Fresenius Medical Care AG (FMS) 2005 Q4 法說會逐字稿

Thank you, and welcome to my side for Fresenius Medical Care's Q4 and full year 2004 analyst meeting. Everybody here in person, welcome and everybody joining us on the Web.

I think I can cut it really short because it is the same procedure. The only thing I have to do is to comment on the Safe Harbor statement. That the presentation we present today includes certain forward-looking statements, actual results could differ materially from those included in the forward-looking statements due to various risk factors. The risk factors and uncertainties are detailed in our Company reports filed with the SEC and with other filings we have, for example, with the Deutsche Borse.

Like in the past, we also gave you, which is actually due to the compliance with the Section 401 using non-U.S. GAAP measures and we switch them to the nearest U.S. GAAP measures, so please use that information. So, with us today, like [Berger] mentioned at the beginning, is Ben Lipps, the CEO of Fresenius Medical Care and Larry Rosen. This is all from my end. So Ben, the floor is yours. Thank you.

Thank you Oliver. And before I start, I would like to say thank you to the management board, to our employees, our clinical associates and to the Mark and the FAG management board employees for all of the assistance and support this year. We had a great year in 2005. I'll go into it. And again, appreciate everybody's support. Oliver has already covered the Safe Harbor. So, we will go to the next one. I will cover the business update and discuss some of the things around the world. And Larry will follow up and discuss the Q4 and the financial results for the 2005 and then we will go into a question-and-answer session.

Now, again before I start here, hit some of the highlights, we had a great year. We're very optimistic for 2006. I want to share with you -- and the reason for that is all sections of our region -- all regions of the world performed very well in 2005. And that is very reassuring to see everything all cylinders hitting at the same time. And so, from our standpoint, a great year. Organic revenue growth 7%, again totally above industry average. We saw positive revenue per treatment growth in both North America and Europe, very substantial.

Increased -- we were able to increase our operating margin by 50 basis points. Our target was 30, so we overachieved in that area. Again, I will show you for a number of reasons. Net income, 17% on a like for like basis. And I will talk about that in a second, which again exceeded guidance. We saw solid cash flow for the year.

And we voluntarily believe we will comply, and the auditors have told us that they agree with this, comply for SOX-404 compliance for 2005. And I think we'll be one of the few international companies that can have that achievement and basically we're quite proud of it. It took a lot of effort this 2004 and 2005. Now, it is one year before it is mandatory, so actually we are doing this ahead of time and that is why it is voluntary.

Now, this is the financial results for the year. We saw about 6.8 billion total revenue for the year, constant currency growth of 8%. EBIT again excluding one-time charges, 961 million, or 13% growth. Let me say up front, I personally dislike one-time charges, especially those one-time charges that have become one-time charges every year. That is not the case for this Company.

And -- but we have two major strategic projects, the conversion to the KGaA , and the acquisition of RCG. And quite frankly, you could not see the great performance of the Company if we lumped those in and didn't point them out to you. So, that's why I'm doing this year. You won't see that again next year. But you are seeing it here. So excluding those one-time charges, we saw a 17% increase in our net income. A great year for us, ended of the year at around $472 million of net income, excluding the 22 million or 455 at it was reported this morning.

Let's look at the revenue. Larry will follow up on more of the information in terms of financials. It was a very good year for us revenue-wise, in both products and services, in all the regions. And basically, North America ended up about 4.6 billion in revenue, 8% growth, which is clearly above the average in North America.

North America accounts for about 68% of the revenue. International came very close to $2.2 billion in revenue and again, a 9% constant currency growth, very strong for the international. Europe, which accounts for 24% of our total business or 24% out of the 32% of our business accounted for about 1.6 billion of revenue, very strong growth in Europe. 9% constant currency. We were able to turn the situation around in Japan. Remember in 2004, we had basically a reimbursement decrease that cost us some pain. And so Asia-Pacific is back on track. And Latin America continues to grow at an impressive 17%, same basically constant currency growth. So revenue-wise, on both products and services, we had a very good year in 2005.

Now, let's take and look at a little more detail on the dialysis services part across basically the segments, North America and international. Our dialysis services business reached about $4.9 billion this year. It grew at 8% in constant currency. And as I mentioned that is a very strong performance, it accounts now for about 72% of our business.

Looking at North America, it grew at 7%, about $4.1 billion in size. And if you look at the international now, we're up to almost 800 million in revenue and it grew at a constant currency of around 14%. It now accounts for 37% of the international revenue. Back in 1999, it was only 26%, so this is one of the growth areas. We believe our vertically integrated model is excellent for both North America and in the European theater. I will show you a little more about basically what the service business looks like in the European theater.

Now, looking at the metrics. For the dialysis services business, our organic revenue growth was 7% this year. We usually are -- we're very light on acquisitions, we usually spend no more than 100 million, except for something strategic like RCG. North America had around 6% organic growth, revenue growth, and international was around 12.6. Now, what you see then is the next line here, you will see about 7.6% or almost 8% same store growth in the international area and that's one of the major growth drivers in the service area, in terms of organic growth. The U.S. or North America was down in the 3% range, I'll will talk a little bit about that as we go through.

Again, the markets in North America, we believe are growing at around 3% or a little under that. And we had some difficulty with the hurricanes this year and this is not an excuse, except that it affected about 125 of our clinics. We did have to close three permanently. But basically, we're down in the range of around 3%. We expect to stay there in the same store growth range in North America.

Now, looking at revenue per treatment, I will talk about that a little later. But we came very close to doing 20 million treatments this year or our treatment grew by 5% for the year. So, the service part of the business continues to grow organically 7% and quite impressively in both North America and the international region. Looking at the North America, one of the real exciting parts of 2005 is we continued to grow our revenue per treatment. If you just use quarter over quarter, we're up almost 4%. We clearly exceeded our $290 per treatment, as our target, for 2005. We exceeded that each quarter.

We're setting a new target, with RCG, of greater than $310 per treatment for 2006. So, we continue to make good progress and basically have seen a significant increase in our revenue per treatment. Now, this comes primarily from contracting and essentially from contracting and we got a 1.6% increase in Medicare last year. So clearly, there was an influence in terms of the the Medicare increase.

Now this -- if you go ahead and look at the dialysis products, it is an equally strong story. We grew at 10%, 9% constant currency on a worldwide basis. And basically the products business on a worldwide basis is growing between 4% and 5%. And so you can see that we're clearly growing almost double or double the market. And if you look at international, where about 63% of our business is still products you can see that international grew at a 9% constant currency growth, which is clearly above the market. And again, I believe about two times the market.

And if you look at it, at the U.S. where we grew at 8%, including sales to ourselves and we grew at 17% again, in terms of sales to the external or the independents; I've got to say that I do not expect, and as I said last quarter, I do not expect that to continue. But it did continue for another quarter, so one of the cautions I would like to throw out then as far as next year, is that we do expect that we will not continue to grow at that rate in the U.S. in terms of products business. And I think there is just some specific situations going on right now that are probably favorable to us. But if you take it as a whole, we still expect to grow better than the market in the U.S. And clearly right now, we had a great 2005 and we grew at about double the market. And all of our products have been pretty much accepted and these are third generation products that we've brought out.

Now, let's look a little bit at some highlights for each of the regions. Again, North American as Larry will show, you did increase in profitability this year, did a very good job. And on top of that, we saw excellent demand for our hemodialysis machines. Basically, a record. We sold 27% more machines this year than last year. We continue to see our single use therapy or we call it CarePak therapy growing at about 28% and about 58% of the independents now are on single use. So, we continue to see acceptance of that.

If you look here at the service side of the business, I've mentioned we're growing at 7% organic growth, year-over-year and that's excellent. Organic revenue growth. And one of the things that is encouraging is; all around the world, Europe and the U.S., we continue to see positive reimbursement signs. Okay? Now, they all have to come through and you've got to actually bill and get the money but basically they look like positive signs. And at CMS, again we have a 1.6% increase for 2006. We have a final direction on hemoglobin monitoring. We also have one on the MMA. Basically, those are just starting this year. They will start -- HMA will start in April.

So we essentially have a very level playing field then in the U.S. in terms of pharma utilization starting this year. And so we've seen some positive signs then from CMS that the industry is being listened to and that we actually saw another increase in reimbursement, which is quite good. So we see positive signs in Europe, we have also seen positive signs -- we saw 5% increase in reimbursement last year in the European theater.

So, all around the world, we feel that our message that we're providing the best care and when you do that, you save other costs in the system is getting through to the payors. And that we have been talking about now for four or five years but it's got some traction. So anyhow, if you look at North America, very good year. And very good year in a number of cases and we are optimistic as we go into 2006. But some of these things we haven't billed for yet, we haven't been paid and so that's usually what what I'd like to see.

So now, let's take a look at Europe. Fourth quarter highlights. I think one of the highlights as we reach the 1.6 billion revenue in the European theater, as I've talked and Emanuele talked at the capital markets day, we clearly are migrating in terms of additional value-added services that we provide in the European theater. We're now into the products and services and we're emerging in some of the pharmaceutical areas. But the key that I want to leave with you is that there are as many patients in the European theater as there are in North America. And as we are able to get into the service side of the business, successfully and profitably, that is a very exciting partner for us then as we go forward. So we really have two very strong legs on the stool.

Now machine-wise last year, we grew about 6%. Our FX-Dialyzers, again double digit, 23%. And I won't bother you with the quality data but we basically will start publishing that and we have a network now where we have about 130,000 patients in our system. So, we monitor quality country by country and we do comparisons, it is very interesting. So we see then Europe, in terms of its ability to do a very successful, profitable, vertically integrated model, is maturing. And this particular year, I think we showed extremely good signs with that.

Looking at the service business, we have over 325 clinics in Europe, 14 countries. We now treat almost 23,000 patients. Again, we've had exceptional organic revenue growth, 16%. And one of the major areas for our growth drivers for last year and going forward is Eastern Europe, which is growing at a very impressive 32%. So again, we have a very strong financial model and a very strong business model in Europe.

Now, let me talk a little bit about Asia-Pacific. It represents 5% of our sales. But basically outside of Japan, we're seeing excellent results. We have a 15% growth. However even with Japan, we are the largest provider of dialysis services and products in the Asia-Pacific theater but our market share again, with -- outside of Japan in the products area is about 40%.

So we are focused in Asia-Pacific but the focus is basically outside of Japan at this point in time. However, we have restructured in Japan, it is back to the profitability we expect. And we are essentially, feel comfortable about it at this time. In China, which I think is always very interesting to everyone, I got to tell you a little bit, we are the leading hemodialysis, basically, provider for that business. And interestingly, other than North America, China is our largest machine market today. And so that's -- I think that gives you some indication of essentially how China is growing with respect to business.

Taiwan, we converted another very interesting area, we converted to single use, many of our customers and so we've seen a great improvement. Now, there are some clouds in that area. And clouds are every two years, the Japanese health care system reduces the reimbursement. And so 2004, they did that. And we expect to see it again in 2006. We think we've anticipated it. We think we've got the structure to handle it. But these are the things that you have to basically see it happen. Make sure that you did anticipate it correctly. And it will not be a major impact on our business. We're very certain as far as the global corporate financial picture, it won't be that significant. But we would like to have it basically not significant in that region also.

So, that's the highlights for the region. And I can tell you again, very proud of all the regions this year. Every one of them basically came in on target or above. And we had a very balanced excellent year.

Now, let's talk about our strategic projects. You've known about our one share conversion or the conversions of the KGaA. We started talking about that in May of this year. And I think Mark in his speech indicated that it along with RCG have been very well received by the stakeholders. And that basically our evaluation has increased by somewhere around 3.5 billion euros. And so I think we're moving in the right direction. I would like to say we were very, very successful with the conversion from the preference shares to the ordinary shares, we had 96% approval. We know have a free float of about 63% so we're expecting the liquidity aspects of this conversion to be very helpful.

We do have about 1.1 million preference shares left, and I just want to indicate that as we said in May, we have no intentions to buy those shares back and we have no intentions to convert those shares into ordinary shares. So, I just want to make sure that message is still out there in the -- basically in the field. And we're proud to have preference shares and they will be treated as preference shares under the KGaA.

Now, cash flow, we received almost $310 million of inflow, very pleased with that. We started trading the ordinary shares on the 13. And since that time, we've seen an increase in basically trading volume of over 15%. So, it seems like this has been accepted. We're quite excited to get this behind us. And essentially, that's the source then of the one-time charges that you've seen to date.

Now, RCG acquisitions. We have finished again, most of these types of acquisitions of this magnitude with this much discussion and clinics and concentration in the U.S., it usually takes about a year. We're targeting the completed in 10 months, that's what it took the DaVita. And right now, we're at the stage where we're making very good progress, once the DaVita transaction closed in basically in October, things started moving for us. We were working very closely with the FTC and so far they have been good partners to work with. They've -- with them, we've determined where there were overlapped clinics, we've identified which ones we are going to sell. We actually have a very good buyer for those clinics. We've signed a purchase and sale agreement with the buyer. And so we're moving along in this process and at the same time RCG, I believe it is -- they published their quarterly results or preview, they're doing very well.

Our integration process is basically all set and ready to go. We were ready to kick it off in early 2006, but we can't do that. And our synergy estimates are still essentially where they were when we talked to you last year. So by and large, we are now in the final phases of the RCG acquisition. We need to basically do a lot of things in the next six weeks but we are confident that we can get those done. And we're working at it very, very focused and it's great cooperation from both companies. So, that's where we are. We are coming down to the finish line on that project.

Now, to give you some idea of part of our is intention here was to combine the best of both companies. And we have hired a number of the managers who joined us after we -- basically after we combined. There is a number of -- basically projects and programs within RCG that we think are quite good. We are going to essentially adopt them. So it has been a very good process here through the fall of trying to take the best from both companies. So as we put it together, we will have essentially the best of both companies.

Now, I'm very proud to mention that this is our ninth consecutive year that we're going to propose to the Supervisory Board and then to the AGM, an increase in the dividend. We will be basically proposing a 10% increase in the dividend for the ordinary shares and a 9% for the preference shares and this is a number, 1.23 Euros per share and 1.29. So again, this follows the policy that we have followed over these years in terms of an income-driven dividend policy. This shows our confidence in the coming year and we're sharing that with our shareholders or proposing it to share it with our shareholders, basically in May.

Now, to finish my part of the program. North America is going to be focused this year in 2006, continuing to grow above the market, that will be a difficult because we are moving a lot of -- as we sell 100 clinics, we have to change certain relationships with doctors. So, there is a lot of activity going on in the doctor area -- in terms of medical director area. But we think we can get it all done and we still want to grow above the market this year. But the main focus in 2006 will be on successful integration of RCG. As I said, we're clearly in the position where we're poised to start that but it can only start when we close.

We also have a demo project with the government. It's -- now we've enrolled a number of patients. And this is our integrated care model, which we believe long-term is a good way to add additional revenue and additional profits to our Company in North America. And we're actually focusing also in Brazil and U.K. on the same type of model. So, we have products in the pipeline that we are now in what I call the demonstration phase and we still have over 4,000 patients in our disease management program with the commercial supplier. So that will continue. But we finally are able to work with the government, which is one of the real focused here.

And of course we will continue with the single use expansion. I believe we will probably top out at about 80% of the independents, we won't get there next year but we are moving up but 8% to 10% a year. Europe, we'll continue the focus of vertical integration, vertically integrated model. We'll continue to be aggressive in portions of Europe in terms of building clinics, de novo clinics. We built almost as many clinics in the international last year as we built in the U.S. And so, you can see that the growth in the international area is coming from the de novos and from the opportunity to treat patients in the 8% to 10% of same store growth range.

Europe has -- basically international has come back now to excellent profitability, the leader in the industry, we want to continue to stay with that. And I think as you've seen, and Mark mentioned it also, we've won the first place for the Innovation In the German Industry Innovation Prize. Dr. Gatti and his group has basically held that product and done an excellent job. We're now in the market with it. We have over 1,000 of those machines out there in the market. And so, we're -- this is not only successful from a design standpoint, it's a successful business venture also and it's got some very interesting features such as new therapies that we're introducing here in Europe.

Now, as we come back into 2007, we're going to go back to what I call our basic operating plan, where we're in the 6% to 9% revenue growth range. We will continue to grow double digit in terms of our EAT. And we will basically be delevering our debt, which will spike back up and Larry will show you later in the acquisition of RCG. So, we will come back to our -- pretty much our own game plan back in 2007. But this year is really focused on finishing the strategic projects that we started. I think at this point, let me turn it over to Larry and he will give you some input in the financial area.

Thanks, Ben. And good afternoon to everybody. I would like to review our excellent financial performance for Q4 and for the full year. I want to try to give you a sense for the momentum that we've really built up through the year and that we have especially, as evidenced by the progress that we've made on operating income and operating margins, but generally on all metrics. I will conclude the presentation with our guidance for 2006.

Let's take a look first at the P&L for Q4. You see in the upper part the revenue growth that Ben already mentioned 8%, which was 10% in constant currencies. We've got a reversal in Q4, so our strongest quarter of constant currency growth for the year. It really continued the trend and allowed us to achieve 8% for the whole year. Operating margins before considering one-time costs, so on a like per like basis, were up 70 basis points compared to what was a pretty strong Q4 in last year. I will come back to the details both on the operating margins and also on the one-time costs.

Net income is up 18% for the quarter. And it was primarily due to the excellent operating performance that we have. After one-time costs, we had plus 7% both on operating income and net income. But again, we think the most relevant comparison is before one-time costs, so we can compare on a like for like basis. Really, the same thing for the full year. We had 9% reported revenue growth, it was 8% constant currency basis, we had 6.8 billion U.S. dollars of sales for the year. The 8% compares to the guidance that we've been giving throughout the year of 6% to 9%, somewhat on the upper end of the guidance.

Operating income was up 13%, increasing 50 basis points over last year. And as Ben already mentioned, more than the kind of informal guidance we've been giving of moderate increases of 20 to 30 basis points each year. So in 2005 we had a very nice 50 basis points increase. And again, I will come back for a little more detail on the reasons for that in just a minute. Net income was up 17%, so exceeding the last guidance that we had given of 12% to 15%. And remembering back to this time last year, the guidance of just a bit above 10%. It reflects primarily, the very good operating performance but also reduced interest expense for the year, primarily due to our excellent cash flow performance and reduced debt.

After one-time charges, plus 10% on operating income and 13% on net income. So here is a look at operating margins both for Q4 and for the full year by segment. First, North America on the left-hand side. We have an excellent 50 basis points increase in Q4 and 30 basis points for the full year. This reflected the revenue per treatment progress that showed by Ben 4% on a Q4 over Q4 basis. But it also reflected very good cost control in the clinics, excellent product sales growth, particularly in the strategic products, in machines, and in dialyzers, and also very good manufacturing efficiencies at our plants in the U.S.

We're fighting some headwind in the U.S, and this applies also to international, in the form of higher fuel and delivery costs related to the higher oil prices and also some higher raw material costs. In international, we had an excellent Q4, up more than 2% compared to last year. Here we had a really big contribution, especially from manufacturing. And in particular, as we wrap[ed up production of the 5008 machine to commercial quantities, we are able to reduce costs substantially.

We also had some reimbursement increases in some key countries. I'll name a couple, Turkey, Portugal, and Brazil but there were a couple of others and we also had a favorable mix everything in the international region. We also had, as Ben also mentioned, a solid recovery in Japan, following the restructuring that we did earlier in the year, reducing overhead costs substantially. And we have continued very good performance in Asia ex-Japan.

Now, turning to cash flow and eventually the balance sheet, let's look first at DSO. In North America, we continue the industry-leading performance with 63 days outstanding. So, the same as Q3 but at a very low level and an excellent level for North America. In international, we stayed in the range of around 120 days but we dropped off a little bit, we gained two days in Q4.

Overall, for 2005, for the whole Company, we have reduced two days and good performance, a little bit less than the five days progress we made last year, but still quite a good performance. We're targeting additional, very small improvements in particular as we bring online the new clinic system in the U.S. in 2007 and 2008, which allows us to automate and speed up the billing process by a little bit.

Now, let's turn to cash flow which is a bit complicated and we have here also some one-time items. Just focusing on the column on the right, this is the performance before one-time items, 280 million of operating cash flow, an excellent 16% of revenues. And if you compare that to the middle column, with 200 million, the primary difference is about an $80 million tax payment, which we've made on a disputed tax audit item without having yet reached a settlement. But we have very penalizing interest rates building up on the outstanding amounts, so we decided to go ahead and pay it before settlement. And it is something that, if we get a very favorable settlement, could eventually come back to us.

Again, we did that to reduce high interest on the disputed amount. We've reserved the full amount on the P&L, so we don't expect to have any P&L effect from that one-time item. Even after the one-time item, it was still an excellent performance with overall 11% of sales. Remember that our long-term target is to be over 10%. So even after having paid the 80 million of taxes from the audit, we're still at 11%.

It was our highest CapEx quarter for the year, and it reflected higher de novo spending, also some expansion spending on our plants, and also continuing spending to implement the new clinic system in the U.S. For the full year, we had an excellent performance, again looking at the right-hand column, with805 million of operating cash flow at around 12% of sales. So significantly more than our 10% target.

And we had, in addition to the one-time item in the fourth quarter, we had a couple of other one-time items, remember in the first quarter, we had another 40 million tax payment in the U.S. related to a prior year audit. That also accounts for the difference between the 805 and the 670 that you see in the middle column. And we've also excluded from the 805 a one-time cost reflected in the settlement and the transformation project. So even still, we are around 10% of sales, even with all of those one-time items, with 670 million, so a very good year's performance on cash flow.

Now, let's start to look at the balance sheet and in particular our key credit ratio, debt to EBITDA. Going right to the bottom right-hand portion of the page, you can see a number that we're very proud of, 1.8 times debt to EBITDA. Remember, around three years ago, the goal that the Company set was to be at 2.5 by the end of 2005. We've both had better performance of EBITDA on operating income and better performance on cash flow. And that's allowed us to bring down this ratio and the whole balance sheet leverage much faster than we had projected a couple of years ago.

We also had a special benefit in this year, in that debt was reduced due the currency translation. And you can see about halfway down the page the 130 million benefits, or debt came down 130 million due to favorable translation. We also had, for the first time in some years, some substantial proceeds from option exercises. As our stock price increased this year, we got about 80 million of cash in flow due to option exercises. But even so, a great performance on debt to EBITDA and it is so great, we've included two charts on it. So this one, too.

You see here on the left, the reduction in debt that we have had over the last five years, giving some historical perspective and at the same time a steady increase in operating income or EBITDA. The main information that you have in addition on this chart is on the right side. This is debt to EBITDA ratio. And you see that at the point where we will close the RCG acquisition, we anticipate to be up at 3.9 times debt to EBITDA. But just at that point, we project, as Ben said, that we will close the transaction by the end of March.

And if we do that, we think we will be able to reduce already by the end of 2006 to below 3.6 times. And eventually, within the next three to four year, to come down to a target level of 2.5 times debt to EBITDA. We've done this in the last five years, delevered consistently and we think and are very confident, that we are going to be able to do that again, following the leveraging up that we'll have with the RCG acquisition.

Now, let's focus on one-time costs and how we've built them in or excluded them from the guidance but built them into our forecast for next year. Just first quickly on 2005, the pre-tax or operating income impact of the transformation and conversion project and the related settlement of shareholder litigation was 22 million. Much of that was not tax deductible, so the after-tax impact is 17 million. For the full year 2006, we won't have any more one-time costs related to that project but we will have the restructuring costs related to the RCG acquisition. We continue to be confident that those restructuring costs will be around 50 million pre-tax, or 30 million after-tax.

We also have a kind of one-time effect in 2006 and that's the beginning of the FAS 123 recognition of stock option related expense in the P&L. We estimate that for us, that will be 14 million, both pre and after-tax, and we're just going to treat that as a one-time effect, one time. So, when we get to 2007, we will correct 2006 and include that on an ongoing basis. But since it is a fairly big effect, we thought we'd call it out as a special effect for 2006 as we compare to '05.

We have one more I'm that is the third item from the bottom, the write-off of the prepaid financing fees. These are related to our existing credit facilities. And when we start our new credit facilities at the time of the RCG acquisition, we have to write off those costs that we've been amortizing and we project that will be a cost of about 9 million after-tax. Again, a one-time effect related to the RCG acquisition.

Finally, there will be another potential impact that you see down at the bottom. And that is that we expect to have a net impact in the P&L on the sale of the dialysis clinics, so 100 dialysis clinics that we're selling to DSI, we're still working on the accounting for that. As you know, we've just reached agreement on the sale in the last week to 10 days. And you see that we're still determining what the exact impact will be. Our best estimate at this point is that it will be break-even to a small positive. But again, we will update you as soon as we have more information about it.

Now, let's turn to our guidance. We've spent a lot of time in the last few weeks thinking about how to present our guidance to make it as meaningful and useful to you, not only right now, but as we anticipate going through the year and post-closing of the RCG transaction. And we decided that the best way to to track guidance for this year was on a pro forma basis with RCG included for the full year, since we anticipate closing towards the end of Q1. And also to give you guidance before one-time costs.

So we've given you guidance on what the one-time costs will, what we think they will. But we think it is most useful to compare the ongoing business and therefore we've given guidance before one-time costs. On that basis, we expect revenues to increase by 25% to around 8.4 billion if we do close on March 31. So we have one quarter of RCG excluded in our actual recording, that would give us revenues of around 8.1 billion. Net income growth, we're projecting a range of 10% to 15% growth and that's based on the 472 million of net income in 2005. Again before one-time costs for the transformation and conversion project.

That would give us a full-year range on a pro forma basis at 520 to 540 million. It will be slightly less on a full-year basis, excluding RCG for the first quarter, a range of about 515 to 535 million. This comes back to guidance we've given you before, which is that the RCG acquisition in 2006 will basically be neutral to very slightly accretive for FMC in 2006. That's the guidance that we're giving again today and that we still are convinced about. Spending for next year, 450 million for CapEx, 100 million for acquisitions, and again this is combined basis, including RCG for the full year. And as I've said before, the leverage ratio below 3.6 by the end of 2006. Thanks very much for your attention and we're ready now for Q&A.

Great, thank you, Ben. Thank you, Larry for the presentation. So, we're going to take questions first here in the room. Hold on, there's the mike coming up.

Thank you very much. Markus Krämer from Sal. Oppenheim. I've got three questions actually. The first one is you showed North America Q4 same store treatment growth of 2.8%, which appears rather low to me. What would you say from your experience, what the the market growth has been in Q4? The second question is, the outlook that you just provided shows only a 5 million difference between the full year consolidation, and the nine month consolidation. Could you elaborate a bit on the small difference between these two guidances? And the last one is, that you told us that the net impact of the sale of the dialysis clinic in the U.S. of the 450 million deal, should be slightly positive or break even impact. Could you elaborate a bit more on that one? Because we thought it be would sort of a negative impact. Thank you.

Thank you. Let me take the first one. Yes, as I mentioned, we believe the market is probably growing 3% or slightly under that. The 2.8 reflects part of the problems that we're seeing as we're getting ready to integrate RCG because we did not renew a couple of contracts. Because as we absorb RCG, those contracts would not be essentially the right thing for us to do business-wise. So I think you're going to have to watch for the next few quarters it won't reflect. I believe that as we get into next year we will grow at somewhere above 3%, which is going to be above the market. And RCG grew at 3.1% this quarter, so I think the market is down at the very low 3% at this point in time.

Let me try to answer your second and third questions on the outlook and the small difference. If you think about the kind of missing RCG for the first quarter, we missed our operating income contribution but we also don't yet half the debt and therefore we don't yet half the interest expense associated with the new debt for financing the acquisition. And 2006 and the first quarter is before we start to integrate, so we don't have any synergies yet. And so it is pretty close in terms of the operating income contribution and the interest reduction. That's why it is so close. On the third question, the sale of the clinics in the U.S. and the 500 -- the 450 million and the associated gain or loss; we will have to allocate a piece of our goodwill to that transaction because it is a relatively big divestiture of 100 clinics. And that basically leaves us -- should leave us pretty close to a break-even to maybe slightly positive result, after goodwill allocation.

Next question?

Gerrit Jost, BHF. How should we split the integration costs of RCG over the quarters?

Most of it will come in the second and third quarters. So, there's 50, I would say 20, 20, and 10 would be a pretty good estimate.

Next question? Ludger is next.

You mentioned some new therapies emerging with the 2008 machine in Europe. Could you elaborate on that? What could it mean, in terms of revenue potential, which we haven't seen so far?

The therapy I'm speaking of is hemodiafiltration and at this point, let me ask Emanuele Gatti to talk about it, because this is one of the areas that we're the leader in terms of online hemodiafiltration. Emanuele would you like to make a comment?

With international, the 5008, we make available to the European markets, the therapy, that has been known for some years but has never been possible to use industries to say, because of difficult uses of the machine, and also costs. That's why we are very hopeful that with international, the 5008 generation, means this and the following machines, doctors will use much more of this therapy that is being known and proved by the international studies, increasing the quality of life and the life expectancy of patients. I think that we would like to continue our growth in terms of sales and profitability in Europe at the same pace we had last years. I don't think we can expect higher growth than the ones we had because these are already almost two times the market. So, I think this product range will help us to keep the base we had over the last years.

Ludger, what we're looking at then is the pace is about double the market. We believe with this therapy and this machine, we can stay in that range, in the European theater.

Okay. And maybe on the product from the U.S., you mentioned some specifics that allowed you now for another excellent quarter, about your own expectations, is it just the [machine] production issue or are there some other factors?

Well, we've had excellent success with 2008K machine and it continues to sell very well and of course that may be related to some of the integration issues with DaVita, I'm not quite sure but it continues to sell well. We continue to see acceptance of the dialyzers, we're 28% growth in the dialyzers. And in peritoneal dialysis, we actually in the external market grew 5% to 7%. So all of the third generation products, quite frankly, are doing very well. I don't believe we will stay at the rate you saw, the 16%. I think we are going to come back into the range of 5% to 6%. But the question is when. I've been predicting that for a couple of quarters but it didn't happen in the fourth quarter.

And a question on the [European] usage gap you have to your peers, do you think you would close it a bit in 2006?

I believe that the industry will close in 2006. We -- as I mentioned in November, the HMA has been basically finalized. We're just ready to start that in April, and right now, it is a little too early to determine exactly what that will do. We said in November that we did not believe it would be negative. We thought it would be at the very least neutral. So, I will have to wait until probably sometime when we report in May to give you some better numbers in that. But I think that will level the industry, yes.

Oliver Kämmerer, next.

A question with regard to the patient mix now in 2006. Actually, after you sold the 100 clinics, what are you looking in terms of share of product, payor, patients and actually the Medicare patient population? And probably following on that one, what are your thoughts currently on the idea of extending the coordination period from the 30 to 60 months timeline, is that a bundled idea from Mr. Bush, or could there also be pieces of the law being enacted in 2007, actually? And what sort of upside you might see out of that?

Let me take the 2006 budget proposal first. As you know, there are many, many hurdles that that budget has to get through. And at this point in time, it is really very difficult to say whether that particular piece of the Medicare Bill will stay in there. But on the positive side, it is much better to have it in the Bill to start with than to try to insert it during the process. So, we're all encouraged by the fact that it made it into the Bill. But we have not counted on it financially at this point in time and I don't think it would be wise to do that. Now, as far as the mix of commercial patients, I don't know the exact mix with respect to the clinics that we're selling. But at this point in time, we do, because of the guidance we gave you, we do expect that everything we promised on RCG will be there in terms of the actual final commercial mix and in terms of the revenue per treatment. So, this will not have an effect on our going forward position with RCG.

But in terms of the share now that you've sold the clinics for the Company in the U.S. actually, any idea on what we should be looking for?

Not at this point can I share that, except these clinics are both FMC clinics and RCG clinics and so you will find it has very little effect on the final share count composition that we expected with the RCG acquisition.

Marcus Wieprecht, MainFirst. I have two questions. One coming back to the patient or market growth in North America. We expect something around 3 of that percent in '06. Overall, the market growth has been declining and what do you think when this market growth may pick up again? Especially, looking at the epidemiology of Type II Diabetes and also the young population, there should be at least some trend that should bring this market growth overall a little bit more towards the 4% or 5% we have seen in the past. So, what's your view beyond 2006 on that one? Second question, the cost per treatment was relatively stable in the first three quarters, then you had a $2 increase in Q4. Where do we see this going in '06? And maybe also '07? Thank you.

With respect to the same store growth for the patient -- prevalent patient intake, I believe right now Medicare just published the results for 2004, and it was right around 3%. And we model it then, that we will probably be under 3% in 2005, slightly. And our guess is it will now level between 2.5 and 3. And the question is we see a tremendous buildup of previous RD patients. And so it depends on the time it take for them to come to dialysis. And again, it is a little hard, I've seen models where someone says, by 2009 it will be back, by 2008. But our business strategy is to continue to offer more services so that if it does level off in the 3% range and someone solves the problem of patients coming to dialysis, we will still stay in our 6% basically organic revenue treatment by adding more services. But right now, it looks like we will be under 3% in 2006, as the industry in North America. Now, as far as the cost per treatment, can I turn that over to you Larry?

Excluding drug costs per treatment, which is a little bit of a separate, all of the other costs we expect to be firmly under control. We expect to increase by less than inflation and roughly on the order of 2%.

If you look at the entire year, you will see we're about 1.9% in the U.S. So, now exactly how they fall by quarter, it depends on when the raises are passed through and we may be seeing some of that but we will stay in that 2% range and we've been quite comfortable with that. This will be excluding the drug costs.

Over there.

Then coming to the direct costs regarding Epogen and Amgen, have you finalized an agreement yet, or will you wait for the negotiating power of RCG?

No we've finalized our agreement with Amgen. It was finalized as of January 1 because it was a two year. So, we have a two-year contract with Amgen for the 2006 and 2007, it is in place today. I think I mentioned that we believe it is a good contract. And that we believe that obviously during our last two year contract, there was was a 4.9% increase in Epo pricing. And so at this point in time, I've mentioned publicly that we've ameliorated a good portion of that. And that's really all we've said at this point in time. So, it is a good contract and we're pleased with it.

I think I have some more questions actually from the Web for you Larry. There's one question actually; How large is the -- how much of the CapEx is related to products? And what is the long term CapEx needed in that business, assuming a top line growth of 6% to 9%?

Generally, about 60% of the CapEx budget is relating to the manufacturing plants. About 40% for maintenance. And 20% for expansion. Although that varies significantly from year to year.

There is one more in terms of; Since we talked about synergies, could we provide timing details for the integration savings for the synergies? When do you expect the first synergy to be realized, specifically what will be the U.S. dollar integration in '06 and '07? Maybe we can reiterate on that one.

Well, based on our integration planning, which we've had time now to do in great detail and with great enthusiasm together with the RCG colleagues, we're very confident about being able to achieve our initial synergy estimates. And remember that was 30 to 40 million in 2006, and then 40 to 50 million for 2007 and each year beyond, once we had implemented all of the integration plans. And we expect to be on that track. Of course, being one quarter late in starting the implementation in 2006, allows us to achieve just three quarters of the synergy benefit. But then after that, we're basically on track with the 40 to 50 million per year in 2007 and beyond.

Okay. And one more, I guess. I think that's one we have to answer because there seems to be some misperception in terms of reading the guidance and the numbers. Please can you precisely reconcile the difference between the guidance of 25% top line growth and 10 to 15 net income growth? On the face of it, this implies margin. At what point does income growth surpass top line growth?

Let me take a try with that one. The 25% is the one-time increase in sales that you have from integrating RCG for the first time. I think what's important is to go back to the kind of long-term guidance of 6% to 9% per year and then the net income guidance of 10%-plus per year. So, we do expect to be able to grow the bottom line faster than the top line. We just have that one-time effect in 2006, because it is the first time that we're integrating RCG. And what you have, as you go down through the P&L, is you have a significant increase in operating income, offset by a significant increase in interest expense. So, you're left with basically the 10% to 15% increase in net income. And again, coming back to the statement that the RCG acquisition is neutral to slightly accretive, it is very consistent with that statement.

So actually, we will see a step-up in the operating margin as we go through, which is what we said.

Any more questions here in the audience? That's not the case, so, I think operator we can open up the lines for questions actually.

[OPERATOR INSTRUCTIONS] Your first question comes from Ilan Chaitowitz.

Afternoon, Ben, Larry and the rest of the team. This is Ilan Chaitowitz from Redburn. A few questions. Firstly, your recent SEC filing in January said that you are expecting a positive impact on your operating results from the drug add-on. I was wondering if you could quantify that to the markets?

Larry, why don't you handle that one. And -- [Laughter] Okay.

I'm happy to do that. It is a rather complicated piece of legislation. And maybe I will talk about the impact of that together with the 1.6% composite rate increase that is also in place for 2006. And say that we expect that in our guidance, there is about a 2% to 3% part of that guidance, the 10% to 15% net income growth that is attributable to with both the -- let's call them the MMA changes to the drug reimbursement methodology and also the 1.6% increase together. Again, about a 2% to 3% part of that 10% to 15% increase is due to those regulatory changes in the U.S.

And the reason that I wanted Larry to present it that way is, as I mentioned in my talk, until we get into the history HMA and we see essentially the ASP+6 and everything settle down into some predictable fashion, is it is really difficult for us to add any more to the guidance or to be any less or more conservative. So, that's why we're looking at it and it will take a little more time through 2006 to really understand the full effect of that. But we believe it is positive and I've said that from the very beginning.

Okay. The final ruling on the 1.6% came out after you made that announcement to the SEC. And it doesn't look like that you had included that in your impact for 2006. But that aside, just to get firmer on the numbers, DaVita are looking at $55 to $60 million boost in sales and they've got about 15% less public payor patients. Do you think they're being particularly aggressive? Why can they do that sort of calculation and announce that to the markets where you aren't able to?

I'm sorry, could you repeat -- you're talking about the Medicare, not the commercial patient improvements, right? The Medicare improvements in terms of reimbursement?

That's right. The 1.6 and the drug add-on, DaVita have recently stated that they think they're going to $55 to $60 million off the back of that. And they've got about 15% less public payor patients than do you. And I was wondering why they are able to make that calculation and announce it to the public markets and you aren't?

Well, we felt that we gave you guidance here in the 2% to 3% in terms of the total positive contribution at this point in time. But we're a little reluctant to go beyond that until we see some of the actual billings and some of the activities actually generate the final income. Larry, would you like to comment a little more on that, if you want to?

It is hard for us to compare because we don't know what assumptions were behind someone else's estimates and what may be included in them and what not. We've done a very careful analysis, and there are some clear positive impacts and the whole thing is a net positive, as I mentioned. But there are also some take-aways, the change in the methodology for labor cost reimbursement. And some other items which are offsets to the kind of headline positives that you read about. So, I think we've been kind of on the realistic conservative side. We've taken our best estimate, we don't know yet what the impact from HMA will be, that's being implemented, on April 1. And y we're just at the beginning of the implementation of the MMA changes. So, how the ASP+6 reimbursement dynamic will compare to how it has been historically, we've made our assumption about it. But we will have to wait to see how it actually is implemented and how it works to give you a better feel for what the impact is.

So in summary, that's really the way we look at it and you would have to go back and talk with the other group if you need more information from them. Thank you.

One last question. And Larry, this is for you. In May, when you first spoke about the Renal Care Group acquisition, you said that in the first year, it was going to be neutral to slightly positive to earnings, the Renal Care Group acquisition. And part of the rationale to that was the amortization of patient relationship, we were cut off at the last call for hearing a bit more detail on that. But can you quantify how much amortization of patient relationships you have currently included in your guidance? And how much of that is up to question, whether we should put that in our numbers going forward?

Again, from the last conference, this is something that is currently under evaluation. We're also in contact with our auditors about it. We have noted again that the other players in the industry are having a different accounting policy than we are and so we're strongly considering to make a change. When we've come up with our forecast for 2006, we very conservatively included that in our forecast and in the guidance that we've talked to you about today. It is a little more complicated and there's a number of factors to consider, in deciding how to implement the change and what the eventual impact will be. Again, we anticipate to make a decision whether we're going to change or not in conjunction with the accounting for the RCG acquisition. And as soon as we know that, we will advise you what our decision is and maybe we will be able to give you a better idea of what the exact impact is.

Can you not just tell us how much you've factored into your guidance?

Again, we've been quite conservative about the way that we've factored into the guidance and I would prefer not to disclose a specific number at this time because, again, it is still under evaluation.

Thank you very much.

Michael Jüngling.

Thank you. Two of my questions have been answered, so I've got two more. The first question is what are your expectations for private payor increases in 2006 excluding any impact that may have -- that may occur in 2006 as a result of the potential shift from 30 to 60 months? I'm just curious as to whether you can maintain your current private payor increases from previous years into 2006? And secondly, how serious do you view any potential threats from [Nexstage] on your home hemodialysis business?

This is Ben, I will take that. Basically, when we look at the -- I will go backwards on that one. When we look at NexStage, we don't see the rationale in terms of the amount of treatment that device can supply. And we it very similar to CAPD or CCPD. So essentially, at this point it is a little hard for me to see that it will have an impact on us in terms of the actual operations of the clinics or that it will get that much traction.

Now, as far as the commercial payors, remember there are two parts to the commercial rate. One of them is the drugs and the other one is the actual rate for the dialysis treatment. We have been on the low end of the drug area. And so we're quite comfortable that we will probably see somewhere in the 5% -- the continued 5% increase in our total reimbursement for those two components going forward from the commercial payors. And so that is what we feel and we continue to see that. So, we're still on that track. Without any Medicare increases, we would be in the range of 1% to 2% increase in the reimbursement and Medicare of course on top of that.

And just a follow-up question on NexStage, did you indicate that the part would have more of an impact in the PD market than in HD?

This is Ben again. It is a little early for me to tell. And I certainly don't want to be in any way negative to any new ideas that come into the field. But as I look at it, there is really three choices. Four choices that our patients have in the home program. Home hemodialysis, PD, which we think it is a good therapy. Or they could do nocturnal dialysis in our clinics and that's the fastest growing program we have. And that is where they actually come to our clinics three times a week, dialyze in our clinics overnight and then basically then go home. And so, those are the three areas basically -- I'm sorry, and then you have NexStage, the fourth one. So, there are four competing therapies out there and clearly, the overnight in our clinic provides the best care, safest care and the most treatment. So, that's the one that we see growing faster than any of the others.

Thank you.

Your next question comes from Charles Weston.

Hi. Could you talk a little bit about your plan for sale drug [Inaudible] And also, could you comment on how the gross margins -- [ Inaudible ]

Charles, we are sorry actually you are fading in and out. Are you talking from a handset? Can you pick up the phone maybe?

Is that better? I hope it is better? And the questions related to the sale of drugs and the phosphate binder in Europe, particularly, being the first one. The next question related to the cost of goods. You talked about higher cost of goods, higher cost of raw materials in 2005. I was just wondering how that was expected to pan out in 2006?

Thank you. Yes, we've -- we're well on our way to having a license and being in the market for our own phosphate binder in Europe. We have other products that we're offering in Europe as distributors. So, the activity in the pharmaceutical area is focused primarily in the European theater. And I think at the capital markets day, we said this would be a five year type program and we're now in the second year of it. But we're pretty much on schedule. As far as the costs, one of the largest costs, at least in the U.S. is the cost of fuel. And we see that also in the international area, in the delivery of PD products. As far as Larry had mentioned increase in raw materials, yes, most petroleum-based raw materials have increased. We have long-term contracts but they have escalators. But we also have projects underway within our plants to continue to reduce essentially or improve efficiency and try to balance with this. So overall, we have faced this for a couple of years. We think we have plans. But it clearly is there as a concern in the delivery and primarily in the raw material area for plastics.

Thank you.

Your next question comes from [Bairig Connors].

Hi, and good morning. Good afternoon, I guess. I just had a question in terms of the guidance for next year. Does it include the synergies and the one-time costs? Or are those basically net each other out in your guidance?

It does include the synergies for the three quarters, second, third, and fourth quarter and it does not include one-time costs.

Those were the one-time costs we identified.

So, the 10% to 15% net income guidance includes about 30 to 40 million of synergies in '06?

Again, because of the later than anticipated closing, it is more closer to 30 than to 40.

The net income is up 10 to whatever, 10 to 15, and have you 30 million of synergies in that growth number?

I think I don't want to give an exact number but it is in that range.

So without the synergies, there is only about a 30 million growth, round about 25 to 30 million growth in net income?

Well, we've given a net income range of 20 million. So, I don't think you can be that precise and do that calculation. But clearly, without synergies, the net income growth would be lower. And also remember that the net income growth is on an after-tax basis and the synergies are on a pre-tax basis.

Okay. Thank you.

We have a follow-up question from Michael Jüngling.

Yes, thank you. Just one additional question. If you look at the other rising price of oil and your push toward single use dialyzers in the United States, particularly with the independents; is this a serious hand break going forward, given that you've got to produce around 10 to 15 times the amount of single use orders compared to multi-use? So could this meaningfully threaten the penetration rates because of rising costs in the United States for that product?

This is Ben. No, actually not. Because what you find is our efficiencies and the amount of plastic in a dialyzer, you have an awful lot of foam in the products or you have a lot of air in the fibers in terms of the density. So, we've looked at that quite carefully. And if you look at the escalation of the costs of the chemicals that you're using to do the re-use, it basically neutralizes it or it is actually more expensive if you look at the actual materials that are used in the re-use process. S,o this is not a deterrent at all. We have a slight advantage but not significant. In time we will recycle some of the products, some of it but at this point it is not economically feasible.

If I could just add one comment, in addition to all those things, we believe that single use is a better therapy for the patients.

Your next question comes from Gary Taylor.

Hi, I just wanted to clarify a point on the synergies and the costs. And when you've guided that the transaction would be neutral to slightly accretive in '06, I'm trying to reconcile that with an expectation of synergies in '06. But that comment excludes then the 50 million roughly of nonrecurring costs that are involved with the transaction?

Well, that's one of the reasons that we wanted to give guidance before one-time items. When we announced the transaction, we expected that we would have those one-time costs in 2005 and now, we've got them in 2006. So, the neutral to slightly accretive was before the one-time items, both when we announced it and now. And we think that that is the most relevant and useful way to think about it.

And am I correct that you were saying the one-time costs were to play out 2Q, 3Q, 4Q, on accelerating sort of basis?

I would say again most of the costs will be in Q2 and Q3. And then fell off in Q4 with very minor amounts, if any, in 2007.

And when you report your quarterly results, you will itemize the amount and the impact of what you consider nonrecurring expenses and we will be able to see those?

Yes we will, as we go through the year, we will track against guidance just on the same basis as we've presented it today.

And the one thing, on this particular quarter, I think there was a nonrecurring item. What line item was that included in, of your income statement?

It was included in the SG&A line item.

Thank you.

We have time for about one more question.

There are no further questions in the queue.

So thank you very much, everybody, for joining us today. Thanks for being here. It has been a pleasure, like always. See you next time for our Q1 in May. Thank you.