Fresenius Medical Care AG (FMS) 2006 Q2 法說會逐字稿

So I think everybody is back, so we can start on time. Also, from our end, I would like to welcome everybody here in the audience and the ones joining us via the Web. Thanks for joining for Fresenius Medical Care's second-quarter and first-half analyst meeting here at Hamburg, which will cover our Q2 results and the first-half results and achievements.

You should have received all the material. If you didn't, you can access the material, actually, on our webpage. Let me also point out that, like in the previous meeting, this meeting is also broadcast via the Internet.

I would like to comment on the Safe Harbor statement (indiscernible). This presentation includes certain forward-looking statements. Actual results could differ materially from those included in the forward-looking statements, due to various risk factors and uncertainties. You can look up these risk factors uncertainties in detail in our company reports filed with the Securities and Exchange Commission or the SEC and with the Deutsche Borse Commission.

Concerning our Q2 and first-half 2006 press release and the end of our presentation which we used today, we include it in compliance with the Section 401 of the Sarbanes-Oxley, [a complete which] is provided for any non-US GAAP measures that we utilize. Please make use of the measures we actually gave you on the back of the presentation.

I also, my own concern, would like to inform you that Ms. Terry Proveaux is joining our Investor Relations team globally. Terry was the Head of Investor Relations for Renal Care Group, and she will focus on our North American Investor Relations activities, and I am proud that Ms. Proveaux actually joined the team. I don't know if you have seen it, but you can see her details at the end of the investor news at the end of this presentation, if you would like to call her.

With us today, like in the past, is Ben Lipps, our Chief Executive Officer of Fresenius Medical Care, and Larry Rosen, our Chief Financial Officer. Both will brief you on the results for the second quarter and the first half and give you a business update.

So this is it from my end. Ben, the floor is yours.

Thank you, Oliver. I would like to extend a warm welcome to the ladies and gentlemen in the room, all of our employees and associates that have joined us around the world and those who have joined us on the Internet. I will cover the business update, Larry will cover the financials and then we will open it up for questions and answers.

Let me start by saying, as you have seen, we had an excellent second quarter, good first half. I think you'll see that each of the regions have contributed to this. It's been a global endeavor, and everyone has contributed and done quite well this quarter.

At this time, I would like to thank the management board and all the employees and the associates who have made this happen. Our financial results are quite good, but you'll also see that the quality of both the Products and the Services is excellent. That's the underpinning of the Company.

Now, the first slide here will show you some of the achievements. We had a strong organic growth, 9%. That's about double the market on a worldwide basis. We had positive revenue developments in both North America and International. The integration of RCG is proceeding smoothly. It's basically doing very well. You can see that later on, in the numbers from Larry. We also saw an increase in our EBIT margin of about 140 basis points for the quarter versus last year, and our cash flow was solid.

Again, that all translates to a net income of around 19% growth. Again, this is without considering first-time or one-time items. So that leads to the upgrading of the guidance that, again, you will hear a little more about as we go through the presentation.

Now, taking a look at the next slide here, you'll see that the revenue for the quarter was about $2.2 billion, up 29% actual currency or 30% in constant currency. Of course, the net income I discussed. Now, what's reassuring about this quarter is that that's a combination of the successful integration of RCG and a very strong underlying business around the world in both the FMC, old FMC North America and the Products and Services around the world. So this is both a combination of strength of the base business, as well as a good integration project and success in the integration area.

Turning to the next slide, you'll see a breakdown of our revenue on a worldwide basis. You can see that our revenue in North America was approximately $1.56 billion. It grew by 38%, but what is reassuring underneath that 38% coming from the acquisition of RCG, we also saw an 8% organic growth or growth without base of the RCG. So that's a very fine growth in North America.

Turning to the International group -- and I have tried to show the International group as components, which is basically Europe, Asia-Pacific and Latin America -- the total International group grew at 11% constant currency and reached revenues of about $0.6 billion or $604 million, definitely a record.

Turning now to Europe, which represents 20% of our business on a revenue basis, we saw very strong 9% growth in constant currency. The revenues reached $430 million, which again puts them at a run rate close to around $1.6 billion a year.

I will talk a little more about Europe as we go through the presentation, but I would like to turn to Asia-Pacific. It represents 4% of our revenue at this point. As you remember, last year, we said that there was going to be the problem of every two years we see a revenue decrease in Japan and that we were preparing for it this year. I can tell you that the Asia-Pacific group, led by Roberto Fuste and his group, did an excellent job of preparing. We saw very impressive growth in the second quarter, which is the first quarter of the new revenue decrease, 13% basically constant currency growth in the margins, as you will see later from Larry. The International margin was up 100 plus basis points. Asia-Pacific and Japan contributed to that. So very proud of the Asia-Pacific region and what they have accomplished, and we feel very comfortable that they are in a position to continue to do that.

Latin America -- it's now 68% Service. Remember, our strategy in Latin America was to move more and more towards the Service, less towards the Products. It continues to move along, rock along very well, at the high teens in terms of growth. You can see that they were the winner in terms of growth this year, 19%. Again, the margins in Latin America have firmed and continue to increase, and very proud of the activity. I think we're on the right strategy. I'd like to, again, compliment the Latin American team. Very good results, and I think we're on a good path in Latin America.

So, to sum it up, each region of the world grew very well this quarter, and basically delivered on the bottom line and the top line.

Now, let's look at the Service business on a global basis. We, on a global basis in the Service area, reached $1.65 billion worth of revenue this quarter. You can see that, of course, the Services was up almost 38%, but that was because of the acquisition. But if you look below the acquisition, you can see that we had a very strong organic growth in North America, without the acquisition of RCG, at 9% in the Service area. In the International Services, we had an impressive 12% growth in actual currency, 13% in constant currency. We now are at about $0.25 billion a quarter in revenue in the International Service business. We have, in Europe alone, 330 clinics in 14 countries. So again, the Service business in all aspects around the world has continued to grow, primarily in Europe and North America, though we have very strong concentration and very strong presence, as I will show you as we go through. We expect to continue to see the International and especially European Service business grow because of the privatization of dialysis in a number of countries, which continues to proceed forward.

Now, just to give you a view of our total business in terms of the Service area, we now treat about 162,000 patients on a worldwide basis, and this is about 11% of the total patient population. If you want to get kind of cute, you can add managed clinics into this, then another couple hundred thousand patients to it. But at this point in time, we're basically involved in between 162,000 and 165,000 patients. In North America, we treat 117,000 -- almost 118,000 patients in our own clinics and a couple thousand more in managed clinics. If you look at the International business, we now treat almost 44,000 patients in the International area, and you can see that that has been growing at a rate in terms of clinics of about 11% year.

So in total, as we stand today, we have about 2,078 clinics, and of those, about 1,500 are in the US and about 500 are international and about 330 are in Europe. So we have a very nice presence in each of the regions and a leading presence in each of the regions as far as the patient care.

Now, let me took about more details about our strong organic growth in the organic revenue development for the Service area. Organic growth in North America -- this is organic revenue growth -- was 9%. In International, it was 10%. This is, again, a very significant growth in terms of our revenue per treatment and in terms of our organic growth.

Now, on a worldwide basis, that comes to around 9%. So, again, it's in that 9% to 10% quarter. If you look at North America, the revenue per treatment grew to $317 a treatment. I'll talk more about that on the next slide, but clearly that's a pretty significant number. In International, we grew to $132 a treatment. Again, that's up 2% in constant currency year over year. So not only are we growing the patients in International, we're also increasing the revenue per treatment.

Now, during the past 12 months, in our International business, four countries that we've seen a revenue increase, and in three more countries we have actually seen an increase in the revenue per treatment by offering additional services. So we clearly have the opportunity to grow our revenue per treatment essentially by covering inflation and providing great quality, and at the same time, adding services.

On our same market treatment growth, in International, we had an impressive 8%. In North America, we had 1.6%. Now, let me put a little color around that, because in North America for the last two years, the management team has been focusing primarily on two objectives. One of them is to get the revenue per treatment up, and at the same time, get the profitability of the North American franchise into a leading position. They have done that. We now have the leading position with respect to operating margin in the North American industry.

We have had to, during this time, not renew some contracts. When you do that, for about a year, that goes through the system. So what we're seeing, then, is if you take the contracts that we did not renew because of profitability, that we would actually be closer to a 3% run rate if you looked at the same market growth.

Now, clearly, as we go forward here and we have the acquisition behind us, we will focus on this. We still will stand by our commitment to grow 20 to 30 basis points above the market, but defining the market is a little bit difficult, because our data is a year behind. But it looks like the market is somewhere between 2% and 2.5% and 3%. So we clearly have accomplished our goals in North America, with respect to profitability, and now we need to, as these contracts wash through, we'll see that we can back up into the basically 20 or 30 basis points above the market. Now, when you look at the overall number of treatments that we performed, we're clearly at a range now of about 25 million treatments a year, so we clearly have a major franchise around the world in our service area.

Looking a little closer at the revenue per treatment in North America, if you look -- first of all, let's look at the combined US operation. This is RCG plus the Fresenius Medical Care segment. We ended the quarter -- or for the second quarter, we had a revenue per treatment of $317 per treatment. That is up 5% over last year on a combined basis. Looking at each of the segments, and this is probably the last time I will do this you because, quite frankly, after this quarter, the operations have been blended together in different regions and it's going to be very, very difficult to pull a meaningful number. But I thought it would be worthwhile, at least this one time.

If you look at RCG by itself, it has increased from $320 a treatment last year to around $327, or about a 2% growth. Again, RCG had more commercial payers, so all the MMA add-on that was provided to us at the end of the year, they participated less than that. So if you look at Fresenius Medical Care, we went from $294 as Fresenius medical care to $314. A good chunk of that was the participation that we had and because we had a significant number of Medicare patients in our system.

So all in all, we believe and I'm very, very comfortable that the team has essentially been able to maintain the momentum of each segments and put them together. I clearly one to preempt at this point. I don't see that we have had any synergies yet with respect to revenue, and they are not in our calculations and they are not in our model. So I can say up front that we put -- clearly, it's too early to talk about those. But everything else, I think, is going very well. We didn't expect that, anyway.

Now, if you look at the actual cost, you'll see that the cost per treatment for Q1 and Q2 essentially is essentially the same. It's up about 4%, you'll see on this scorecard, over last year. We do expect that to drop back down into the 2% range. Clearly, we had a different cost structure between RCG and FMC that we are working through, but the team is doing a great job because, sequential quarters, it was essentially the same cost. So we are basically bringing them to the most cost-effective level.

Now, let's talk a little bit more about the highlights and the integration of RCG. The new organization is in place, been executing from day one. I've got to say that everything in life has a little bit of a gain or loss. But you all know how difficult it was during the first quarter to go through all of the FTC discussions and work. But the good side of that is we had another three months to plan the integration, and so I think when we hit the actual close on March 31st, the integration teams were there ready to go. I think whatever we lost in one case we gained then. So we're basically executing ahead of plan right now, and everything is on schedule. So I think we basically used that time, then, to do a little better job of planning. So very pleased with that.

Now, I think the one thing I would like to mention is that I talked about the strong organic growth. What we have tried to do is to disrupt very, very minimally the operations at the facility. So we're actually keeping both computer systems. We bridged them together at the Corporation with respect to clinical data, so I will be able to show you, from day one here, clinical data on the two operations. But it's because we've actually bridged it at Corporate. That takes a lot of pressure off of the actual facilities. We will not change that until we roll out our new system in 2008, so clearly that's one of the benefits of a new system; we will develop it together and we will roll it out together.

Now, if you take a look at the other activity that I'm really proud of is we actually had a positive development in our days outstanding. Usually, when you go through mergers, they go up a little bit. We are now at 59 days in the Service side. You'll see on the chart -- I think basically that should fit with some of the chart data. So essentially we're down in the high 50's, low 60's. And that is a record for us, and it's essentially an industry best-in-class. So we're quite proud of that. The guys have done very well.

At this point, I would like to think Mats Wahlstrom and his team in North America. That have done a great job with the integration. You will see they have done a great job basically with the quality, and so I think I'm very proud of the activity in North America in terms of the Service group. Also, Rice Powell and the Products and Hospital group and the lab has been right in there with him and doing a number of things in the lab area. So again, I would like to thank Rice and his team for what they have been doing. So it has been a very good program, and I think we're off to a very good start.

Now, looking at some quality data -- I normally don't show this, but I thought possibly it would be of interest, because this is the first quarter where we have combined the two groups. One of things that I think was a real legacy of RCG and of FMC is the quality of care and the attention to the quality of care. I just want to make sure that everybody in the investment community knows that that's still absolutely important to us, and we've actually done a good job here of improving it.

If you look at the little chart here, you'll see that -- and if you look at the scorecard, you'll see that our hospital days actually decreased on a combined basis between last year and this year on the quarter. So we were about three to four days below, essentially, the norm in the US. We're quite proud of that. We also, if you pick one other metric, which is the dose of dialysis, the Kt/V, over 1.2, you can see that almost -- well, 94% of our patients are, clearly, receiving that dose.

Now, the reason I want to mention this is that RCG would generally look at this after 90 days. So of course you have a little higher number by a couple of percent. This is nothing wrong with what we were doing, because it's really internal, but this is basically looking from day one with respect to the patients coming in your clinics. Ray Hakim, who was the Medical Director of RCG, joined us in this area. I think we basically have migrated over to looking at it from day one. With Ray's Right Start program, we expect that the numbers will come very close together, because this is one of the programs that we have taken over from RCG, and we're really proud of it.

So the bottom line is the quality of care has continued. Both companies are very proud of it, and I think that we're on a good path here. We have not missed a beat in terms of the integration.

Okay, let's turn over to Products. It's really kind of nice when you have two products lines around the world, and they are both doing great. Usually, there's somebody having a problem someplace, but this is one of those rare times in my career where honestly, everything around the world is hitting on all cylinders. That's pretty nice. So let me go to the Products area.

We had a very strong Products growth. If you look at the total growth internally, it was 12%. But if you really look at the external growth, we were essentially at a 9% constant currency growth in the external market. That's really significant, because we were probably double the market.

Now, if you also look, we look at it by regions here. Of course, the Products business is larger in the international region, but you can see that it grew by 10% constant currency. Again, our products are just very well-received. The products that are leading this sales growth in all of the international regions are, again, our dialysis machines, our human dialyzers and our PD solutions. So the fundamentals of our company continue to go forward.

If you look at the US area, you will see a 5% growth in the external market, and you say, whoa, that's pretty low. But the reason that number's there as a reported number is remember, RCG was external last year and now it's internal. So if you strip RCG out of the external business, you'll see that North America grew by 10% also. So we clearly, in the external market, are growing at a low double-digit but compared to the market that's about, again, about twice what we see the market growing around the world.

So we're having a very good year, and it's not by accident. We've got some of the best products. We basically are on the leading edge of some of the new technologies. So again, we're just pleased that each of the regions are doing so well.

Now, if you take a little closer look at North America, in terms of the products, you see some numbers here that are really pretty impressive. Rice Powell and his group has been doing a great job. You'll see that on machines, we're running at about a 20% increase, 21% increase in machines year over year. The market is probably growing, like I said, at 3%. So we're doing fairly well there. If you look at blood lines, which is basically part of the Carepak, we're also growing at about 20%. Peritoneal has a very strong quarter. This is all external business, so we are doing very well in the external business. Now, one of the things that I show each time is, well, what's happening with single use in North America. What you can see here is we're now up to the 59% of the independents are on single use, and they buy most of those products from ourselves.

So North America, then, is actually doing very well in the Products area, and we are quite pleased with what the team is doing. We expect this to continue basically for at least this year. I think everybody we have talked to in the past about some of the issues, but right now we're really proud of what's going on.

Okay, turning now to Europe, the point I wanted to make about Europe, and I think Mark highlighted it in terms of the International group, International segment of our company -- I would like to just focus on Europe. What you see here is we have now a European franchise where we're the leader in both products and services. If you take a look at the left side of the chart, you will see that we treat about 24,000 patients in Europe, which puts us clearly in the number-one position in the Dialysis Service part of the business. But the good news about that is that's only about 7% of the patients. So there's a lot of opportunity long-term to grow in this area in terms of patient care.

Over on the Product side, you can see that we clearly have about a -- well, we have the leading position in Products, or 34% of the Products business. Again, one of the other points that you don't see on this chart is that the actual operating margin of this region is always at the high end of our scale, and it's between 18% and 19% operating margin. So again, Emanuele and his group have done an excellent job over the years, and we're in the number-one position, both in the US and in Europe. That's kind of reassuring, when you have got a couple of strong horses that are pulling along.

Now, let's look a little closer at Europe. You can see that Europe, we're running at an organic growth rate of 10%, which, again, is clearly double the market. Obviously, as we mentioned last time, we have introduced a new 5008 machine last year, which brings with it a new therapy that we're essentially revolutionizing, which is the hemodiafiltration. You can see that our machines, then, are growing at about 23% in Europe also. So we're having a very strong around-the-world position in terms of machines this year. A part of it is we're helped by our competitors, but quite frankly we also have an excellent machine base. We have over a couple hundred thousand of these machines in operation, so we have really a very good franchise in the machine business. With the 5008 and some of the new therapies, we are leading technologically also.

In fact, we have about 3,000 5008 machines operating, which is 100% more than we had last year. The significant portion of this statement is that on those machines, on those 3,000 machines, almost 50% of the treatments are hemodiafiltration. That's quite significant, and basically what it says, then, is the medical value is being recognized, as well as the design features. The cost-effective design features in the 5008 are clearly recognized also.

Again, I think I'd like to make one other point down here as far as the dialyzer, 10% growth. We are introducing a new phosphate binder. Now, when I say new, it's new to the us. Whatever we do, and I'll discuss it later, we work with proven drugs. It's OsvaRen. We have it approved in Germany and other European countries. I'll talk with on the next slide what we're trying to do with it. So again, we're making a move. We told you that we would be doing some things in our renal drug initiate, and it's starting to move forward.

The last point I would like to make is in the service area, we have a global quality base, and I want to tell you that I talked a little bit about North America. In the 24,000 patients we treat in Europe, over 95% of those patients receive a Kt/V of greater than 1.2, and over 86% of those patients have an albumin greater than 3.5. So we're offering the same or better therapy around the world, and I'm very proud of that, because the reimbursement systems are quite different around the world.

Okay, now let's go to the next slide. I apologize for the slide a little bit, but I felt I ought to at least tell you why we're spending time with OsvaRen and what we're trying to do. What I would like to talk about is our what we call Pharma-Tech. This is really therapy development. What I'm looking at here is, well, we're trying -- most of the renal drugs that have been developed for dialysis were developed over the last 10 years, and we have made some significant changes in the dialysis therapy over that time. So a lot of the conditions that were not available, in terms of actually altering the therapy to accommodate the drugs, were not essentially considered by various groups.

So what we're looking at is to take proven drugs and see if we can create an effective therapy with those drugs by altering our dialysis therapy, which we control. And so this is a little tutorial, and what we're trying to do here on the mineral metabolism area. What we're trying to do is that, if you look at the slide I have in front of you, it's a retrospective analysis of about 77,000 patients.

What I'm plotting there is essentially the risk hazard of death -- in other words mortality -- on the Y axis versus the concentration in the body for two compounds, phosphorus and calcium. What you see that is -- and then there's the DOQI standards, if you can read it close enough. You can see that clearly, the reference at around 5.5 mg/dl for phosphorus, as the phosphorus in your body increases, the risk of death increases; in fact, it almost doubles if you get up to the range of 9 mg/dl to 10 mg/dl.

Now, if you look at calcium, it's not nearly that significant, and if you stay within the range, you clearly essentially can mitigate that effect. Now, there's a lot of discussion in the literature about the effects of calcium in binders. A lot of it did not consider the amount of calcium that comes from the [dialysis]. So what our program is to take binders that are proven and adjust the phosphorus, remove the phosphorus and calcium; some of these binders are very effective compared to some of the new ion exchange resins. So basically what we're trying to do, then, is reduce the phosphorus, control the calcium with our dialysis, our dialyzers, hemodiafiltration and the concentrate [of that].

So we're just basically going back and looking at this therapy from a therapy standpoint with the technology that we have today. That's basically what it is. Again, we're in the development stage, but it is something that's exciting to us, because we have a chance here to essentially add value to our business and create better opportunities for the patients.

Now, moving to my last slide, this you have seen before. We clearly are focused -- this is a very important year for us, but more than that, it's also a very intense year. North America will continue to be focused on the integration. It doesn't end in three months, but we have made great progress. We intend to continue that. We also will maintain the quality. We have the highest quality in the industry in both products and services. That's very important, that we keep that. Finally, as I mentioned, we'll have programs under way to continue to increase our organic revenue growth.

Europe, we will continue to expand our vertically integrated model. If you'll watch our charts, you'll see that we're increasing the de novos in Europe. The 5008 machine -- we will continue to expand that. Hemodiafiltration will go with it, and we will basically start to do some work here in the Pharma-Tech area. Asia-Pacific/Latin America -- they will continue what they're doing, which is essentially keeping that double-digit revenue growth and focusing on their operating margins going forward.

So in summary, then, that's my part of the presentation. We're having a very good year, both financially, but more than that we're having a very good year with respect to creating some new things, and seeing some of the things that we have been creating over the last few years actually take a major position in the market.

So I think at this point, Larry, I'll turn it over to you.

Thanks, Ben, and good afternoon to everybody. I very pleased to report on a great financial result in the first quarter, where we are fully consolidating Renal Care Group. I will cover the P&L summary, segment margins, the cash flow situation, our leverage ratio and therefore, indirectly, our balance sheet. And I'll talk about our guidance for the rest of the year and the full year 2006.

So first, moving to the P&L, we had an excellent quarter, with strong performance down through the P&L. The 30% constant currency revenue growth was 10% when we exclude the effect of RCG and, as Ben mentioned, 9% organic growth. So excellent organic growth rate. The other 1% is coming from other, smaller acquisitions other than RCG.

Before one-time items, our operating margins increased by 140 basis points. What is most encouraging is we know that a lot of that is coming from RCG, but a lot is also coming from the underlying performance in the business. I will talk about that in some more detail when we come to the segment margin charts.

Net income was up a strong 19%, above our guidance of 10% to 15% before one-time costs. After one-time costs, we have the positive effect that [Stephan] talked about in EBIT of a gain from the divestiture transactions. But when we get to the bottom line, it's canceled out by the high tax burden on that transaction, where it actually becomes a small loss. I will talk about the specific numbers on that when we come to a chart on one-time costs. So after tax, the EAT is still growing at 12%, even after all the one-time costs and after the effect of the divestiture transaction.

Looking at the full first half, we see a very similar picture -- again, about a 9% organic revenue growth rate. I think this shows that FMC was already clearly on the right track. In Q1, we had a 50 basis point operating margin increase in Q1, and for the whole first half, we're at 140 basis points. Clearly, in the second quarter, you have the impact of combining with RCG. But I think we're doing quite well on the P&L. We're getting very good results in all the different metrics, and certainly we want to continue that for the rest of the year.

Now, let's turn to the segment operating margins. What we have tried to do here is to portray for North America what the breakdown is between the basic contribution from just the pure combination with RCG. We all know that RCG was the leader in operating margins in the industry, with several percentage above FMC. So the combination, also considering the effects of the estimated synergies and also the divestitures, which already took effect in Q2 -- we estimate that the pure RCG combination was worth about 100 basis points in the North America margin, but that there was an additional 80 basis points of additional contribution coming from the underlying business performance.

When we think about that underlying performance, we certainly think about the strong increases that we have been able to achieve, and that Ben talked about, in revenue per treatment. But we also think about productivity and efficiency measures that we have, both in our clinics and in our production plants, where we produce our products, and our plants are performing very well generally. We're operating at very high capacity utilization levels, and they are doing quite well.

Turning to International, we had 120 basis points improvement -- congratulations to a Emanuele, who is here in the front row -- in Q2. Here also, we had a very strong contribution from the manufacturing plant, performance also operating at high utilization levels and on a very efficient basis. We had excellent growth in margin increases in Asia-Pacific, despite the every-two-year reimbursement cut that we had on April 1st of this year. So the two-year anniversary was April 1st, so we had it for the full second quarter. Remember, last year we had a restructuring program. We have really been able to get the cost structure for the Japanese organization in good shape, so that we're really not suffering too much from that reimbursement cut that we had for the first time on April 1st.

Latin America, as Ben mentioned, is doing very, very well. Increased operating margins, and it is primarily being driven by two of the bigger countries, Brazil on the one hand and Columbia. It comes back somewhat to something that [Mark] mentioned in his presentation, and that is really leveraged on the overhead structure. As we have grown very quickly in those countries, the overhead structure -- we have not had to continue to interest as much relatively or proportionately in the overhead structure, so we have been able to increase our operating margins as we have grown on a very fast pace in some of the countries.

Finally, we had some revenue per treatment increases Ben mentioned in several countries. I'll just name Argentina, Italy and Venezuela as some of the countries where we have seen recently some revenue per treatment increases.

Let's turn to cash flow performance, and first look at DSO. In Internationals, the top line here, we stayed in the quite favorable range, with 119 days. So the level that we have been for the last several quarters, where we think that's quite a good performance in International, considering the conditions, the normal payment conditions in many of the countries where we operate.

Looking at the bottom, in North America, again, 59 days is the industry-leading position. We're very, very proud that we have been able to reduce for the first time to below 60 days.

Finally, we see the line in the middle, which looks at first like it doesn't quite compute. We looked at it several times, too. But what is happening is that we're getting a mix effect where, with RCG increasing the [WE] of North America, it's actually having the mix effect of reducing the overall by three days, even though North America has come down by only one day. So, and interesting calculation and a funny-looking chart, at first, but I can assure you that it's correct.

Now, let's look at overall cash flow. Both this slide and the next one, showing the whole first half, take out the one-time effects of the RCG acquisition and the divestitures. So the acquisition itself and the divestitures, not the cash flows coming from the RCG business in Q2, so that we can show the underlying performance of the business. That performance has been excellent, with operating cash flow over 11% compared to the target that we have talked to you about before of about 10%. So a really good operating cash flow performance, and certainly a good contribution is coming from our DSO performance. Also the increased net income and the lower effective tax rate as compared to last year, when we take out the one-time and special effects of the tax on the divestiture transaction.

CapEx and acquisitions were pretty much as planned and on target, leading to very strong increases in the free cash flow metrics for the quarter. We see very much the same kind of picture for the full first half, and that gives us a lot of confidence that we will meet or exceed our deleveraging targets in the coming quarters and years.

In fact, if we look all the way at the bottom right of this slide, you see that our leverage ratio of 3.6 has already reached, on June 30th, the level that we have projected for the end of the year. We're very, very pleased with that. Our last 12-month EBITDA is slightly higher than what we had previously projected, and our debt is lower, due to the very good operating cash flow performance. Therefore, we've already reached 3.6.

Our debt has come down during Q2, even though we have paid the dividend payment, we had some headwind from currency -- that is the $64 million that you see in the middle, the FX debt translation effects. On the other hand, in the first half of the year, we've had the positive effect of the divestiture proceeds themselves, and also remembering back to Q1, the very good results from our share conversion transaction. That's the $307 million that you see towards the bottom of the page. All in all, a very good performance, and we're ahead of schedule in terms of our target debt to EBITDA.

I left this chart in because I think it's a good reminder that, even though we're relatively highly leveraged now, that we have been highly leveraged in the past and we have had a demonstrated ability to deleverage over a number of years. Certainly, in order to reach our target range of 2.5 to 3, we will need to do that again over the next couple of years. As we have just talked about, we're on our way to doing that. We're heading in the right direction.

We have updated our guidance now, so that our new guidance is to be below 3.5 by the end of the year in terms of debt to EBITDA. We are confident that we will be able to achieve that goal.

So here is some more detail on the one-time costs. It's a little bit confusing, and there is a lot going on, as Stephan mentioned. So I think it's worthwhile to take a look at it one more time. We have updated the guidance here. Again, if you look at just Q2 compared to the whole year, you see that the biggest impact again was the effect of this divestiture transaction, where we had a gain at the operating income level, but because of the nontax deductibility of allocated goodwill to the divested clinics, we have a relatively higher tax amount. That tax amount ends up canceling the gain that we have at the operating income level, and then an after-tax level, we have a small loss of $5 million on the overall divestiture transaction.

So a little bit complicated, but that is the effect of the divestiture transaction. That also has a strong impact on our reported tax rate, and that is what makes the reported tax rate close to 50% for the quarter. But again, our effective tax rate is more in the 38.5% range during the first half.

When we look at the full year, the only real change from the previous guidance that we have given is the treatment of the RCG restructuring costs. As we have looked during the second quarter at the detailed accounting treatment under US GAAP of all of the different categories of restructuring expense that we have, we see that some of those costs are required to be booked as part of purchase accounting, as part of the purchase price for RCG.

In fact, we still do expect the expenditures for restructuring to be approximately $50 million, but we now expect about half or around $27 million to be part of the purchase accounting, and only the remaining $23 million or so to end up affecting the P&L this year. That's why we have changed the guidance from $50 million to $23 million, and on the bottom line, that flows through so that the net income effect, in total of all the one-time items, is reduced from $60 million to $40 million. $40 million is now what we expect to be the net income impact of all the one-time items during 2006.

Before we come to guidance, which is the next slide, I thought it would be useful to talk about a couple of macroeconomic matters, because they frequently come up in our discussions with investors and with some of you, and I want to give people a perspective. I want to give you a perspective on what's the real exposure that we have to these kinds of macroeconomic factors.

The first is interest rates. Stephan talked about it for Fresenius AG. Again, when we decided to finance the RCG transaction with all debt, we also decided that we would have quite a conservative interest rate management strategy and philosophy, and that has paid off very much so far. We targeted to have 75% fixed-rate exposure in the first couple of years, because we have been able to bring the debt down even a little bit faster than we had projected. The hedges that we in place have increased the fixed ratio to about 78%. So pretty close to the 75%, slightly higher, which is certainly good in the rising short-term rate environment that we have.

Not only did we hedge the RCG debt, or most of it, but we did it in advance, up to 12 months before the transaction closed. So in the summer of last year, we did most of the hedging. We're very, very pleased about that. Even though rates have come down a little bit in the last couple of weeks, certainly rates are certainly significantly higher -- five-year swap rates are significantly higher than what we had last summer. And we certainly are benefiting from having swapped and hedged the interest rate exposure early, as we did last year.

If we think about what's the exposure to our overall P&L of the variable rate debt, and we look on a full-year basis, we can tell you that a 50 basis points increase, on average, for the whole year would result in about a 1% decrease, so in the neighborhood of $5 million in earnings after tax, and again, on an annualized basis. So if we just see a 50 basis point increase in the second half of year, on average, it would be worth only about half that much.

The other one I wanted to talk about was energy costs. Of course, with the very strongly rising energy costs that we have seen in the last few months, you might ask, what's our exposure to that? We have exposure in a number of different ways. One is that we buy raw materials that are hydrocarbon-based -- polysulfone, PVC, HDPE. But we also move things around a lot, move our products around, move semi-finished goods around, move finished products to warehouses and to clinics. So, of course, there is fuel and delivery costs.

Then there's the energy costs we have to run our clinics and our manufacturing plants. What we see first is that when we think about hydrocarbon-based raw materials, we see that there's really a low to varying correlation to energy prices. You can't assume that when we see increases in the price of a barrel of oil, that polysulfone prices are going up in exact correlation. The further you get away from the refinery, the less correlation there is. Certainly, polysulfone is pretty far away from the refinery, and you start get more of an impact from supply-demand relationships in the industry.

So again, for some of the raw materials, it's variable. For some, it's a relatively low correlation. All in all, those costs make up a relatively small portion of our total costs. So the message there is, even though energy prices, oil prices and other kinds of energy prices are rising rather strongly, it doesn't have that much of an impact on FMC.

On the other kinds of costs, fuel and delivery costs, many of those costs can be passed on. Deliveries to our third-party customers can be passed on, either immediately or with some time lag. So our exposure there is also rather muted. Again, the whole point of this is that energy is important to us. There are significant or many different ways in which energy costs affect us. But the overall exposure and correlation to strongly rising prices is not that much.

Now, let's take look at the guidance. We're upgrading our guidance for revenue from $8.1 billion -- and this is on an as-reported basis -- to now $8.3 billion for the full year. EAT growth is being upgraded from $515 million to $535 million -- that was the range that we have talked about at the last meeting -- to more than $542 million. The reason we said $542 million is that it's exactly equal to a 15% growth rate over last year's EAT.

I want to emphasize that it's 15% or greater. We have mentioned that in our press release and investor news, yet I have seen a number of reports that have come out today saying that FMC has upgraded its guidance to $542 million. That's not true. We have upgraded our guidance to $542 million, at least.

When we take into account the $40 million one-time costs, it means that our net income guidance after one-time costs is at least $502 million -- or $502 million or more. Again, the leverage ratio -- we have updated the guidance to below 3.5 to 1, from 3.6. We confirm our investment guidance of combined capital expenditures and acquisitions of $550 million for the year.

That's the end of my presentation, and we are ready to take your questions.

Yes. Thank you, Ben. Thank you, Larry, for the presentation. So we take a question first. Gerrit?

Gerrit Jost, BHF-Bank. On restructuring costs, the remainder, 20 million -- how should we model them for the third and fourth quarter?

Can you specify the impact on the Japanese business related to the reimbursement cuts?

International margins were relatively high. Is there any room for further improvements, or should we expect somehow lower margins in the forthcoming quarters?

So what I would say about the distribution of the remaining 20 million of restructuring costs is that there will be restructuring costs both in Q3 and Q4. I would expect a meaningful part of the 20 million -- I don't want to give an exact forecast of whether it's 50/50 or 45/55 or any exact breakdown, but I would say there will be a meaningful part in Q3 and then the rest in Q4.

Outlook for 2007? Restructuring costs?

At this point, if there will be restructuring costs, I think they will negligible in 2007. (Multiple speakers). Restructuring costs is a one-time item, but the synergies are, of course, a continuing effect. The guidance that we have given for 2007 is $40 million to $50 million for the full year.

In terms of the Japanese business, I think that the reimbursement cuts are quite detailed, and have different effects on different product categories. Even different sizes and types of dialyzers are affected differently by the reimbursement cuts. Overall, it is resulting in a reduction of a couple to a few percent in prices. But again, that is offset by the efficiency programs that we have implemented by reducing our overhead structure in Japan, and by having grown the business so that we are spreading costs over a bigger base of business.

Can you provide us with the absolute sales figure for Japan, for the Japanese business in Q2?

Japan on an annual basis is somewhat less than 2% of our total sales.

I think the other thing on Japan -- as Larry mentioned, we had two programs. One of them was to restructure, and the other one -- it isn't always just a cut by products. There's usually -- they move to some product that they want you to start to offer. We anticipated that, right? So we were able to be there with the product earlier rather than later. So it's a combination of anticipating where they are going, plus controlling your structure.

The last question was on the International margins. Again, I think, if you study our history, you'll see that there is a cyclical nature to our margins in International, because in the summertime there's a lot of vacations. We take our plant shutdowns. So I think you have to really take this into account as you look at this margin and as you look at the year. So I think, at this point, we probably do not want to give you exact guidance, but we would like to operate essentially in the 17% quarter for the -- 17% to 18% for International. But it does vary by quarter.

Holger Blum, Deutsche Bank. Could you update us on the current discussions about US Medicare reimbursement for next year? Any gossip there, how confident you are in an automatic inflation adjustment or the Bush proposal?

Then a second question with regard to the 5008 machine. Could you update us here whether you have received additional reimbursement in other European countries? Maybe, longer-term, whether there might be any (indiscernible) or implications [also] for the US market?

As far as the Washington scene, I think when we spoke in May, we sort of had three views. One of them was the Bush proposal, and again, I don't think there's been much change with respect to that proposal. However, the Bush proposal was that the Medicare secondary payer or the commercial payers would cover a longer period of time; they would go from 30 to 60 months. Again, that particular proposal needs a vehicle to go through. So I think we still stay on less than 50% that something will happen in that area. However, if it does, it will be something, we think, in the 6 to 12 month range, not to 30 months.

As far as the index, the yearly index, that particular proposal is in one of the bills that the industry has sponsored. We have a number of sponsors for that particular bill, but again, it needs a vehicle. There's some question whether it will find a vehicle this year, so that's probably a lower probability.

MedPAC has recommended a 2.6% increase, which I think has been public. That's about what they recommended for 2006, and we ended up at about 1.6%.

So I think, all in all, I would say it's still neutral to positive. But none of there are basically in our forecast at this point in time, and none of them are in our guidance, as we go forward, because there still is a probability there will bring no vehicle for these to go through this year with the election.

With respect to the 5008, I think what I would like to do is ask Emanuele to talk about the reimbursement possibilities for the 5008 hemodiafiltration, if someone could give him a microphone -- Dr. Gatti.

Good afternoon, everybody. I would like to clarify that we have a difference between pricing of a product and pricing of a service. In other words, we get presently a premium for the 5008 compared to the old series 4008 and 4008S. That's from the pricing of the product itself.

On the other side, we will receive definitely reimbursement increases on the service side. This takes a little bit more time. What we are doing is to prove that the system increases the quality of life of patients and reduces mortality, primarily in the context where we have the largest number of centers, so primarily Spain, Turkey and Portugal. Then, when we have proven that, we will go to the authorities, and with some kind of pharmoeconomics, we will try to get a higher reimbursement increase. So this will happen in the next years, and normally this takes time and requires a little bit of documentation that we are preparing, and looks very good so far.

There are no further questions in the audience. Operator, I think we can open up the audio lines.

(OPERATOR INSTRUCTIONS). Darren Lehrich, Deutsche Bank.

With regard to the US business, can you just provide us your commercial pricing outlook with managed care payers, and what is the dynamic right now with regard to exclusive contracting, if you could just talk a little bit about that?

My second question is, where exactly are you with your conversion to single use with the RCG book of business?

With respect to our outlook on the commercial side, we're staying with our 2% increase in revenue per treatment off of our base. This would assume that we would continue to see increases on the commercial side of the 5% range. Basically, as far as any other dynamics at this point, on the commercial side, I think that they totally understand the aspect of quality and that we're always in contact with the commercial payers, showing the value that we can add. I think we've got a -- there's obviously a little bit of pressure for basically getting a lower price. But quite frankly, it's in a totally manageable space because of our reputation and our utilization basically of the drugs at this point.

Now, as far as single use, we've got a situation where the demand for single use in the external market has basically brought us to capacity in our plants in the US. We're expanding our plants, so we'll probably be a little slower in converting to single use with RCG, because some of this external business is there at this point, and we feel that we would like to make sure that the external business, or basically independence if they are interested in going single use, we will go with them. But our plant capacity will come on mid-year next year, and then we will accelerate the conversion at RCG.

If you could comment a little bit on medical director retention with the RCG group of clinics?

Well, it's a little early for me to give information on that. But we had a combined medical director meeting in this past quarter, and had some excellent enthusiasm for some of the programs, combined programs between basically RCG and FMC. So I'm quite comfortable that we will not see a particular problem in this area. As we move to single use, that's even more attractive for them. So I don't see any clouds on that horizon at this time.

Maybe I could just add on the answer on your first question, I don't know if you mentioned that the 2% average guidance for revenue per treatment increases does not include any assumption of Medicare reimbursement increases. So it's assuming the whole 2% is coming from the private side.

But that would include increases in the inflationary drug increase for the add-on. Correct?

Actually, I think at this point, that was not in our equation. If we do see that, and I know it's due to come out soon, that would be a little bit of an upside.

Hans Bostrom, Goldman Sachs.

Could you quantify what the impact in percentage or dollar terms have been from the MMA on the revenue per treatment in the first half? I believe this was mentioned as a driving factor, particularly for the legacy FMC business. But if you give do that as an overall factor, that would be helpful.

Secondly, I'm slightly surprised by a relatively high borrowing rate, which I estimate somewhere around 6.6% for the incremental borrowing for the Renal Care Group acquisition, so about $3.5 billion, if I take that correctly, which I think compares somewhat higher with the 5.5 to 6% range which I think you have been discussing before. Could you give us some color on that, or whether I'm off the mark in my estimations?

With respect to the MMA contribution, obviously it's a little hard for me right here to pick it up. But if you assume that we were driving in the 2% to 3% range at that point, the difference between the 7% that I talked about would be somewhere in the 3% to 4% of the increase. I think that would be in the ballpark.

With respect to the interest rate, Larry, why don't we turn that to you?

At the last meeting, we talked about what could be a good assumption for the interest rate for the full year. I mentioned that 6.5% would be a good assumption, and that was really an all-in rate, including not only the new financing for the RCG transaction and the refinancing of our senior debt, but also the trust preferred securities. So, really, all of our debt and including also the amortization of credit facility fees that we have paid at the time we established the credit facility.

So it's kind of an all-in rate, and we still confirm that 6.5%, roughly, is a pretty good assumption for the year. Obviously, if we get very strong increases in short-term rates, then we would have to revise that upward a bit. But from today, it looks like 6.5% is a pretty good assumption.

If I just go back to that, I think you have an incremental increase of $58 million in borrowing costs in the second quarter, and I assume you have an incremental debt increase of $3.5 billion. That gives me, actually, that increase of 6.6% interest rate on that incremental borrowing, none of which is trust preferred securities. Is that a good estimation? That seems to be bringing that north of 6.5% in view of your trust preferred securities carrying a rate north of 7%.

I'm not sure exactly the calculation that you're doing, but remember that as we leveraged up the credit margins that we pay on all of our debt, not only the new RCG debt but also the existing debt that FMC had, has increased. That may be why the calculation is off just a bit.

Michael Jungling, Merrill Lynch.

On the cost synergy guidance that you gave late last year between FMC and RCG, you indicated in the first quarter of this year that there could be greater cost synergies than you initially expected. It's now three months later, and I was wondering whether you can share your view on the cost synergies that we may expect in 2007. When would you be ready to perhaps raise your guidance on that?

Number two, on the dialysis pharmaceuticals, you started to move into phosphate binders. I'm just curious what other opportunities you have got in Europe for iron, active vitamin D and perhaps some anti-hypertensives.

Thirdly, a question on the President Bush proposal. I would just like to know whether you are aware of anyone who is important that may be currently lobbying against the extension from 30 to 60 months.

Let me take the first question, on synergies. At this point, we reconfirm confidently our original forecast of $40 million to $50 million in 2007 and indeed in the years beyond that. Obviously, as we go through our budgeting process for this year and get a couple of more quarters of experience with RCG under our belts, then we may be able to update or to reconfirm that figure.

If you look at our program, we are primarily looking at what we call renal dialysis drugs, and that would be the EPO, the binders, the iron and vitamin D. The anti-hypertensives -- at this point, they wouldn't be in our focus.

With respect to the Bush proposal, in talking with our government office, we really haven't identified -- they haven't identified any strong opposition to that proposal yet. Now, that's really -- I checked on that earlier this week. So, so far, that's my best on it.

Just the quick follow-up on the cost synergies. In the first quarter, you said there could be more. I'm just curious when would you feel comfortable perhaps raising your expectations on that? Would it be a 2007 event, for 2007? Or would you feel comfortable perhaps in three months' time?

I would say, at the earliest, in our November meeting, it could either be then or in our February meeting. It won't be later than February.

It will be as we put out the guidance for next year, and that's what Larry is talking about. Easily, we'll put that out after the year-end close, in our February meeting.

Jack Scannell, Sanford Bernstein.

I've just got a couple of questions about the International business. The first, I guess, is as a long-term view. Where do you see things being different? Or where do you see the major opportunities in a sort of three to five-year timeframe? That's the first question.

The second one is, are there any large, attractive international markets where the structures of the local market -- for example, requirements to partner with local firms -- actually would make value capture difficult?

If you break the International market down into, let's say, Europe and Asia-Pacific, as you look at the next three to five years, our opinion would be that Europe offers tremendous opportunity, because there's about 300,000 patients, even a few more than the US. We have got a solid leadership position in both Products and Services. Except for Germany, in that area, we clearly can operate clinics in most of those countries.

Now, we see opportunities in Germany starting to open. So that's our major focus on the three to five year, would be Europe. Beyond that, it would probably be towards Asia-Pacific. But that would be clearly beyond five years, in terms of major growth opportunities there.

Ilan Chaitowitz, Redburn Partners.

Just on the top line, there's a noticeable divergence between the core operations of FMC and Renal Care Group, and I was wondering if you can yet disclose any opportunity that you may see to narrow the gap in the two companies or heritage companies, different revenue per treatments.

The second question is on the costs. I was just wondering if you could give a bit of an outlook in terms of the market for nurses and if there's any cost inflation that you are seeing on that front, particularly in the US.

The third point I would like to raise is the fact that there's increasing evidence that diabetes is now a distinct and separate causal factor for end-stage renal disease. I was wondering if you see, at any time in the next year or two, a need to have a big capacity ramp-up in terms of capital expenditures and manufacturing output.

With respect to the revenue synergies between RCG and FMC, I think, as we talked about our synergies, we were reluctant and are still reluctant to basically try to quantify synergies in that area, because it takes time for contracts to come up for renewal. So at this point, there's nothing new in that area in terms of our basically identifying synergies.

With respect to cost inflation, in the North American and in other markets, yes, there still is -- in certain pockets or certain regions, there's still a nurse shortage factor. That leads to inflated or basically increases in nursing salaries. We try to and committed to have our labor costs grow no more than 2%, because we can do additional activities within the clinics to change the staffing ratios. So basically, we expect the shortage to continue. We think we can live with it in certain pockets of the country. It is clearly something we have to contend with, but it's not across the entire package.

Diabetes -- we just don't see that translating immediately to ESRD patients. There's quite a bit of activity in the pre-ESRD area, and so we see the growth rate around the world for dialysis in the 5% to 6% range at this point, in terms of new patients. In accelerate in three or four years, but we're not putting that in our radar screen right now.

Maybe I'll take the one on the revenue per treatment and the divergence. The difference in the revenue per treatment between RCG and FMC relates primarily to payer mix, which is a function of geographic footprint. That's why one of the reasons that the RCG acquisition was so attractive to us was the complementary geographic footprint. RCG had a higher proportion of patients and revenues in that footprint coming from private payers compared to FMC. That was the primary reason for the difference in the revenue per treatment. When we operating in the same markets, we saw normally that we had fairly similar revenue per treatment. So I don't know that there's a divergence, but the combination has certainly helped FMC to increase its overall revenue per treatment and payer mix in a positive way.

You previously disclosed or guided that you thought that the HMA might have potentially further benefits further down the line. I was wondering if you could give a bit more color as to where you are in your calculations, and maybe where the current situation is with regard to that piece of legislation.

Second, I missed your answer to the previous inquiry regarding any pushback from private payers on the proposal to double the MSP. Are you aware or has there been any strong pushback against that?

As I mentioned, we have not seen, our Washington office has not seen strong pushback or any pushback on that particular part of the Bush proposal. So far, that doesn't seem to be the case.

As far as the HMA, remember, second quarter was the first quarter in which that particular monitoring program started. Again, we said it would take us a couple or three quarters to determine and change our algorithms, and we thought at the very least it would be neutral and maybe some upside. But it's too close to call right now, because we're still going through the transition. At this point, it's probably more on the negative side than the positive side in second quarter.

I think we have time for one more question.

Michael Jungling, Merrill Lynch.

Can you please give us an update on the two subpoenas that are outstanding, the one issued in October of 2004 and April 2005?

The second question is, what are the penetration rate of single-use dialyzers in RCG following four months of your ownership?

The final question is, given that you're expanding in ancillary dialysis, I was just curious whether you would expand your business in needles and in ports through acquisitions?

Again, it's terrible, but when you say the October 2004, you must be talking of the New York -- are you talking of the New York subpoena?

(Indiscernible).

With respect -- and this was basically [PTH and] testing -- that particular program, it's our belief that the focus is on a group other than the providers. So it has been fairly dormant.

With respect to the April 2000, that one -- which one is that? That's the same -- okay. I try to remember these by where they are in the country, rather than when they start, because they go on for so long.

The St. Louis one -- essentially, I think the issue there is that the gating issue for FMC is really what is covered by that subpoena versus what was covered by the settlement that we had in Boston in 2000. So that particular issue is still under discussion with that group. So I think that's probably the best I can say at this time. We're certainly cooperating with both of them, as is our policy.

With respect to the penetration of single use in RCG, I believe it probably is about where it was when we merged three months ago, in the range of 25% to 30%. As I mentioned, we have a lot of enthusiasm to go there, but at the same time we're capacity-constrained. So we will probably not -- it will take us probably 18 months to make that change.

With respect to needles, there are some excellent ancillaries around the world that we could buy with our global network. That's really not something, at this point, that we think we can add value to. So we tend to only get into products that we think we can add additional value. At this point, that's not high on our radar screen.

Would you consider, for instance, buying someone like Kawasumi?

Well, that's a pretty direct question. I wouldn't want to disparage Kawasumi because, remember, they are a partner in Japan, where they are a joint venture partner. So we have a very good relationship with Kawasumi; we work with them all the time. But if your question is, would we buy somebody in Japan to supply needles to us around the world, I think the answer is we probably wouldn't do that.

Thank you very much, everybody. Thanks for joining us today. Have a good day and have a safe trip back, and I hope to see you actually end of October for Q3. Thank you very much.