

And so we believe that we need to do more analysis on this package to understand exactly what they are planning to do. And there is a 60-day comment period that is -- basically will start on the eighth and run through September 30th.

So at this point in time, it is very difficult for us to give you any guidance on what this means for next year, except that we believe that both Congress, CMS, and clearly the industry all intend for it to be neutral. And the way that will happen is that as they change the pricing for drugs, they will add the differential as they did last year back to the composite rate.

So it is difficult to call that. If you look at just the beginning numbers they threw out, basically you could assume that it may not be attractive to us. But that is just the beginning and we have to see the methodology. And I don't think there is any intent on the part of Congress or CMS for this not be neutral to the industry. So we will have to wait until we analyze it and go through the 60-day period. Those are the three activities that I know that are going on basically in the U.S. in the Congress.

Due to the planned takeover of Renal Care, you have replaced your old credit facility to a new credit facility of around $5 billion. Could you give us some hints about the financial covenants of this facility? For example, the old facility, there was a limit set of $180 million for dividend payments. Do you have another limit now? Is it reduced, or is there any limit for dividend payments?

I think I don't want to talk about all the specifics of the covenants, but they are the ones that you would expect. They are fairly standard for a company with a balance sheet like ours and for a credit facility of that size. In respect to the dividend covenant, it has been increased somewhat, but there will be a limit as to how much dividends we could pay.

What is the average rate you pay for the credit?

Well, again, we haven't borrowed the money yet. So that still will be determined at the time when we close the RCG acquisition. But our expectation is in the 5.5 to 6% range.

With respect to dividends, we clearly have an earnings-driven dividend policy. We see that has very important for the Company, and we feel these baskets will cover what we need to do.

Anymore questions in the audience? Yes -- Marcus.

Marcus Wieprecht, MainFirst Bank. Two questions. Ben, in the beginning you mentioned that you get some feedback from investor road shows, and various aspects. I would be interested if you have any specific feedback from the share conversion from preferred (ph) into ordinary shares, how investors view this issue?

The second question is generic EPO. What is your view on the situation on the regulatory side? You mentioned the timeline -- '07, '08 when you would expect generic EPO in Europe. Where do you get this conclusion from? Maybe -- could you be a bit more specific on the cost-cutting potential you could derive from that?

Let me take them in the one through three order. The feedback that we received, again, we have seen feedback of the entire package -- the RCG, the KGaA conversion, and the preference (ph) share conversion. So basically, that has been positive. And I think you can see that in the share price appreciation on both shares during that time.

And as far as specifics, I think the question on the RCG was the price. As we talk to shareholders, they understood basically this -- it was accretive. This was a good transaction. So I think that is very positive. I find very little concern on the KGaA in terms of -- we have the same governances, so people are quite comfortable.

And of course, on the preference share, there is always the tussle between how much do you dilute the ordinaries versus how much do you give the preference shares? And we have been very clear that we have looked at that and this is the right place to be, and we have looked at it legally. So I think we have actually -- at the end of the day, people understand that this was thoughtful. This is a good move for all shareholders to get more liquidity. So by and large, I think it has been positive in every aspect. Now, I cannot go into individual shareholder by shareholder. But as I took it, as a total package it was very positive.

Now, as far as generic EPO, I think the 2007, we feel that the patent situation in Europe will change. And I think so does everyone else, so there will be more activity in the EPO area. We have not commented what our plans are at this point in time, and I prefer not to.

And as far as basically the cost-cutting, if you are talking about the synergies basically for RCG

Just the European. Assuming that there is generic EPO, do you have any feeling of what that could mean to your (multiple speakers)

No. We really -- that is too far out in time. We haven't even looked at that yet.

Any further questions here? So thank God we have your sister online, this time, Ben. No, it is Gerrit over there.

Gerrit Jost, BHF-Bank. On international margins, you mentioned a recent reimbursement increase in Turkey, France, Portugal -- a currency impact and lower bad debt expense. However, I think this does not explain the difference between first quarter and second quarter. As I remember correctly reimbursement increases already took place in 2004. So any other influence here? Maybe product business related, business mix, or --?

We have had very good growth in the business, and in particular, very good in-center growth in the clinic business. And of course, as you leverage those fixed costs, when you build a new clinic, you create new fixed costs. But when you're adding patients to the existing clinics, you certainly are able to leverage the fixed costs that you already have in place. And so that certainly helps. Also, the manufacturing plants performing extremely well in Q2 at very high production levels. So those are some of the major factors.

Any further questions here? Stephan?

Around 50% of the patients for Renal Care are private payers. Can you tell us the proportion of private payers you have at FMC? And what kind of synergies do you expect to realize by the acquisition? And one question to days of outstanding sales. Can you quantify the cash flow? What is one day of sales outstanding in terms of cash flow? Can you quantify that?

Larry, do you want to take this?

Yes. So in the case of Renal Care Group, a little bit less than 50% -- around 48% is what we estimate to be the revenue; not the number of patients, but the revenue that RCG is deriving from private patients for us, it is more like 38%.

And on your second question on synergies, we are projecting around 30 to 40 million. And you can take the midpoint, around 35 million in 2006 and then 40 to 50 million -- again, the midpoint -- 45 million in 2007 and beyond.

In terms of the impact on cash flow from one day of DSO, it is around $17 million. As the business grows, that value increases. Every day is worth more in terms of cash.

So in between, we have a question from the Internet. Larry, that is one for you. Why did bad debt expenses in North America go up 30 basis points in the second quarter?

Noise.

Yes. I think it is just kind of a normal deep variation. We have seen bad debt also go down in the international segment this quarter, so that in total for Company we stayed about the same. So I would not read anything special into the 30 basis point increase in North America.

One more. What is the outstanding balance under the AR facility? And what are your plans for the trust preferred securities, because now it's on balance sheet, they can't find it anymore (ph)?

That's right. Right now, we have about $360 million outstanding under the AR facility. We try to maximize that because it is one of the most attractive financing sources that we have. And so 360 is about close to the maximum that we can do.

The second question, what do we plan for the preferred securities -- there is no particular plan. We review them from time to time. We review their trading levels. But at this point in time, there is no particular plan to do anything other than let them go to maturity in 2008 and 2011.

Okay, any further questions in the audience? So even your sister is out of questions, Ben. So I think now we can open up the audio line for questions, operator, please.

(OPERATOR INSTRUCTIONS). Charles Weston, Morgan Stanley.

Charles Weston from Morgan Stanley. A couple of questions, if I may. First of all, I wonder if you could comment on the environment for private payers, if you have seen it getting more difficult to push through price increases with them, or whether it's kind of the same this year? And do you expect next year as it has been in the past?

Then secondly, if you go back to the international margins, obviously, you have seen such a big change in the second quarter over the first quarter. I wonder if you could give us some sort of guidance as to how that might pan out for the rest of the year? Should we expect the same level as Q2, or something in between Q1 and Q2? How should we be thinking about that?

This is Ben. I will take the environment question. Basically, we see a stable environment with respect to commercial contracting. Clearly, health care costs are an issue with basically employers as well as payers. But remember, we have a number of options that we can offer them, such as disease management, integrated care, where we can actually assist them in controlling their overall costs, even though they will end up paying us a little more in terms of our revenue per treatment.

So I think that we are in sync with them in trying to control costs. But we think we can help them through what we do in the dialysis area, which leads you to a fairly stable type of environment.

So on the international margins, we have talked about the ability to have continuous incremental improvement. I think for sure, we're going to see that this year. And we might expect something in the range of 20 to 40 basis points in total for the whole year.

With the performance of the first half in mind, I think it indicates that you could expect that we are going to hold most of the gains that we have seen in international throughout the remainder of the year. The mix might change a little bit between North America and international, but again, 20 to 40 basis points is what I would think of as incremental continuous improvement, and that is what we are expecting for this year.

Okay, just to clarify, that was in the international business, or the whole business?

The whole business.

This is Ben. I would like to also point out that as anyone knows who has studied the industry, our third quarter -- basically there are a number of holidays in the international areas, so our second quarter is always our strongest. Third quarter is probably generally our weakest, and then fourth quarter is quite good. So from that standpoint, what Larry said -- if you look at the entire year, we will be in the 30 basis points improvement. But you have to understand there is a little seasonality here as you we through the year, especially in the international area.

Darren Lehrich.

Darren Lehrich from Deutsche Bank, New York. I just wanted to follow through a little bit more on the question that was asked with regard to the commercial pricing environment in North America. I think some of your competitors have indicated that the large payers that have been consolidating here in the U.S. have been looking and discussing more with the providers about contracting on a national basis. And I just want to get your perspective on whether you are starting to see that. You have described the environment as stable, but is that something that you would expect to compress your pricing, perhaps in 2006? And then, if you could, just comment perhaps on the need to divest any clinics in North America due to the RCG deal -- if you are able to quantify or talk at all about that? Thank you.

There has always been the discussion of national contracts. And I think all of us have looked at them over the years. They do not work very well for either the payer or for us, because this is a very local, individualized health care system. And so what we look at is that we essentially continue to deal on a state by state basis.

And we also believe, though, that the larger providers such as Davida (ph) and ourselves, who have a basket of opportunities to offer the commercial payers, we do find that basically we expect this environment to continue to be attractive because we have products we can offer them that will assist them, as I mentioned, in controlling their total costs, not just their dialysis costs.

As far as the divestitures, we have quoted I think in May that we think from our calculations we will be in the 2% range. At this point, that is 2% of the total number of patients. We clearly don't have any reason to believe that that is not the case today. And so we are very -- were still talking (ph) arrangements (ph). (multiple speakers)

And there are no further questions from the phone lines.

Okay. I have one more on the Internet, Ben. You partially answered that question already. But can you please discuss the views on the recent approval of the portable home hemodialysis machine? And how do you believe it will affect your business?

Did they say the name? I think I know who it is.

2008K -- the home hemo machine.

Okay -- you are talking about our machine. (laughter) I know all the competitors, too (multiple speakers) I just wondered if they were talking about us. (multiple speakers)

Well, we are talking -- sorry, we will talk about our -- as I mentioned, we see a limited market in home hemodialysis now. Again, there are a number of people who are equally as familiar with this field as we are and see it just the opposite. But we also have an excellent machine that we'll be bringing to market here in the range of -- there are only 2000 patients. And we sell 20,000 machines a year. So this is not going to be a major product for us anywhere in the scheme of things. But it is a service that we believe we should offer. And that is what we are doing.

Okay. Any further questions? That is not the case, so I would like to thank everybody, and have a safe trip home. Thank you very much.