Fresenius Medical Care AG (FMS) 2006 Q1 法說會逐字稿

I would like to comment on the Safe Harbor Statement at the beginning. The presentation you see today, on the Web, includes certain forward looking statements. Actual results could differ materially than those included in the forward looking statements due to various risk factors and uncertainties. These and other risks and uncertainties are described in detail in our Company's reports filed with the Securities and Exchange Commission and the German Exchange Commission Deutsche Börse.

Concerning our Q1 2006 press release and at the end of our presentation which we use today, we include it in compliance with the SOx 401 Sarbanes-Oxley a complete [bridge] for any non-U.S. GAAP measures that we utilize, and relate such to the nearest U.S. GAAP measure available.

With us today is Dr. Ben Lipps, Chief Executive Officer of Fresenius Medical Care and Larry Rosen, our Chief Financial Officer of Fresenius Medical Care. Then we'll cover our business update and Larry will give us some more detail on the financials--so that's it from my side--Ben the floor is yours.

Thank you, Oliver. And again, welcome to everyone who is joining us today on this Webcast; and also, we thank you for your interest in Fresenius Medical Care. As Oliver mentioned, I'll cover the business update, and Larry will cover the financials, and then we'll open it for questions and answers.

On Slide #4 you'll see the achievements of the 1st Quarter. In addition to completing our major strategic projects this year we had an excellent 1st Quarter. We saw very strong organic growth of 9%; our revenue per treatment developed positively in North America and around the world. We saw very strong demand for our hemodialysis machines, in fact, sales were up 24%; our EBIT margin increased by 50 basis points; our bottom line, excluding one-time costs, grew by 18%. We also saw a very solid cash flow generation for the quarter.

At this time I would like to thank the management board, our employees, our clinical associates for the hard work they have put in this quarter and for their dedication, and also for their dedication to providing the best quality of products and services. We're very pleased with the 1st Quarter. We confirm our guidance with great confidence and we feel that we're off to a very good start for 2006.

Moving now to the next slide, Slide 5; as you can see, we had record top-line performance of $1.75 billion that was a 9% growth in actual currency, 10% constant currency. Excluding the one-time costs, we saw 18% growth in net income reaching $127 million for the quarter. Again, Larry will give you more details on the financial aspects of 1st Quarter in his presentation.

Moving now to Slide 6, you can see the revenue development for North America and the International segments. In North America we had revenue of $1.2 billion up year-over-year by 10% driven by both the Hospital Division and the Patient Care Division. Our organic growth in North America was a very strong 8%.

In the international region, which accounts for 32% of our revenue, our total revenue reached $553 million. We had a growth rate of 12% constant currency--clearly above the market. In Europe, which accounts for 23% of our revenues, we saw a 10% constant currency growth--again, strongly above the market.

Asia-Pacific, which accounts for 5% of our revenue growth, basically gave us a 16% constant currency growth. Latin America, 4% of our revenues, grew at 18%. Clearly in all aspects of our regions around the world, our revenue growth was exceptional in a very strong quarter.

Turning to Slide 7, I'd like to give you some more details about our organic revenue development in North America and in the International segment. Organic revenue growth in the dialysis services business, in North America, was 8.1%. In the International area, it was a very impressive 11.4%, giving us a worldwide organic revenue growth of 8.6%.

The growth in North America corresponds to a $310 per treatment -- In International, the revenue per treatment, our 1st Quarter 2006, was $130 -- it was an increase of $4 from last year or a 3% increase year-over-year. In seven of the 14 countries, in which we operate, we saw reimbursement increases in the International area.

The revenue increase in North America was driven primarily by contract effectiveness and the Medicare increase -- reimbursement increases. Our same market growth in International was 10.4%; in the U.S. it was 2.2%, or in North America 2.4%. This clearly was below our target.

The primary responsibility for this was that there were a number of physician contracts that we did not renew, and our focus has been diverted to the acquisition of Renal Care Group. I clearly expect, during the second half of the year, that we will see a significant improvement in the same market growth in North America.

Treatments for 1st Quarter were 5 million treatments, up 6%; and I think you can see from this slide, that we clearly had very strong momentum in our service business in both North America and the International theater.

Turning now to Slide 8, I'd like to give you a few more details on the development of our revenue, total revenue for the regions. Our worldwide service revenue grew at 10% constant currency. North America achieved $1.06 billion in sales. This was a 9% growth year-over-year.

The international services showed strong momentum and grew at 10% actual currency to $213 million dollars; however, on a constant currency basis this which was a very strong 15% growth in revenue for the year. The service business is now 39% of the international business, which grew by 130 basis points year-over-year. It's a clear indicator of the growing strength of this business in our international section.

Turning now to Slide 9, I'd like to talk about the positive outlook that we're seeing for the revenue per treatment. I'd like to give you some more details in the U.S. service aspect of it. As you can see, our U.S. service business, we continue to see progress in the revenue per treatment. In 1st Quarter, the revenue per treatment was $310 per treatment, up $17 over 1st Quarter 2005, and $8 sequentially over the 4th Quarter of 2005.

And, as I mentioned, the 1st Quarter increase in primarily driven by contacting and by Medicare reimbursement increases. RCG also continued to perform very well, with revenue per treatment of $330 per treatment. This is up $6 or 2% from 1st Quarter 2005. I'd also like to mention that our quality indicators for the 1st Quarter were quite good. Ninety-three percent of our patients achieved adequate treatment of Kt/V of 1.2 or better.

Our anemia management program was on target for the 1st Quarter, as we prepared for the introduction of the hematocrit measurement audit guidelines, with the HMA or the hematocrit measurement audit program we have a new hard cut-off at a hemoglobin of 13 grams per deciliter. We will have to change our algorithms to provide for the best care, but yet be cognizant of the economic cliff at 13.

Although we believe that this program will be positive for us in 2007, we clearly are monitoring it closely during 2006 as we implement it. Of another note, our hospital days for the 1st Quarter of 2006 decreased by almost 2 days from a year ago. So again, our quality is excellent, and we are clearly in a position where we're implementing and monitoring the HMA policy.

Turning now to Slide10, I'd like to give you some more details on the revenue development for both North America and International for the products business. In total, our products business grew very well last quarter to 9% constant currency, clearly in excess of the market. On top of that, our external products business grew by 10% year-over-year in constant currency.

Product business revenues now account for 27% of our total revenue. The International products business grew by constant currency of 9% for the 1st Quarter of 2006 over the same period of last year. We saw above market growth in Europe, Latin America, Asia-Pacific led by dialyzer machines and PD solutions.

Also, North America's product growth was excellent at 12% constant currency or 12% to the external market--very strong. Again, it was driven by machines and dialyzers and PD solutions.

I'd like to now turn to Slide 11 and give some highlights with respect to the North American segment. As I mentioned, the products in Hospital Group saw very strong sales. We continue to see very strong demand for the hemodialysis machines--in fact our market share was probably in the 70% to 80% during the 1st Quarter. Dialyzers grew at 15%, and we saw PD grow at 8%.

With respect to the service business, as I mentioned before, our organic revenue growth was 8%, and our nocturnal program is growing quite nicely at around 16%--we have over 650 patients registered in the nocturnal program and being treated in this program.

Turning now to Slide 12, I'd like to talk about the European highlights. We've seen exceptional growth in the European theater, and we continue to maintain strong profitability. Clearly our Service business in Europe has been growing and expanding very well, and our Products business has also been performing above the market.

We saw excellent demand for our hemodialysis machines 1st Quarter for both the 5008 and the 4008. In fact, our demand was up by 69% year-over-year. Again, we saw a very strong market share in the European theater. Our PD products were up by 11% and we produced a record 10 million dialyzers during the quarter.

Turning now to the Service business in the European theater, we increased our number of clinics by 30 clinics this year. We now have over 330 clinics in 14 countries. We are treating 24,000 patients. Our same-store market growth was 12% for the 1st Quarter; and in the Eastern Europe theater, we grew at 33% revenue growth. This is an area of focus for us in terms of the European Service business.

As I mentioned, we saw reimbursement increases in 7 countries out of 14 which is really quite good. The others were neutral. This was primarily driven by either new therapies which provided more value, or cost of living increases.

So, in summary for the European theater, we continue to maintain very high profitabilities; and we continue to grow the Service business as well as the Products business in the European theater.

Turning now to Slide 13, I'd like to comment on our recently published study on Kidney International. This was a retrospective study of 2,165 patients from 1998-2001 comparing the outcome of patients treated with hemodiafiltration compared to hemodialysis. The results of this study suggested that patients treated with hemodiafiltration had a significantly lower, by 35%, mortality risk than those treated with low-flux hemodialysis.

As you know, we've launched the 5008 machine; and last year this machine, as I mentioned, was equipped with online hemodiafiltration as a standard feature. We're very encouraged by this paper and we're pleased that we have made HDF a standard feature of the 5008 machine. As I mentioned earlier, the demand for our machines, including 5008, is exceptional; and we expect that to continue.

Turning now to Slide 14, or the RCG Acquisition, clearly we completed the acquisition in the end of March. We divested 105 clinics with a revenue intake of around 512 million. RCG continues to perform well, as I showed you. We are now in the process of implementing our synergy program.

The process is running smoothly; however, we're only one month into it and we need to essentially be mindful that this is a major project, and we devoted a considerable effort to the planning. We're encouraged by the progress so far; but again, we're just at the very early stages. We feel also that we've combined some of the best programs of both companies, so we look forward to the future and to the increase in profitability as well as increased patient care.

Looking now at Slide 15, you'll see a snapshot of the Q1 performance. For Renal Care, net revenues increased by 10%; net income, before one-time expenses, by 11%; and as I mentioned earlier, the revenue per treatment was $330 per treatment; and the same-store market treatment growth was 3.5%.

So all in all, they turned in a very good quarter. And again, it continued during the whole 11 months that this transaction was being consummated. As I mentioned, we have started the integration process and we're optimistic that we will achieve our targeted synergies--and actually, above those.

Turning now to Slide 16, you can get a rough idea, on a pro-forma basis, what our revenue would look like. We clearly would be above 2 billion in revenue per quarter in the range of 2.06 revenue per quarter. And basically, Larry will give you more detail in terms of the pro-forma guidance with respect to RCG.

Turning now to my final slide, Slide 17, I'd like to basically focus on our activities in Europe and North America. These two regions account for about 90% of our revenue; and clearly, as you look at 2006, we have accomplished our strategic activities and now we need to, in North America, clearly focus on patient growth, quality outcomes. We need to continue to successfully complete the integration of RCG. This will lead to improving margins, margin expansion; and we would expect to see continued revenue per treatment increase.

We do expect to see our Medicare integrated health program or the demo project to continue to expand. And, we're seeing very good acceptance of our single-use dialyzers or our Carepak products to the external market, and we expect to continue to see that expand in North America. So it's primarily operations in North America, integration of RCG.

Turning to Europe, we will continue to expand in our vertically integrated business, especially in Eastern Europe with respect to the Service business. We will continue to accelerate our de novo Clinic Program. We will also continue to see expansion of our machine business, especially the 5008; and above all, we will maintain our profitability--our very good profitability in the European theater.

So in summary, 1st Quarter was an excellent quarter. We're off to a very good start for the year. We've been able to complete our strategic projects, and at the same time turn in a very good operational quarter.

So I think at this time, I'd like to turn it over to Larry Rosen, who will cover more of the 2006 financial aspects. Larry?

Thank you Ben. Good afternoon to everyone in Europe and good morning to those in the U.S. I'm pleased to report on our very good performance in Q1 and an excellent start to the year 2006. I want to briefly review our performance in the last quarter before full consolidation with Renal Care Group. Then I want to focus on some of the accounting matters affecting our financial statements. Finally, I'd like to give some extra perspective on how to think about our guidance, given both the special accounting matters and also the general business environment.

Let's take a look first at our P&L for Q1. Again, this reflects only Fresenius Medical Care and is not pro forma with Renal Care Group. Ben talked a lot about the excellent revenue development, so let me focus on margins and the non-operating metrics of interest and tax expense.

It was clearly a good quarter for operating margins. We had an increase before one-time costs of 50 basis points, compared to the first quarter of 2005. I'll discuss in some detail in a moment how that played out by region, and what the contributing factors were.

I want to mention that we did have some one-time effects in Q1 -- $3 million at the operating income level that was primarily the introduction of SFAS 123, the expensing of stock option or stock compensation-related expense. We also, below the operating income line, in the interest line, had the write-off of the financing fees that were amortizing for our old credit facility, which we've replaced with the new financing for the RCG acquisition.

Before one-time effects, that income increased by 18%, above our 10% to 15% guidance for the year. And here we benefited from very good continuing performance on interest expense and also tax expense.

Now, let's turn back to operating margins and look at the primary drivers in each of the regions. In North America, clearly revenues per treatment coming from both the public sector, where we had the 1.6 percent Medicare increase, but also some very good developments in contracting in private insurance led to part of the reason for the margin increase. We also had very good machine sales, one of our higher-margin products in Q1, even compared to last year. Some offsets were the continued higher fuel and delivery costs and also some higher personnel costs, both in our clinics and in our administration structure.

In international, we had a 1.5% increase compared to Q1 of last year, and there were several contributors. We had a couple of reimbursement increases-- one in Italy, one in Venezuela. We also saw an excellent improvement and an increase in margins in Brazil and Colombia as the economic environment in those two countries continues to improve. We also saw some improvement overall in Asia Pacific and in particular in Japan, where the full effect of last year's restructuring has taken place.

We also had continuing very strong performance in our plants, where in most of the plants we're running at close to full capacity. And also in international, we had very strong machine sales, led by the 4008 and the new 5008 machines.

Now let's turn to cash flow and the balance sheet. Q1 saw a good performance in DSO. In total for the company, we were down and even stronger than expected four days. And if you compare it to each of the regions, which were each down three days, we see basically a rounding effect. So it was really nothing other than rounding going on. In total for the company, we were down four days. Especially noteworthy is the performance in the U.S. at 60 days, which is clearly leading the industry in this metric.

Now, in terms of cash flow, we had a good quarter. Our performance was up 17% on operating cash flow versus last year. We did spend more on CapEx as planned. And we spent less on acquisitions. We basically had no acquisition activity in the U.S. pending the RCG acquisition. I think that will pick up a little bit as we go through the year. But overall a good quarter, up 14% after acquisitions compared to last year.

And here's basically the same picture, but just including the RCG acquisition which you see down at the bottom and basically dominates the cash flow picture for Q1.

Now, let's turn to the balance sheet, and our credit ratios, based on our good operating cash flow performance, but also the excellent results from the preferred share conversion. And remember that, with each preferred share, a premium was paid. And so we got the proceeds that you see in the middle of the page of $309 million during Q1. And that reflected, again, the excellent 96% conversion rate.

We also had some help from some additional stock option exercises. And that all led to a pro forma debt to EBITDA ratio of 3.8 at the moment of the RCG acquisition -- so on March 31, on a pro forma basis. Remember, even in February, we were projecting that this would be 3.9. And about a year ago today, when we announced the RCG acquisition, we believed that we'd be in the 4.3 to 4.4 range for this.

So, really good cash flow performance in 2005 that continued into Q1 of 2006 -- really led to a great starting position compared to where we thought we would be. And that leads to our confidence that we'll be able to reach our targets that you see now on this slide. On the right side, we said in February, and we strongly confirm, that we believed that by the end of this year, we'll be below 3.6 on the credit ratio. And we're more confident than ever that we'll achieve our medium-term target of below 3.0 by the end of 2008.

Now, let's begin to look at some of the key accounting matters and also assumptions that we've made. And here you see the one-time effects, first, in the left-hand column, the one-time effects in Q1. Again, most of the effect in operating income was from the first-time stock option expensing according to FAS 123. And then you see, on the EAT level, the 9 million after tax of the write-off of the financing fees that we had been amortizing with our old credit facility. But now that we've refinanced with the new credit facility, you have to write off those fees. So that's clearly a one-time effect.

Maybe more interesting is for the full year --what we're now projecting, and for the RCG restructuring costs, we continue to forecast a total of 50 million for the year. And just jumping down to the stock option expense, 14 million for the whole year -- so similar to what we had in Q1. And then you see the impact from the FTC-related clinic divestitures. At the operating income level, we expect a gain, and we estimate 38 million.

Jumping down to the bottom at the net income level, we expect a small loss of 6 million. The reason for that is that goodwill must be allocated under U.S. GAAP to these divestitures, but of course is not deductible for tax purposes. And so that leads to the small loss. And we're now projecting a total EAT impact from these one-time factors in 2006 of a total of 60 million.

Now let's talk about, on the next two pages, some additional accounting matters and also key assumptions. First, intangible amortization. Under the column old FMC, you can see the items that FMC was amortizing or not in the past. So we were amortizing. We were separately identifying, on our balance sheet, and then amortizing patient relationships. We were not separately identifying or amortizing non-compete agreements. And we were amortizing acute care contracts.

RCG and indeed others in the industry were not any longer recognizing patient relationships, but were recognizing non-compete agreements and acute care contracts. Following a careful analysis and discussion with our auditors, as well as a review of the accounting literature, we decided to change our policy as of January 1 of this year, and will no longer separately recognize patient relationships, but will separately recognize and amortize non-compete agreements and acute care contracts.

The net effect of all that is neutral versus the pre-acquisition standalone financial statements of the combined FMC and RCG.

Now just turning to SG&A and cost of goods sold, we have one reclassification that I wanted to tell you about. We looked at the items that were contained in SG&A and respectively cost of goods sold and thought that, intuitively, that location expenses, in particular the location expenses for our clinics, really better belonged in the cost of goods sold classifications than in SG&A. And so we've made that change starting in January 1.

And you can see the impact. For 2005 we reported an SG&A expense as a percent of sales at 19.8%. With the reclassification, it was at 18% for the full year. And for the Q1 2006, we were at 18.4%. That's consistent with the run rate in the last half of the year, when we were at approximately 18.4%.

Now going on to some other key matters -- Here's a little more information on the gain and loss or gain/loss calculation of the FTC divestitures. We received proceeds of approximately 512 million. We anticipate, and are very confident, that we will have to pay a tax of about 150 million for the combined FMC and RCG. Only the FMC part of that goes to the P&L, whereas the RCG gain/loss calculation is part of the purchase accounting for the RCG transaction. And again, as I mentioned, for FMC the net loss is 6 million projected.

Again, restructuring costs, we confirm the amount of 50 million that we announced originally one year ago and have been confirming and still do confirm today. And then we have transaction costs. We estimate a total of 140 million. About 40% of that is for the first category, M&A advisory, legal advisory and other kinds of consulting that we needed to accomplish the RCG transaction -- all of those kinds of fees. And again about 40% of this 140 million are part of the purchase accounting and only affect the balance sheet, whereas the other 60% are in the second category, the credit facility fees. And those costs will be amortized over the five respectively seven years of the new credit facility that we've put in place for the RCG acquisition.

Finally, we confirm that synergies will be approximately 30 million for the remaining part of 2006, so nine months of the year. And it includes the effect of a later closing. Remember originally we had estimated 30 million to 40 million. At that time, we had thought that we could close the transaction by the end of the year. We have now closed on March 31, and we believe that the synergies for the year will be about 30 million.

Now let's take a look, again, at our guidance. We basically are reconfirming our guidance for the year. And if you look at the middle column, this was our primary guidance, and we gave it on a pro forma basis. And we forecasted a 25% revenue growth to approximately 8.4 billion. Net income growth, again, 10 to 15%, and this is before considering one-time expenses. And we reconfirmed the capital expenditures and acquisition budget combined 550 million, and again, the leverage ratio to be below 3.6 by the end of the year.

Now as my last slide, let me give a bit more perspective on this guidance. And what I want to do is talk about some key changes and uncertainties that have kind of filtered through the time that we've given our original guidance about the acquisition last year, and then the guidance that we've given for 2006 in February, and that we're reconfirming today.

We've also importantly said that we expected that the RCG acquisition would be neutral to slightly accretive for FMC in 2006, and that was on a pro forma basis and excluding one-time items. And again, we reconfirmed this guidance as well today.

And there are certain things that affect our decisions on the guidance that we know, and certain things that will play out during the year. Under the category of the things we know are the certainties. We know that we've missed at least one quarter of synergies due to the later closing on March 31. We've also had higher than expected divestitures than we had originally projected, and this clearly has a negative impact.

But on the positive side, we've had the significant regulatory changes. We've had the enactment of the 1.6% reimbursement increase in the U.S. as well as the drug add-on methodology, which also had a positive effect, and finally patient relationships and the overall subject of the amortizable intangibles. It's clearly a plus versus our original guidance, but basically neutral versus 2005. So we originally thought that we would amortize patient relationships, and we thought that would have a significant impact on the P&L. With our accounting change, we no longer will have that burden on the P&L and so it has a positive impact from that standpoint. If we take all of those factors together, the net effect is basically neutral to slightly positive for the year 2006.

Finally, there are some key uncertainties, one of which is international product pricing, in particular the every two year Japan reimbursement reduction which occurs in April every other year. It's now occurred in April of 2006. We continue to assess the impact of that, and it's somewhat of an uncertainty for the year. Also uncertain is the new enactment of the HMA legislation and implementation. And we kind of limit the uncertainty to 2006 because we think once HMA is fully implemented that it actually will have a neutral to somewhat positive impact for Fresenius Medical Care. However, we think the initial introduction of HMA may be neutral to very slightly negative.

So overall, some key uncertainties, a very good start to the year. We will very carefully evaluate our guidance during the year and update you as soon as is appropriate. So thanks very much and I think we're ready for questions-and-answers.

And your first question comes from [Elrich Hulluah with MM].

Yes, hello. I've got a few questions if I may. The first one is, is there anything, news from your side regarding the possible changes in the reimbursement in the U.S.? Second question is could you be please a little bit more precise on the outlook for the revenues per treatment for this year? And the third one is the impact of the mentioned transaction costs. Where would this be booked, the 40%? You mean affecting the P&L? And which quarters will we see this? Thanks.

Thank you very much. This is Ben. As far as reimbursement situation in the U.S., the extension of the MSP that was in President Bush's budget is, to the best of my knowledge, still there. We do expect that the budget process will continue and be defined by the end of the year. So at this point it's basically anyone's final guess what will go into the budget.

As far as the additional revenue per treatment for the year from other sources, we continue to see a strong increase in terms of revenue per treatment of around 2% a year. And if you'll notice, one of the slides, our target with the combined RCG activity was around $310 per treatment. And clearly we will exceed that. I think that we'll be basically, when you put it all together, somewhere $5 to $6 above that. With respect to transaction costs, Larry, let me turn that to you.

Okay. Let me differentiate between the restructuring cost of $50 million. We expect most of those costs, if not all of them, to hit the P&L in the second and the third quarter of this year. In terms of the transaction costs, the 40% that I talked about of the $140 million that represent the M&A and legal fees primarily will not hit the P&L at all. They'll be booked in the balance sheet as part of the purchase accounting, part of the purchase price accounting of the RCG acquisition. The remaining 60%, the credit facility fees, will be amortized on a straight line basis over the life of the credit facility of five to seven years.

That's great. Thanks.

Your next question comes from Holger Blum with Deutsche Bank.

Hi, it's Holger Blum from Deutsche Bank. Could you maybe talk a bit on the [same] growth rate of 2.4% and your expectations going forward? And do you still plan to grow 20 to 30% above the market in that respect? And also maybe say a word with regard to UltraCare or the single use. How do you see that progressing in the market? And finally an outlook for 2007 and the latest gossip and gut feeling on the Bush proposal? Thank you.

Thanks, Holger. This is Ben. Yes, as I mentioned the 2.4, or actually 2.2 in the U.S., this clearly is below our target. As I also mentioned, there were some contracts that we decided not to renew for profitability reasons. Those are pretty much behind us at this point. And I would expect with our renewed focus after the RCG acquisition that we will be 15 to 20% above market growth. Our estimate of market growth right now is somewhere a little south, or a little below 3%.

With respect to UltraCare or to the external market care pack, you'll notice that we had very strong revenues in the external business in the U.S. -- 12%. We're now up to around 59% of the independents are operating with single use. And that continues. I think that was up from 52% last year. So very well accepted, and we continue to go forward.

With respect to 2007 outlook, I would expect that, and Larry maybe you can comment, we'd have most of the one-time expenses behind us. We clearly would be in a goal where we would be growing at 6 to 9% a year, as I mentioned before. And of course the acquisition of RCG will be accretive clearly in a major way in 2007. So I would expect, at this point, 2007, we'll be pretty much back on our normal operating plan. Larry, would you like to add something on that?

No. I would just kind of reinforce that there's no reason to be anything other than optimistic that we'll be able to meet our previously announced targets of being able to grow the bottom line on a double digit basis clearly over 10% and the top line in the 6 to 9% range. And again, we would expect the effect of the RCG acquisition to be clearly accretive starting with 2007.

Back to the Bush proposal, I guess I'm personally optimistic that I believe some combination of that and an increase in reimbursement or some sort of yearly cost correction will be -- will come into play this year. But again, it's a little early. I clearly wouldn't count on it in your models. But I still see that as a positive overall because it was in the budget proposal, and that's usually a good portion of the activity, to get it in that proposal. So I'm personally optimistic.

Okay. Thank you.

Your next question comes from [Alex Perlay] with Merrill Lynch.

Hi. Good afternoon. A couple of questions. Maybe to follow up on this 2007 budget proposal. Could you clarify, to the best of your knowledge, was the planned increase in this commercial payor period, does it relates to all private insurance policies, i.e. all employees? Or just to the ones who are at a larger company such as greater than 100 or 200 employees?

Secondly, on synergies, you've said that you can do better than what you've guided to, which for full 2007 I believe is EUR40 to 50 million. Could you tell us a little bit more as to how high do you think you can go? Or at which point you can update us to the new guidance for synergies. And thirdly, on this intangible amortization issue, could you just tell us how - I believe you have about $40 million of intangible amortization by yourself for 2005, and RCG I believe had $6 million. Could you tell us what's the combined number for 2006 pro forma?

Okay. This is Ben. With respect to the Bush proposal, I believe that it will apply to all of the secondary payors with respect to the commercial payors. At this point in time I can -- I believe that's my understanding of it. Moving to the intangibles, Larry, and the synergies, why don't I turn that to you?

Okay. I don't think that we really can or want to quantify how much higher the synergies might be in 2007. I would say we continue to work hard on optimizing the organization structure and network. And as soon as we have some better visibility about 2007 and those synergies, we'll be happy to update you. I think the important thing to recognize is that the direction is more in the plus than in the minus direction. And as soon as we can quantify that, we will be happy to talk to you about that.

In terms of the intangible amortization, I think I would make a couple of points about that. One is the $40 million sounds a bit low, but that's about what we had on the balance sheet for FMC on a stand alone basis. And the actual impact on the P&L of making the accounting change just considering FMC is very slightly positive. Remember that we don't eliminate all intangible amortization. We just eliminate the patient relationships. We do add the non-compete agreements and we continue to amortize the acute care contracts. So the net effect is clearly positive versus the case of continuing to amortize patient relationships, but it doesn't go down to zero.

In terms of quantifying the exact figure, I think that's probably too much detail and we don't want to quantify that. Suffice it to say that for 2006 we expect, including the acquisition of RCG, that there'll basically be a neutral impact vs. the amortization that FMC and RCG on a combined basis had in 2005.

The neutral compared to the pro forma of FMC plus RCG?

Yes.

And to follow up on the synergies. You said there is kind of plus and minuses. Where do you see, I guess, the upside coming from in the synergies, and where do you see perhaps the shortfall coming from?

I think we're very confident about being able to reach the figures that we've announced. We've - having the small delay in the timing of the acquisition has given us an even better chance to do very detailed planning. We're really in the implementation phase now. And we're very, very confident about being able to achieve those figures that we've announced. I think that we will continue to analyze the organization, the administrative activities, and the clinic network. And I think that we have a chance to identify some additional synergy opportunities.

Thank you.

Straight on the numbers, we said $40 to $50 million, not euros.

For which number?

For the synergies in 2007. Because you mentioned euros.

Your next question comes from [Richard Perriet] with Sanford Bernstein.

Hi. I was wondering if you could give us an idea about how you think the Bush proposals - what the impact on patient mix and revenue per patient between 2007 and 2009 would be if the proposals were implemented in full?

This is Ben. I really hate to do that because I believe that we're building on a foundation that hasn't been set in place yet. So I think it's too early to try to extrapolate that out to 2008, 2009. I'm sorry, but I think we ought to keep it that way now.

Okay, sure. Thanks Ben.

Your next question comes from [Tamara Fink] with ABN Amro Bank.

Yes hello good morning. I was just wondering if you could let us know what your consolidated leverage was -- is right now, as per the credit agreement? And whether or not you would expect a change in applicable margin on the term loans?

Again, our consolidated leverage ratio of 3.8 is defined as it is in our credit facilities. We do have some step down in margins in the credit facility, but we don't expect one -- a step down very near term. Clearly, over the life of the agreement we will get some number of step downs as we de-leverage.

Alright, thank you.

Your next question comes from [Ilan Chadwick] with Redburn Partners.

Good morning -- good afternoon today in Europe. A few questions. Firstly, on your P&L and your top line. You managed pretty good revenue development across all your business units. And this resulted in about a 150 basis point improvement in your gross margin. But that was offset, it seems, by quite a strong rise in SG&A expense. And I was wondering if firstly you could go -- go over a bit more detail as to where exactly that's coming through. It looks like it's very much isolated to your North American business.

And second, if you could give us a view on the cost containment prospects for the rest of this year, given that -- up to date you've guided that it's going to be contained below inflation. I just wanted to know whether that was still holding. And secondly, I was just wondering about your medium term EBIT margin guidance that you gave about 12 months ago, where you were hoping to accomplish 15% EBIT margin. I expect at the next quarter's results we'll be pretty much there. And I was wondering what sort of medium term margin guidance you're hoping to achieve.

Let me take the last one first. I think that we have not given and do not want to give a specific EBIT margin target or guidance for this year. What we've said is that we expect continual improvement. And we do expect that also for this year. And when we've been pressed to quantify, we've said on the order of 20 to 30 basis points. We've seen 50 basis points in Q1, so clearly on the right track. But I don't think we want to give a very specific EBIT margin target for the year.

In terms of the P&L metrics that you talked about before. First keep in mind the reclassification that we've talked about. We've reclassed both 2006 and 2005. I think you have to look at the different metrics in the context of the whole year, and not necessarily individual quarters. We had a couple of special factors which reduced the SG&A as a percent of sales in Q1 of last year. Some smaller non-recurring items that were to our benefit. If you look at the EBIT, sorry, the SG&A, as a percent of sales in Q1 at 18.4%, it was reasonably consistent with the second half of last year. And so we haven't really seen a big change in SG&A as a percent of sales in that period.

And I'd like to add to that. If you look at the data on the cost per treatment, last year vs. this year we were up about 2.4%. And I think our target was in the 2 to 3% range. So that clearly is, we're operating in that target and we're quite comfortable. So that's one of the major cost containment programs. Larry has covered the SG&A, as we look at it. I think what we have said, as sort of what would you expect with RCG, we thought that would add from 50 to 70 basis points. We've already added 50 basis points on our own here this quarter, so that's why it's a little bit hard to put those on top of what we did. But, I think you'll definitely see margin expansion as we go through the year.

Thanks. Thanks for bringing that up Ben. Just on those metrics that you just mentioned, we have very strong growth in revenue per treatment in the U.S. by about 6% to $310, and much smaller growth by 2%-3% in average cost per treatment to have actually $259. If you multiply the difference between that by the number of treatments you did in the U.S. that implies a marked reduction in profitability in the U.S. products business which doesn't appear to be the case. So, maybe I'm not calculating this correctly, but could you please explain that to me?

So Ilan, let me take a stab at it first. First, the cost per treatment that you mentioned, the $259, is including Mexico and sort of comparable revenue per treatment is 307, not 310. Second, those costs per treatment do not include some overhead factors. First, the central overhead of the Service Division; and second, the corporate organization and overhead that we have in the U.S. that is working both for the Services and Products group. So, the answer is, No.

We haven't had a reduction in profitability in the Product business, but you really are not looking at the whole picture when you look -- when you do the calculation that you've done. I think it's important to think about some of the cost increases that did not come into the metrics that you mentioned. A key one is fuel and delivery. Again, it's part of SG&A and it's one of the off-setting factors and one of the key issues in SG&A that we're seeing. Obviously the rising oil price has come through to rising to rising fuel and delivery prices and that has an impact for us.

Just on a final thing, your view of these costs. That metric going forward, do you see costs staying at this kind of level, or even decreasing as the year progresses? Can you give a view on that?

In terms of SG&A as a percent of sales, we think generally they will stay approximately in the range that they are now.

This is Ben, following up on Larry's comments. One of the things, that of course you saw on his slide, and I mentioned, is that we're in the process of implementing the HMA. And again, the way that works is if you exceed 13 cutoff for the month after that, you need to reduce the treatment by 25% for Epo(ph) or they'll reduce the payment.

Now, we think we can clearly get our arms around this, and we'll provide better care, but we're being cautious here as we basically move into second quarter. We're very proud of the increase in reimbursement per treatment--very strong for the 1st Quarter, but we need to be a little cautious for the next couple of quarters as we implement the HMA. And that's one of the cautions that we basically are following right now.

Okay. Thank you very much.

Your next question comes from Michael Jungling with Merrill Lynch.

Thank you kindly! I just got off a different conference call, so I thank you for the opportunity to ask a question. Three questions in addition to what Ilan asked before. Firstly on revenue synergies between SMC and RCG for 2007, you haven't talked about this much at all. I'm just curious, given that you've had a 6% in the revenue per treatment in the U.S. market, I would like to know what you believe a combined entity could negotiate with commercial payers in 2007.

Secondly, I'd like to go quickly to the amortization chart for intangibles. Could you please tell us what the non-compete amortization is for 2006 and for 2007? And, the thirdly, the increase in intangibles of 3.4 billion as of the 31st of March, could you please split that between goodwill your non-compete agreement and also your [inaudible] contract? And then, just finally, what is the guidance for net interest expense for '06 and 07? Thank you.

This is Ben. I'll take the first one and basically pass the others to Larry. With respect to 2007 revenue synergies, we do not have any in our plan at this point in time. Remember, we indicated that we would have to get involved, look at the contracts and come up with some strategies.

That is essentially underway, but we've seen such a excellent increase in reimbursement to $330 per treatment with RCG, $310 with FMC. I'd like to be a little cautious now. We'll clearly let you know, as we go through the year and we understand the HMA, where this will end up. But, right now we do not have any synergies in the 2007 40 million to 50 million that we talked about based on revenue. Larry--

So, good questions, Michael. I think I'd like to stick with the answer--one of the answers that I gave before, in that we don't want to quantify these additional amounts of categories that we're putting on the balance sheet or the P&L. I will say though that the vast majority of the 3.4 billion that you mentioned will go into goodwill.

And that again, in terms of the P&L impact, we could expect that if you looked at the combined intangible amortization for these three items, for FMC and for RCG in 2005, we would expect that the amortization for 2006 would be about the same for the combined company.

In terms of the interest guidance, we estimate that we're going to be approximately 61/2% interest rate, including the amortization of the fees that I talked about before. And again, consistent with what Stephan Stern(ph) mentioned for [inaudible], we would say that we are taking quite a conservative posture. Now that we have more leverage on the balance sheet, we've been quite conservative and have fixed most of the debt for the next several years. So, we're not that sensitive to rising interest rates. Again, we believe that a reasonable assumption, and would be 61/2% for this year.

Could we get a number, or a range of what you think the net interest costs would be for 2006? And then for a [inaudible] question, do you think that a combined entity has some better negotiation power than you had previously as FMC stand alone?

Again, I think we don't want to quantify an interest amount forecast. Because, the rate of the leveraging--may change a little bit, and vary throughout the year. So, I think 61/2% is a pretty good guidance. Again, we expect the overall level of debt to be down slightly by the end of the year, and 61/2% should give you a good idea of what the range of the interest expense will be for the year.

And the 61/2% is on the total debt, not only on the new incremental RCG?

That's correct.

With respect to the leverage of the combined companies, in terms of pricing, let's put it this way: clearly, the combined entities have considerable more influence in both the commercial and the CMS. And of course, the industry now, there are two players that essentially creep between 60-65% of the patients.

So, I think we'll be well represented, but I'd hesitate, right now, to say any more than we expect to see an average increase in reimbursement in the range of 2% to 3% a year based on spreading it over all of our patients, Medicare and commercial.

Thank you.

At this time, there are not further questions. Mr. Maier are there any closing remarks?

We had several questions via the Internet, but they must have been answered. I have one more left, actually Ben for you. Somebody is asking, "What kind of cost increase we would expect for Amgen(ph) in 2006 and 2007?

I think as we've mentioned in February, we have a contract--a fixed contract with Amgen for 2006 and 2007; and so, clearly I believe that the pricing is fixed subject to a few performance parameters. The issue then is really not a major issue for 2006 or 2007.

I think in summary then, I'd like to indicate we've had an excellent quarter. We're off to a very good start for 2006. You can see that the stars have lined up pretty well in the products business worldwide. We've had double-digit growth. All of our products are enjoying a very strong position in the market. Revenue per treatment around the world has been--is in a positive mode at this time.

So, we're just cautious. We're very bullish on our guidance. We're sure that that guidance is solid, but to do more than that at this point in time, we like to get a little more of the integration under our belt and we'll talk with you at the end of second quarter. Thank you.

--today's conference call you may now disconnect. 13

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