Fresenius Medical Care AG (FMS) 2006 Q3 法說會逐字稿

Good afternoon and good morning, ladies and gentlemen, here in the audience and joining us via the web for Fresenius Medical Care's Q3 and nine-month results conference. I also have to comment on the safe harbor statement. The presentation today includes forward-looking statements, and some actual results could differ materially actually from those included in the presentation due to various risk factors and uncertainties. These and other risk factors and uncertainties are described in detail in our SEC filings and the Deutsche Borse filing. So, for further reference, please look that up.

With us, introduced already this morning, is Ben Lipps, our Chief Executive Officer for Fresenius Medical Care; and Larry Rosen. So, this is it from my end. Ben, the floor is yours.

Again, I'd like to welcome everyone, a warm welcome to you here in the audience, to our Board members, employees, and all of our associates around the world who are joining us today on the Internet. I'll cover the business update, Larry will cover the financials, and then we will open it for questions and answers.

Before I start, I'd like to say we had an excellent quarter. Every region performed, and we're quite pleased with it. I'd also like to thank the employees and the associates. We had excellent quality in all of our products and services during the quarter, during the year. So, we succeeded both financially and also in terms of quality of our services.

Let me turn now to the next slide. Revenue for the quarter grew by 30% to $2.2 billion. Net income rose, again, excluding $6 million of one-time items, rose 21% to $145 million. Again, this reflected a very strong underlying growth in our products and services and also a continued successful integration of RCG. Larry will give you more details from a financial standpoint, and I'll try to focus on the revenue aspects of this presentation.

Again, as I mentioned, Q3 was a very, very good quarter for us. We had excellent organic growth of 10%. We continued to see positive reimbursement around the world in our services area. We also improved our quality around the world in terms of our services. We did see our EBIT, our operating margin grow by 180 basis points, again, excluding one-time items. We saw solid cash flow, and as I mentioned, our net income grew by 21%.

This leads us to a position where we feel we should increase our guidance for the year. And, again, Larry will talk more about that, but we clearly did increase our guidance for 2006, because as we started the year, we did not expect to be as successful with the integration of RCG and also the service business and products business around the world growing at 10% is double the market. And so, we're having a better year than we had targeted at the beginning of the year.

Let's take a look at the revenue by region. North America turned in $1.6 billion of revenue, growing by 36%, again, driven by RCG, excellent product sales, and also the service group, who I'll show you later had an outstanding increase in terms of revenue for treatment. Also, if you'll look later, you'll see that North America grew at 10% organic growth, which is a record for that operation, especially for the size of the operation.

The international revenue for the quarter was $621 million. Again, we achieved an overall growth rate of 13% in actual currency and 11% in constant currency. Europe achieved $446 million. Again, Europe represents 20% of our total revenues, about 70% of our revenues from international, and we saw a very strong constant currency growth in the European theatre in Europe at a 10%.

Asia Pacific turned in a solid 6% constant currency growth, again, taking into account that we had a significant reimbursement decrease in April of this year. We also saw the margins in Asia Pacific increase significantly. So, Asia Pacific turned in a very fine quarter.

Latin America continues to grow at the 20%-plus range. Again, we saw excellent increases in terms of performance in Latin America. In terms of the revenue, we saw increasing margins. And our strategy in Latin America, I believe, is on the right track. We're about 70% service in Latin America, and we saw increases in reimbursement in a couple of countries. So, again, every region within the company performed quite well during the third quarter, and we're very pleased with that.

Let's turn now to our dialysis services. Let's look at it on a global basis. On a worldwide basis, we saw, again, strong performance, $1.7 billion in revenue for dialysis services. The global services grew 37%, 36% in constant currency, North America led the way with 42% with the acquisition of RCG and achieved almost $1.5 billion in revenue in terms of the third quarter.

Again, looking at the international services business, it grew by 10% in actual, 9% in constant. Again, a very good performance, and we achieved approximately $232 million in revenue this quarter. Now, behind that, rests some nice opportunities that I'll talk with you about later. In Europe, we have over 338 clinics. We're operating in 14 countries, and many of those countries are looking at privatization. So, our European service business is in a great space now with respect to future growth, and I will emphasis that at the end of the presentation here.

Looking at other metrics, with respect to the dialysis services business worldwide, we saw each of the North America and the international region organically--organic revenue growth of 10%. That clearly is a very fine performance, and it was a record for us. You can also see that within that area the same store growth in the international area was 7%; again, growing quite strongly above the market.

We did turn the corner in North America in terms of our same market growth. We're up 20 basis points to about 1.8%. Again, as I mentioned in the second quarter, there were a number of contracts we did not renew. We would expect as we move into 2007 that we will exceed the market, which we feel is growing between 2.5% and 3%.

We also believe that one of the key items that we're quite pleased [with] is the actual revenue per treatment growth. Across the entire global company, we saw a 7% increase in revenue per treatment. And this comes because of the quality that we are producing, because the payers understand that, and, clearly, we're seeing that in all areas of our operations. In fact, we saw in 4 of the 14 countries in the European [theatre] increase in reimbursement. So, we are expecting to go forward in the range of a couple percent per year increased reimbursement. And we clearly surpassed that this quarter, and we're quite pleased with it.

The next slide shows our global services, quality outcomes. This is the first time I've shown the global aspect of this. I'd like to indicate that there are four quality outcomes that we measure. We now have one of the largest quality systems in Europe and in international. So, we're now able to supply this data for both the international business or for the European business and the North American business.

If you look at North America, we've increased--and again, the first line Kt/V greater than 1.2 is a measure that we used to show that our patients are basically receiving an adequate or the proper dose. And you can see that 95% of our patients in North America are achieving the proper dose that we are delivering, and we've increased it by 1%, which is very difficult as you get near 100% in these operations. Also, looking at the European [theatre], we have over 93% of our patients, again, receiving adequate dose or receiving the targeted dose.

In the hemoglobin area, we're pretty much, in the U.S., staying near the DOQI standards of around 81% of our patients have a hemoglobin greater than 11. And if you look at the European results, you can see that we've improved that by almost 500 basis points over the last year. Again, you can see a very interesting improvement in the quality of the European [theatre], and this is showing up in terms of a reimbursement increases and the stature of our operations.

Again, you'll notice that the European albumin is greater than 3.5 or higher than the U.S. And that's because we can do certain things in the European [theatre] that we cannot do in the U.S. in terms of nutrition and in terms of restrictions. But, again, you'll see that that shows up in hospital days in the European [theatre] than we see in the North American [theatre].

And so, basically, we are delivering the best quality on a global basis, and we're quite proud of that. And also, it reflects the dedication of all of our associates and clinicians to continuous quality improvement, so that every year we get a little better and we keep working on it. Very proud of the results, and those are unique within the industry.

Let's now turn to products. We surely are having a great year in products. You can see that our revenue in products, which includes both the internal, external, was approximately $700 million this quarter. If you look at the external sales, it was $530 million, which is the sales we sell to other clinics that basically are independent clinics. And that is a 11% constant currency growth, clearly double the market on a worldwide basis.

Again, if you look at the international area, we see a 12% growth in constant currency, and that is almost clearly double, a little of about 2.5 times to the market. We saw strong growth on machines and dialyzers, our hemodialysis products in Europe, Latin America and Asia Pacific.

Now looking at the North American products market you see a 7% growth. That includes--last year RCG was an external account, and this year it's an internal account. If you correct for that, you'll see that our actual growth in terms of the external business this year was 14%. So, clearly, that's four times the market in the U.S. And so, clearly, all of our regions have been doing very well in the products area, and our products have been accepted on a global basis. We're quite pleased with the results year-to-date.

Now, let's talk about a couple of highlights by region. If you look at North America, one of the things that certainly stands out is that we had a 42% increase in machines this quarter. Obviously, we believe that we sold--most of the machines that were sold in the U.S. this quarter were our machines, and so we're saying conservatively 80% to 85% market share.

We also saw increase in the single-use independent clinics up to now 60%, and we call this our single-use care pack. And so, again, those two hemodialysis products have been driving the U.S. products business. And you can see that, clearly, we're growing at [14%], which is significantly above the market.

Now in addition, the integration process with RCG is going very well. The group has been doing excellent job. We are ahead of schedule on that integration, and we've been very pleased with the result. So, we have had success there. And on top of that now, you add a 10% organic revenue growth rate in North America, and you just have a great quarter; and that's essentially what we had in North America.

And you can see this in the next slide. You can see our revenue per treatment. We now are at $324 per treatment. Our target for the year was $310, so we've blown by that. Clearly, that's up 9% over last year. If you look at it sequentially, we're up 2.2%. And again, let me try to explain that because our target is more like 2% a year. So, we're basically still running above that target.

Part of the sequential second to third quarter results to the HMA, where actually our EPO usage last quarter had dropped down as we moved into the HMA which I discussed with you last year, we are pretty much beginning to understand how to run those algorithms, and so, this year we saw an increase. So, that 2.2% quarter-by-quarter is half related to the HMA activity, and the other half is related to additional contracting success. And so, basically that's really where we are.

Now, going forward, I would expect us to be closer to 2% a year, but we clearly are doing much better than that this year, and we're at a very strong base. We're at a $324 base, which is quite attractive.

Now, turning to Europe and Latin America, again, we saw very strong demand for our 5008 and our 4008 machines, 18% up. Again, that's clearly in Europe, almost three to four times the market as we were seeing in the U.S. We also, I believe, that we're now at a 70% market share with respect to machines in the European [theatre].

In addition, we now have 3000, 5008 machines operating in the international [theatre]. And that's 50-plus, a 100% up from where we were last year, but even more important, 50% of those machines are offering hemodialfiltration to our patients or to the patients being dialyzed on those machines. That is the first real step into therapy selling. And we are doing a very good job with that, and that leads into the next thing I'll talk about, pharma-tech. So, we are very pleased with the 5008 introduction.

The dialysis care business in Europe, and especially Eastern Europe, is growing at around 21%. That's where we are investing heavily in de novos, and we are doing quite well there. And patient care in total in Europe is up essentially 11%. Now, as I mentioned, our goal is to continue to see a revenue per-treatment increase in the 1% to 2% range, and we clearly have accomplished that so far this year.

So, the highlights then from both regions basically are quite attractive for the quarter, and we've had very good activity in our products area and doing very well.

Now, let me fast forward into, well, where else the products business is going to go now that you have got 90% market share in one place and 70% in another place. We are at the point where we are clearly positioned in Europe to expand our business and to leverage on our products business and our service business, and we call this the development of the therapy business.

And within Europe, we have a number of countries where we have greater than 40% market share in our hemodialysis business, which gives us a nice leverage to move into the service business. And then, when you have both of those leverages, that's what this little chart shows you here, you are now able to combine essentially drugs with our therapy to come up with what we call pharma-tech. And so, that's why it's very exciting, because we are in a position now where that's one of the new activities. And I will talk a little more about that, in which we feel we are in a position to develop and add value to the services business and also to dialysis. And that's the basis, then, for what we call the pharmaceutical initiatives.

Now, the reason that we are focusing primarily on Europe for this is if you look at our development in Europe since the year 2000, you can see that our products business has grown above market by at least double, 12% CAGR. And you can see our service business, of course, has continued as we develop, grown at the range of 22%. So, we clearly now are the leader in Europe in both the products and the services, and that then is the position that we would like to go forward in terms of the therapy business, and we receive very little income from either drugs, so we do not, as in the U.S. the drugs are bundled into the composite rate; that's not the case in Europe. So, this is an upside opportunity for us.

So, again, looking at Europe, we now treat 7% of the patients. Interestingly, there are a number of countries where we have greater than 40% of the products, and there are 14 of them, and we are also now in the service business. But if you look at the total market potential of the European [theatre], you can see with 340,000 patients, it's clearly at the same level as North America.

So right now, we have an opportunity in the European [theatre] of about $7 billion, and that's what's available to us out of the 14 billion to 15 billion that's actually being spent to treat these patients. So, we see this as a clear opportunity then for us to continue to expand in the European [theatre], and that's where we are primarily launching our, what we call, our pharma-tech activity. And I'll go into that a little bit with the next slide here.

Now, if we are going to branch into what we call the renal drug initiative, we need to add value. We are not looking to be just a supplier of renal drugs. When I talk about renal drugs, these are the drugs that we basically apply during dialysis. And so, we have looked at this pretty carefully over the last couple of years, and if you look at this complicated slide, you will see that everything in green over the last few decades, we have really taken care of with our dialysis therapy. So, there isn't a whole lot of activity in that area that basically we can build on in terms of adding value.

Now, if you look in the upper right hand corner, you will see EPO, and clearly NGN over the years since 1989 has done a very fine job as well as a number of other companies solving the anemia problem for dialysis patients. So, the one area, though, that is clearly an unmet challenge is what we call bone mineral metabolism. And what that has been recently discovered over the last couple of years is that there is far more mortality related to elevated phosphate levels than had really been anticipated over the years.

And so, this is the area that we are focusing on, and this is one of the reasons that we think we can add value, and it's clearly an unmet need. The industry approach today to that particular approach is a multi-drug approach using binders, vitamin D, various activities. And, clearly, only one-third of the patients, less than one-third of the patients, in the U.S. meet the K/DOQI standards or meet the standards that the physicians have set for this particular area. So, clearly this is an unmet need, and it's a very interesting opportunity.

Now, that is the reason that we purchase the binder business, PhosLo from Nabi, because we see this as something where Fresenius Medical Care can combine that particular proven product with our dialysis technology and actually solve this unmet need and create an opportunity for us. And the reason for that--and again I apologize for my engineering slide but, you know, if I don't have one each time, you guys will think that I gave up engineering, okay--but, basically, what we see here, the challenge is removing the excess phosphate while achieving the proper desired balance of calcium influx or outflux from the patient.

And the problem gets worse, because most of the drugs they use to control SHPT, or secondary hyperparathyroidism, require that, basically, there is a change of [absorption] the calcium. So, all of these drugs interact in a way that if you use the drugs on the left hand side of the little balance, we believe we should lower the dialysate calcium. If you use the drugs on the right hand side, you should probably raise it. So what it says is the dialysate and the machine and the dialysis part of the process becomes very keen in developing the new therapy.

So, the longest shot is we believe that is unmet medical need by combining the PhosLo binder products, which are proven, have been on the market for a number of years with our technology. We can actually then--that will be our initiative in the area of renal drug initiatives.

Now, in summary then, we had a set of target of 10 million sales in 2010 back in 2005. Since then, we've acquired Renal Care group. And we now have a pretty clear path in terms of what we are going to do in renal drug initiative that we've taken another look at our 2010 revenue target and elevated it to about $11.5 billion, which is our revenue target for 2005.

About 1.1 of that is the Renal Care Group. The other 400 is the additional products that we expect to bring in through the renal drug initiatives. So, I think at this point in time, I have tried to indicate we had a very good quarter. But as Mark had mentioned earlier, and as you see here, we clearly are doing more than one thing at the same time, and we also have some very good strategic opportunities that we are developing for the future here in terms of growth opportunities.

So, I think at this time, I'd like to turn it over to Larry who will give you more on the numbers and show you where we stand for the year.

Thanks, Ben, and good afternoon to everyone. I'm very pleased to report on another great set of figures for Q3 of 2006. Especially impressive and rewarding has been the across-the-board performance in our service business, in our product business, and in each of our geographic areas. Certainly, there is always room for improvement, and Ben has talked about some of the areas we'll look for improvement, but right now, we're seeing satisfactory, excellent performance in all areas.

Now, let's take a look at the details. As Ben discussed in detail, we had excellent top line growth of 30%, and 10% organic growth in Q3. Operating income before one-time cost was 358 million, or 16% EBIT margin; that's an increase of a 180 basis points vs. Q3 of 2005. We'll discuss that margin increase and what the components of that are in a little bit more detail in a few minutes.

I also want to focus first on interest expense and tax expense, which we'll do on the next page as we look at an expanded P&L. But on this page, we see that net income was up 21% before one-time items, an excellent continuation of the trend that we saw already in the first half and, clearly, in excess of our guidance of greater-than or equal-to 15%. After one-time cost, net income was 139 million, up 20% compared to last year on a comparable basis.

Now, here again is the P&L with a little more detail. Interest expense came in about where we expected at 100 million, especially given the recent increases in short-term rates that we've seen both in U.S. dollars and also Euros. But, again, it's consistent with about what we expected. Starting in Q4, we'll get some slight [tail-winds], some slight benefit from the reduced debt to EBITDA ratio and a step-down in credit margins for our credit facilities. Again, it's slight, but it'll be certainly a benefit for us.

In the tax line, we had a 42% tax rate, but that reflected a one-time settlement of a pretty old tax audit issue that relates to the tax years 1998 to 2001; it's the final settlement of the issue. But it basically pushed away from where it would have come in at 39%, about 3% higher to 42%. So, we're on--$8 million is in the tax-line associated with that tax settlement. Minority interest came in about where we expected it to, around 5 million per quarter, and that led to the net income of 145 million, again, before one-time items, an increase of 21% above 2005.

Now, looking at the P&L highlights for the full nine months, we also had a growth rate in revenues of 23%, but also for the entire nine months, an organic growth rate of 10%. So, significantly in access of market and an in excellent trend that we have established and now continued in Q3. With an operating income margin of 15.4%, we had an increase of 130 basis points, compared to nine months of last year.

And we have clearly established excellent momentum through the quarters--14.2% in the first quarter; 15.7% in the last quarter, in Q2, following the acquisition our RCG; and now 16% in Q3. So, excellent operating income momentum. With the excellent net income performance in Q3, we are now at 20% net income growth for the full nine months.

After one-time costs, operating income continues to reflect the pre-tax gain associated with the FTC-related divestitures, remember the gain of approximately 40 million, while on an after-tax basis; that was a 4 million loss. So, we see the operating incomes slightly higher for the nine months than the pre-one-time cost, and the net incomes slightly lower at 385, compared to 412, excluding one-time cost.

Now, let's come back to the operating income margins and talk about what's driving the significant improvement that we're seeing. A point that can made equally for both main segments, North America and International, is that the performance of our manufacturing plants is a key contributor to the margin improvement. We're operating at very high capacity utilization levels and on a very, very efficient basis in terms of unit cost, and that is definitely leading to part of the gain in operating margins in both North America and also International.

Q3 is traditionally the quarter where we're taking summer maintenance shutdowns, and we did take those this year but we shortened them significantly again because our capacity utilization is so high, driven by the very strong demand for our products both in North America and in the international markets. So, excellent performance in all of our manufacturing locations.

Now, specific to North America, around half of the increase of 200 basis points is due to the consolidation of RCG in the third quarter of 2005. We didn't have RCG, now we do, and it includes the fact that RCG had a better, or a higher, margin mix of business and also the synergies that we have begun to realize in Q2 and have continued to realize additional synergies in Q3.

And so, about half of the 200 basis point increase is due to the consolidation of RCG, and about half is due to the underlying improvement in the business that we would have had in any case. And it relates specifically to the revenue per treatment, increases, and also the very strong performance in our product business, demand for our products in the U.S. is excellent. As Ben said, if you would correct for the RCG effect, we have about 14% growth in our product business in the U.S., and is performing extremely well.

In International, we had a 230-basis-point improvement compared to last year, and that's supported also by the excellent product business growth of around 12% year-over-year, and that in turn is driven very much by the success for 5008 machine, its strong acceptance in the market as an excellent new technology for dialysis machines, and it's also due to improvements in key Latin American countries.

We are seeing much better performance in Brazil, in our Colombian businesses, and also we have seen some reimbursement increases in Argentina and Venezuela. So, Latin America is performing in an excellent way and, of course, also, contributing the 230 basis points as the excellent manufacturing performance at our plants across Europe and in Asia.

Now, let's turn to cash flow and balance sheet. For the first time in a long time we ticked up by one day on DSO, even though North America was down a further day to a record 58 days; this is clearly leading the industry and clearly ahead of where we thought we would be at the end of the third quarter in 2006.

It's been an excellent performance by the North American team, to be able to achieve a further one day reduction. We had a small increase in international [debt]. It could be partly due to mix. I definitely wouldn't read any trend into that. It is staying around the 120-day target and line that we established for the last several quarters, but nevertheless, it caused us pick up in total by one day in Q3.

Let's take a look at cash flow, and we present cash flow before one-time items to show the underlying cash flow generation of the business. And I'll talk about what those one-time items are when we come to the nine-month performance.

But first, just for the quarter, we had an excellent performance of 11.7% operating cash flow, for sales 261 million, clearly in excess for target of 10%. And this is driven very much by our underlying operating performance, the operating income improvements that we've seen; it was a 22% increase over last year. As expected, we are ramping up significantly our capital expenditures, and this is for investment in capacity expansion in service business growth, in particular de novo's and outfitting clinics that we already have, so renewing investment in our clinics, and also new clinics systems particularly in the U.S.

In contrast, acquisitions were lower at 10 million as we focus now very much on internal growth and really are selective about acquisitions and are primarily looking at smaller-to-midsize acquisitions.

Going to the nine months, we see that our operating cash flow before one-time items was up 27%, and now with the third quarter, we had a total of 10.8% operating cash flow compared to sales. CapEx, with the strong third quarter, was at 273 million and, again, is up for the reasons that I just talked about for Q3. Nevertheless, free cash flow before and after acquisitions has significantly increased over 2005.

There were a couple of one-time items excluded from the statement, which I'll talk about here, and particularly affect cash flow and only partly the P&L. One is the $99 million payment that we had in the U.S. related to a disputed result of a tax audit, which we are currently contesting.

We prepaid, in effect, the amount that would we due, so as to reduce very high interest rates that would be associated with that liability and also to get into a jurisdiction that we thought would be more favorable than if we didn't make the payment. So, the payment allowed us to get into a jurisdiction where we felt contesting would have the highest probability of success.

Also, recalling the one-time items that we had in the first half, we had the significant tax payment on the FTC divestitures, and remember that from a cash flow standpoint, cash-out for tax payments is different from the P&L because our tax basis was lower, and we also have the RCG restructuring costs, so not only the ones that are hitting the P&L, but some, also, that are included in purchase accounting and only affecting the balance sheet, but for cash flow purposes, it's still cash that we are paying out over the course of 2006.

So, all together, we have a total of 200 million of one-time items that's reducing, then, the free cash flow from about 350 million to about a 150 million, but again, it's the effect that the one-time items. Our underlying cash flow performance is really quite good.

Now, let's turn to the balance sheet and our credit ratio. You see that primarily due to our excellent operating performance--and that you see in the left hand chart--with our pro-forma annualized EBITDA picking up over 1.6 billion, that our debt to EBITDA has now been reduced to below 3.5. So, we told you in August at the end of Q2, that we expected to be below 3.5 by the end of the year, and, in fact, we achieved that goal already by the end of Q3 at around 3.44. We do clearly expect to stay below 3.5 by the end of the year and to make further progress toward our mid-term target eventually getting in the range of 2.5 by about 2009.

Now, here, again, is the summary of one-time costs [similar] to the chart that stuff on showed for Fresenius AG. In Q3, we just had two items, one was restructuring costs related to the RCG acquisition, and the other was the first-time expensing of stock option expense in our P&L, and you see the before and after effects of those two items, 9 million pre-tax, 6 million after-tax.

For the full nine months, we see the significant gain from on a pre-tax basis from the sale of the FTC-related divestitures, although on an after-tax basis, it leads to a small loss of 4 million. We do expect to both significant additional restructuring charges in Q4 and other one-time charges in particular and in-process R&D charge associated with the PhosLo acquisition which we expect to consummate in Q4 so that the total estimate for restructuring and other one-time costs, primarily in process R&D, is 31 million pre-tax for the full year, and that will lead to 8 million pre-tax for all of the items in the 8 million loss, and on an after-tax basis, 44 million for the full year. I think at the end of Q2, we told you it would be around 40 million. We now expect it to be around 44 million in total for one-time items for the full year 2006.

And finally, our upgraded guidance has been hinted. We are upgrading guidance. We now expect net revenue to be 8.4 billion compared to our previous guidance of 8.3 billion. We have increased our net income guidance by $15 million, and we now expect net income to be at least 557 million for the full year or at least an 18% growth rate for the year.

After one-time items and considering the 44 million after-tax affect of those one-time items we expect net income to be greater than or equal to 513 million. We do confirm that the leverage ratio is expected to be below 3.5, and we do confirm that we'll stay within our envelope of CapEx and acquisition investment at around 550 million for the year.

Thanks very much for your attention, and I think we are now ready for your questions.

Yes. Thank you, Ben. Thank you, Larry, for the presentation. So, I think we can start with the Q&A. And we take, first, the questions from the audience.

[Florin Herald]. Ben, you talked about that you expect mid-term revenue per treatment to grow by about 2%. Could you just confirm what that would mean on a per-patient basis. I noticed that your treatment-per-patients decreased slightly, you know, this might not be significant at all, if you could just confirm what that would mean in your view?

And secondly, on the capacity increase, sort of, CapEx, Larry, that you mentioned on the capacity utilization, could you maybe give us a hint on what exactly that means for 2007, is that an extension of current facilities, is it opening of new facilities, I am talking on the product side purely now? And what that potentially means for, not the CapEx side, but the P&L side? Expect any significant margin events happening with these facilities ramping up? Thank you.

Okay. I will take the revenue per treatment, our target in the revenue-per-treatment area in the U.S. would be about 2% per year. So, we are now to base of 324 so it would be in the range of around $6. That is based on no Medicare increase and essentially a mid single-digit increase in the commercial payers. If there are Medicare increases, then that would add to do that.

In the international area, as I mentioned last time, we generally have 14 to 20 countries, and we don't get increases every year. But we like to be in the range of average of 1% to 2% constant currency, and that's, again, about half of them getting increase on a yearly basis. The other half follow thereafter.

So, on the capital investment, the investments in our production plans are primarily extensions of existing plans, not new green field plans so that we will see good returns on leveraging the infrastructure that we already have in our existing plans.

Okay. I think the next question comes from Holger, if that works; I hope so.

Okay. Holger Blum, Deutsche Bank. A few questions firstly, starting on the CapEx in revenue-per-treatment and cost-to-treatment. Cost went up by 6%; that's quite high. So, maybe you could give us guidance on the [belter], I mean, in the quarter you increased the debt by $11, which is quite nice. What is your outlook there going forward?

And second, with regard to the outlook, mandatory question on the Bush proposal, any political noise you could give us, a gut feeling? And although when you, a longer term question, when you have those hospitalization days, hospital days, [yield] with the U.S. on the screen, I wondered how could you reduce hospital days going forward, what is renewing you in terms of reimbursement? And what would be the economics behind it? Thank you.

Thank you, Holger. I think, Larry, why don't you handle the cost per treatment? And I'll come back and talk about President Bush.

Sure, as Ben mentioned, if we look out a few quarters, we think that the more normalized revenue-per-treatment increase should be around 2% in the U.S., and this doesn't consider any potential increase on the Medicare side. So, it's a weighted average but all coming from the private side.

On the cost-per-treatment side, we would expect that to normalize more in the 1.5% to 2% range. I think the 6% increase that you're talking about and that we, in fact, have had is not really comparable because we're comparing a time before RCG to a time after we've consolidated RCG. And generally, RCG costs were higher, even though their margins were significantly higher.

So, I think what's important to look at is the sequential growth now that you see, for us, and it was around 2%, Q2 to Q3, and most of that, half or more of that increase was related to adjusting to the HMA guidelines, the EPO utilization guidelines, and so, it's really less than 1% cost increase that we have seen in Q3 that were real ongoing-type cost increases. And we think on an annual basis that, again, that the cost increases per treatment are going to stay in the 1.5% to 2% range.

Now, Holger, with respect to basically the budget proposals, I think if anyone reads the newspapers, you can clearly see that the situation in the U.S. pre-election is very unsettled at this point. And so, I don't think we could comment, I couldn't really intelligently comment on what's going to happen at the election and what does it mean as far as the vehicle for any increases.

At this point, what I do want to--and none of that's built into our projections--but I do want to indicate we did see a positive $0.06 of a percent drug aid back that was being proposed by CMS, and our feeling is that probably will happen. So, that's really about as far as I think I can comment today. We'll see within the next few weeks what happens in the election.

And the last question was hospital days, I think it's very informative to look at the European hospital days to the U.S., and clearly that is the basis of our Disease Management Program because within the Disease Management Program, we clearly can reduce those hospital days significantly in the U.S. And that's one of the reasons that we are comfortable in talking to the payers, the commercial payers, that we can actually save a significant amount of costs outside our dialysis clinics by essentially applying some of the disease management, or the knowledge that we have in terms of the dialysis therapy.

So, that's really a [belts and suspenders] type of, what I call, value going forward with the commercial payers in terms of making sure they get value; at the same time, we keep our revenue for treatment increasing.

Any further questions here in the audience? That's not the case. I think, operator, we can open up the lines for questions from the audio lines, from the internet.

[Operator Instructions].

Michael Jungling with Merrill lynch.

I'd like to ask three questions, please. Firstly, on the Renal Care Group acquisition, can you give us an indication what cost synergies you already achieved in the third quarter of 2006? And that's expressed as an annul run rate.

Secondly, on your Amgen contract, I am very curious as to why you decided, a very different history, to sign a long-terms contract for EPOGEN and Aranesp. What suddenly has change compared to history and what financial benefit do you see in 2007 onwards?

And, certainly, on the capacity, what is your capacity utilization right now for both the European and U.S. plant, particularly interesting to me due to potential issues what you [think] you might have in the future?

Thank you, Michael. Larry, why don't you take the RCG cost synergies? I will pick the MGN, and you have got the capacity one.

So, without specifically limiting it to Q3, we have said before, and we still do estimate that the cost synergies that we'll realize in 2006 will be around $30 million and that we confirm our target for 2007 and future years to be $40 million to $50 million of total cost synergies.

And I think we had the question what were the components of the synergies. I remind everyone there were three main components. One was SG&A--it's for overhead type synergies, redundancies, eliminating one headquarters. The second was purchasing synergies, where we could get the RCG purchasing conditions on to the more favorable FMC conditions. And the third was the increased products supply to the RCG clinics, where before, we are supplying about [15%] of the products, and we expect to increase that to over 90%.

Maybe while I'm on, I'll answer Michael's other question which was capacity utilization in Europe and the U.S. in particular, in our dialyzer facilities and also in our fiber manufacturing, which is the precursor to our dialyzer as one of the key raw materials. For dialyzer, we're clearly at the 90% or above in all of our facilities around the world.

Michael, with respect to the Amgen five-year supply agreement, as you know, this is for North America exclusively. And really the thought pattern that we went through here is that, we've had now at least of 10 years to 15 years of experience with the Epogen products in our clinics. Amgen itself has over 4 million years of patient years of product's experience. And so, as we looked at it, we felt that it would be better to have a long-term association with Amgen in the U.S. and basically focus on additional improvements in the therapy that the two companies could collaborate and develop together.

So, that was basically the decision that we've made, and I would [agree] they have a long-term partner there. And there are certainly some opportunities we see in working with Amgen to improve patient care even further.

Ilan Chaitowitz with Redburn Partners.

Hi, good afternoon. I have just a got a couple of questions. Firstly, I was wondering if you are seeing any pricing power with your private payers as you have now got essentially the largest share of the U.S. dialysis market? The second question was also the trend in your corporate expenses; there has been quiet strong growth there. I was wondering if there is anything exceptional in those numbers, or is just the run rate that we should take going forward?

This is Ben. I'll take the first one. Basically, I like to think of it as a different approach. Clearly, with the consolidated provider situation in North America, we really are looking to reach to the payers and collaborate with the payers to find ways to meet their needs, better patient care needs, and, of course, the needs that we have. So, I don't look at it as pricing power. I look at as really a cooperation between the payers and ourselves. I think we are seeing that develop. With respect to the corporate expenses, Larry, let me turn at to you.

I think there has been a significant increase in corporate expense before one-time items. And I think there is two main things going on there, one which we could expect to continue and one maybe not at the level it's been. The first one is that we have chosen to recognize some global R&D projects in corporate, even though they may be performed in a particular region; of course, by definition they are performed in one region or the other. If we believe that the R&D project is going to benefit our worldwide business, then we are recognizing some of the R&D projects as global projects in our corporate expense.

The second issue is, costs for some patent litigations, and that is something that has ramped up this year but something we would expect not to continue for the foreseeable future.

Thank you. Just back to the first question, Ben, in terms of your relationships with the private payers, maybe if I could put it another way. Do you expect to see, or do you believe, that the strong inroads you've made with your relationships with them so far this year will continue at a similar rate next year?

Well, it's always hard to project, but I believe there is more and more recognition on the part of the payers and, clearly, on the part of the two large providers that there are benefits that each of us brings to the table. So, I'm hoping over the next few years, essentially, we have more of a partnership with them and not an adversarial role, which I don't believe we have at this point of time.

Thank you very much.

Hans Bostrom with Goldman Sachs.

Yes, I had a couple of question as well. Could you explain to us why your minority interest was so low in third quarter and what we should expect that to be in the future quarters, in relative line with the EBIT development, which would be very strong in Q3? And if you haven't mentioned that before, I would like you to mention what you think your tax rate will be on an ongoing basis in view of the various tax audit that have been going on? And thirdly--actually, those are the two questions that I have.

Okay. I'll take both of those. First, the tax rate, we would expect to be around 39% on an effective tax rate run basis. Our minority interest, we had around 5 million for Q3, and we would expect that figure would continue to be around 5 million as we go forward. It was slightly higher in Q2. We had reclassifications, so the correct number for Q2 was around 5 million as well, and you see the total for nine months at around 10 million.

So, this in no way reflects any buyback of minorities from Renal Care Group clinics?

No, it doesn't.

Okay. Thank you.

Edward Ridley with Lehman Brothers.

Just a question on the PhosLo Acquisition. I understand that--and I may be right or wrong--but I think it's facing a generic competition. And I was wondering whether we should be worried about that or how we should take that into consideration?

And just in terms of the Nabi's performance with PhosLo, what do you think the problem was [to] your network, what other issues are they having in terms of their sales growth, because sales growth have been very slow?

And on the HD market in the U.S., we haven't looked at [gamble] for awhile. I was wondering if you would comment on whether you basically continue to benefit from their problems, and whether, indeed, you can grow market share even further in the HD market in the U.S.?

This is Ben. I'll take these. The issue that's--what's exciting to us about PhosLo's, it's basically a proven drug, it has a very good history in terms of safety. If you look at the prescriptions in North America, basically [Renegel] and basically another entrant, has about 31.4%, and PhosLo has about a 20% market share. And then, you have number of people that are basically buying over-the-counter. Our position is very clear; we feel that just buying over-the-counter, not having a therapy approach to this particular medical problem, is not going to solve it.

So, this is not an area we believe they're going be able to, in the long-term or even in short-term, continue to offer just a generic product and basically solve the problem we see in bone mineral metabolism. So, we're developing a therapy. We think PhosLo fits very well, it's a very safe product, it's got very good following in the U.S. Now, the question is "well, why didn't it grow more with Nabi?" I guess, I can't comment too much, but I am very certain that if you put it together as a therapy it will have a completely different life than it's had being sold essentially as an individual [or] growth.

As far as Gambro goes, I think, again, I can't comment too much on their situation with the FDA. We assume that they will eventually solve that. They clearly are a very good competitor in the worldwide stage. But we clearly have--also I think you noticed that the contract with DaVita in the U.S. has been renegotiated with few more liberal terms, in terms of the DaVita buying others products. DaVita is our best customer, and so we clearly hope that's an opportunity for us to continue so our products to DaVita in the future. So, that's about all I know at this point as far as Gambro.

That's very helpful, thanks.

[Stefan Paust] with [Myer Lundus Bank]

Good afternoon. Question about Renal Care group, could you give the total number of the EBITDA of the Renal Care Group and the EBIT margin. And the next question is, is it possible to increase this margin too, or is it the level where it has normalized now?

At this point, we are not separately identifying the margin of what's left of the RCG business, so it will just be too difficult to try to parse out what that part of our business would be compared to the old FMC business, so we don't think it's a great exercise. We do know that the RCG prior to be acquisition had an EBIT margin in the range 18.5%. And so, was very significant compared to our EBIT margin prior to the acquisition in the 14% range. So, clearly, RCG is contributing very positively and, of course, the cost synergies that we talked about before add to that positive contribution.

And the portion of private patients, how big is that now?

The relative patient count for private is around 25% vs. 75% for Medicare.

Pardon?

I said that the patient count for the private payers is around 25% now, and 75% is for Medicare patients.

Okay, thank you very much.

Michael Jungling with Merrill Lynch.

Thank you. I have three further questions. Firstly, on the cost per single use--sorry, can you hear me?

Yes, we can, Michael.

All right. First question is the cost--the single use dialyzer in the United States. Can you give us an indication if you use an all-cost approach, how far you are in terms of making the cost neutral to many of the independent that remain to go on to single use?

And secondly, on the renal drug initiative, I noticed in this slide, you did mention injectable iron with number of [other assets] not too far away from where you are in Germany, I am curious as to why you didn't mention injectable line as a drug initiative?

And the third question I have, is in the second quarter of 2006 results, [I asked] you the question whether you saw any material [loading] group adding against the commercial payer period, I was wondering whether you can give us an update as to what your intelligence is suggesting now?

Thank you, Michael. As I mentioned, about 60% of the independents have converted the single use. Clearly, we have a capacity issue in U.S. at this point. We are bringing on more capacity in 2007. But I believe that most of the decisions of the independents are the additional medical value balances, any additional costs that they have going to single use. And remember, the independent market is not as efficient in their use programs as large companies such as we [were].

As far as injectable iron, yes clearly it's one of the four renal drugs that we have of interest around the world. Clearly, though, we think the most important need right now is Bone/Mineral metabolism, and so our focus is in that area. As I mentioned, we feel that the anemia area at this point medically is being handled quite well. And so, that's why we purchased the PhosLo product line, and that's where our focus is today. As far as MSP and what's going to happen in Washington, I think I answered that earlier; with all of the uncertainty of the mid-term elections, I don't feel that I, in anyway, can comment on what's going to happen in that election and then also in terms of will there be a vehicle for any of these increases in reimbursement.

Question answered. You have done a fantastic job, and, therefore, I don't want to sound too negative, but given the opportunities you've got in single use, how come you are so [short] on capacity, have you been overwhelmed with the demand thing of use?

The word "overwhelmed" is a little bit strong, but I think we have almost 80% of the business and dialyzers in the U.S., and, quite frankly, we have been expanding our own business. We have needs--as we grow, we clearly cannot offer reuse in our own clinics, and so, at this point in time, we basically need to increase our capacity. But we've found very good acceptance of the single use concept, and we will be accelerating it when the new capacity comes in next year.

Thank you.

Jack Scannell with Sanford C. Bernstein.

Hi, I've just got one question. That is, it doesn't seem unreasonable to think [Asahi] and Genzyme Roche might get a little bit threatened by a large vertically integrated dialysis player with 35% of the U.S. market getting into drugs. Now, do you foresee any substantial anti-drugs complaints? And if not, why not?

Actually I can't comment on what their feeling, but if you go back and read their transcripts, I think that having Fresenius Medical Care also focus on Bone/Mineral metabolism along with Genzyme will actually be very beneficial in terms of for the patients because, basically, there will be two groups that are working to meet this unmet medical need.

Now, as far as any trust activities, no, certainly not. This is essentially oral drug; it's prescribed through the physician prescriptions. And so, the vertically integrated feature really has no benefit or weakness here because it's up to the doctors and the patients to prescribe the medicine.

Okay. Thanks. And just one more go at the MSP, do you have any preference of Republic of Democrat?

Actually, I'm totally apolitical. We find that basically either party, we work well. I think over my years, I've worked with them over 11 different, basically, organization changes. So, we're very comfortable in this particular space that we can work well with either party.

Okay, thank you very much.

There are no further questions. I will turn it back over for closing remarks.

Okay. I think there is one more actually on the internet, Ben, if you can?

We have one more internet question here. Basically the question is, has the strong performance in the sales of dialysis hardware been positively impacted by the FDA problems for Gambro, and I think in all honesty, yes, it has and clearly not to dwell on that, we've been able to ramp-up and fill the need this past year around world.

Second question is, have you seen any change in activity levels for Gambro since they have [been taken privately] earlier this year? And the answer is, I can't really comment on that. Clearly, they are an excellent competitor; and at this point, I'm not sure that I have anything to add.

The last question is regarding the revenue-per-treatment on the U.S. We talked about $321 per treatment and $324 per treatment. Now, what's the real number? And, again, I got to tell you, when we see North America, we have a number of clinics; about 2,000 patients in Mexico that we're actually treating. And so the North American number is $321 per treatment, but that includes the patients in Mexico. When you notice the chart that says U.S. dialysis services, it will serve 324, which is essentially the continental U.S. revenue-per-treatment.

Okay, Ben, I have one more actually from the internet in terms of the previous announcement we made in [Osren]. What is the logic of the benefits of having PhosLo and Osren to address hyperphosphatemia?

Thank you, Oliver. Actually, we are quite excited about developing a family of phosphate binders, and the difference between PhosLo and Osren is the amount of magnesium that we have in Osren vs. the calcium acetate of the PhosLo. So, we will have a family of products here because we've got some ideas of how to actually improve the calcium acetate or calcium acetate meg, essentially phosphate binders, so they will fit together.

Thank you, Ben. Any last questions from the audience? If that's not the case, to be politically correct, I wish everybody a great holiday season coming up in December. Have a great time, enjoy it. And I hope to see you coming back actually for the announcement of the full year numbers back in February. Thank you very much.