Fresenius Medical Care AG (FMS) 2006 Q4 法說會逐字稿

Thank you, Oliver. Again, a warm welcome to everyone -- board members, employees, associates and whoever has joined us on the internet around the world. We're looking forward to covering a number of topics with you today. I will cover the business update and give you the fourth quarter overview 2006 and some of the growth drivers that we see for 2007. Larry then will follow-up and give you more information with respect to the financials.

And basically I can tell you that we had a very good year, another excellent year for Fresenius Medical Care. We exceeded our financial targets. I'd like to take this opportunity to thank the management board. Our employees and all of our associates around the world because not only did we have excellent financial results this year, we also had excellent quality results and I'll try to share those with you as we go through the program.

As you look at slide four, you can see that our revenue was almost $8.5 billion. Again, up 26% over last year. Clearly, a record for Fresenius Medical Care. Now, if you correct for $47 million of one-time effects, you can see that our net income also increased by about 24% to $584 million.

Very strong year, but what's reassuring about the year is that it was not only based on the acquisition of RCG and the successful integration of RCG, but our underlying business around the world was excellent and performed quite well and, again, Larry will share with you some of the details in the financial presentation.

Let's look first at the revenue growth by region. You can see that in NA, revenue was a little over $6 billion. This is up 32% year over year. And, again, it was driven by the RCG acquisition, excellent performance by the service department, service group, and also by the product's group. The organic growth in North America was 9%, clearly way above the market.

If you look at the international region, we did almost $2.5 billion of revenue in the international region. It too had a double-digit growth of 12% in constant currency.

Turning now to Europe, we did almost $1.8 billion revenue in Europe which accounts for 21% of our overall revenue and 72% of the international revenue. Again, the growth rate in Europe was 11%, clearly double the market and we've gained market share in Europe as well as in the U.S.

Turning now to Asia-Pacific, it represents 4% of our revenue but it too had a very strong year, growing 11% and most of that was product sales. With our recently announced acquisitions in Taiwan and Korea, we now are the leading provider of dialysis services in the Asia-Pacific area. We treat about 10,000 patients in that region.

Looking at Latin America, it too is around 4% of our revenue at this time and it's continued to have the highest growth rate of around 24% in terms of actual currency in Latin America. And, again, the service component in Latin America is 9% of our service component in the international. It's about 70% service. They're doing very, very well in Latin America.

So, in summary, as we look across our regions, every region grew double-digit and grew above the market. So, it was a very good year for us in each of the regions.

Now, let's look at the business segments that cut across these regions and we look at those in two segments; dialysis services and products. On slide six you'll see a break down of the dialysis services revenue for both North America and international. The revenue in North America reached almost $5.5 billion in 2006, again, up strongly over 2005 by 35%. Again, the organic growth in this region was also 9% and of course the RCG integration helped that.

Looking at dialysis services in the international, it grew by 12% and it almost touched the $1 billion mark which it probably will in the foreseeable future but we did do $900 million worth of revenue in the international service business and it grew very dramatically then during the year.

So, as we look at our service business across these regions, we did about $6.4 billion of revenue in the service business and it grew at about 31%. So, very strong performance around the world in the service business and I think our vertically integrated model of where we actually have products and service is actually paying off very well in each of the regions.

Let's look now at the products business. In the products business we'll have to look at it from both the North America and international segments but we'll also look at what I call external and internal sales.

You can see that North America hit external sales of around $560 million which as reported was a growth rate of 7% for the year; however, as we mentioned during the year, Renal Care Group was an external sale last year and this year it's an internal sale. So, correcting for that, we had around a 13% growth rate in the North American products business which is clearly three times the market in NA. So, our market share has increased quite substantially in North America in terms of the dialysis products.

The leading product in that area was the hemodialysis machines and we've talked about that during the year. Volume grew by 26% and I believe our market share for 2006 was somewhere north of 80%, between 80% and 90%. We also saw strong demand -- continued strong demand for our dialyzers. We've expanded each of the facilities around the world for dialyzers. In NA, we're now at about 60% of the independent market, 61% is single-use. And we have about 86% of that business. So, the products business in North America has done very well this year and has met the needs for the business, for the customers.

Now, moving to the international products business, it grew by an even more impressive number, 13% external sales. We reached 1.5 billion and we continue to see, again, very strong demand for the hemodialysis machines, both the 5008 and the 4008. In fact, as we stand here today, we have 3,000 5008 machines operational in the field and those machines, half of the treatments are with hemodiafiltration and, again, that testifies to the market, to the medical value of hemodiafiltration and the cost effectiveness that we've designed into the 5008.

Now, as you look into the total revenue which includes the revenue to ourselves that we sell to our own clinics, we reached about $2.8 billion. Again, it grew at 13% because the clinics themselves were growing at that level. So, as we look then at 2006, we have made the bold move to expand our manufacturing capacity both in the U.S., in Germany, and in Asia-Pacific so that we could meet the demand that we saw in 2006, coming in 2006 and 2007. So, we're actually quite bullish then in terms of what we think we will continue to do in 2007 in terms of our strong growth in the products area.

Now, turning to the value for the shareholders, I'd like to say that I'm very pleased that we again this year can offer to the annual general meeting a recommendation to increase the dividend for our stock. It's -- this is the tenth year in a row. Of course, we've only been in existence ten years, so it's 100%. And from that standpoint, we're going to recommend EU1.41 per ordinary share which is about a 15% increase over last year and EU1.47 for the preferred shares which is about 14% increase. So, again, we are following our earnings-driven dividend policy. We're trying to pass on to the share holders a fair amount which we believe this is and we're very proud of the fact that we can pass on 15% this year and we've had a very good year. So, you should see that in the May 15 meeting.

Now, let's look at Q4. We had a very, very strong Q4. Again, it finished the year in a very good condition. Again, revenue grew by 33%. We saw revenue around $2.35 billion. And we saw net income up 35%. Again, this was driven by very strong organic growth of around 11% for the fourth quarter and of course we had basically a very successful integration of RCG and a number of other projects that we did this year. So, fourth quarter then was a strong quarter. Larry will give you more detail on the financial aspects of that quarter.

I would like to talk a little bit about what happened in the global dialysis services for fourth quarter and you can see on this slide that our worldwide service business for the quarter had total sales of around $1.7 billion. This was up around 39% in actual currency. North America grew to about $1.5 billion, up 44% and, again, this was driven by the RCG plus organic growth. International had very strong momentum, continued their momentum and grew by 17% in actual currency to around $244 million.

Now, we have a very strong network in Europe of around 342 clinics in 14 countries and we continue to see the interest in privatization. We continue to see the interest in contracting with a Company that has excellent products, can provide the building of dialysis clinics, and actually provide the service. So, we see, again, attractive opportunities in the European sector to continue to grow our service business.

Looking now at closer metrics, look at a snapshot of the global services business. You'll see the top-line in green. We had 11% organic growth in our service business. Europe led the way -- or international led the way with 13% and we had 11% growth in the fourth quarter in NA. This is very impressive when you consider that the markets in these areas are growing at somewhere maximum 5%. These are at 4% to 5%. This corresponds to a revenue treatment growth in North America of around $325 per treatment, up 9%. Also, in the international we continue to see reimbursement increases. We were at about $138 per treatment in the fourth quarter. On a constant currency basis, this is up 4% for the year. So, we're quite bullish that we are able to continue to see revenue increases both in international and in NA.

Looking at the same market treatment growth, international had a very impressive 9%. In NA, which includes both Canada and Mexico because we now have clinics in those areas, we saw a same treatment growth of around 2.3%; however, in the U.S. market it was more around 2% rather 2.3%. Again, as I have said through the year, there were a number of reasons for that. We would expect as we go into 2007 that we'll see the same treatment growth in the rang of 3% and we're basically optimistic on a global basis about our reimbursement prospects for 2007.

This give you, the next slide here, 12 gives you a little bit more flavor in terms of the actual U.S. revenue per treatment growth. Again, it's a little higher than North America because the revenue per treatment in Canada and Mexico weighs it down a little bit. We have a number of clinics in Mexico, hemodialysis clinics, and so they're starting to have a slight impact.

What you see is a 9% gain in terms of revenue per treatment from fourth quarter 2005 to fourth quarter 2006. It's very impressive. 50% of that came from contract negotiations. 25% of that came from basically the Medicare Drug add back plus the increase in reimbursement. 15% came from the RCG integration and finally 10% came from utilization. So, this was clearly an excellent performance on the part of the contracting folks in the dialysis services area and that was a very excellent contribution then to the overall profitability of the Company.

Now, if you look at also what have we done in NA, what has the team done in NA? The management of North America for the last two years have been focused on two primary activities beyond the acquisition and the integration and a number of other things and that is to increase the revenue per treatment up into a level that is comparable to what other companies would have and also increase the operating margin to industry leading levels which is what they have done. So the operating margin in North America now is in the 16% to 17% range and is clearly the leading operating margin in North America and also basically in our industry. So, they have accomplished their task and I'm very pleased and very proud of what they've done.

Now, let's look at the global dialysis products. Again, this is for fourth quarter and we had, again, a very strong quarter. Our external sales reach $600 million. Our growth rate was 12% and we also, if you look at what we sold both internal and external, we reach $785 million. So, we ended the year with strong growth in the products area and again as we look at what are the growth drivers, clearly international had a growth rate of 15% in constant currency, very strong, and that was led by our machines, dialyzers, peritoneal dialysis. So we continue to see all of the key products do very well.

In NA, I talked with you about it's a reported 5% growth but, again, if you adjust for the RCG effect of internal-external, you'll be in the range of 13%. So, basically around the globe then we continue to operate in fourth quarter double-digit growth and that's clearly at least three times the market in each of the regions that we're operating in.

Now, I'd like to focus a little bit on quality. Again, we're in the process, we're in the business of maintaining the livelihood, the lives of very sick people and trying to improve them. So, quality has to be number one in everything that we do. And this is the normal sheet that I show you each quarter in terms of our services. And as you can see in this normal presentation here, we have actually improved our hospital days down to 11.7 days. We've actually reached the level in terms of adequacy that we provide in the North American clinics. We're at a 95% level. So, we provide to the patients the adequacy recommended or prescribed by the physician 95% of the time.

We also, in you look at what we do in Europe now, we have a database of about 25,000 patients which is the largest provider in Europe. So, we'll share this data with you and you can see also Europe is very close to the 95%, providing adequate dialysis. 93%. Excellent job. And you'll also notice that there's been a 500 basis point improvement in the hemoglobin anemia management. And as everyone knows, we're trying to get as many patients as we can above 11 grams of hemoglobin, above 11 grams per deciliter and you can see that over the last year, the international operation actually moved up 500 basis points from 66% to 71%. So -- and if you look at the hospital days in Europe, in international -- I'm sorry. In Europe. These are very, very improved days. That's 8.2 days per year. And it too improved over last year.

So, all in all, we believe around the world we have the industry leading quality metrics and we have the dedication to continue to develop those. Now, it would be remiss if I didn't mention that really there are two reasons for this. One of them is our dedicated employees and the clinical associates who do believe in continuous quality improvement. We have great teams around the world that work on that and everyone's dedicated and also we believe that we will -- you will see that our integrated therapy that we're applying in various parts of the world also contributes. Very proud of that.

Now, what I want to show you on the next slide is a little history because this happen immediately and so, what I will show you now is basically what the national average is and again, the data is about two years behind in terms of the -- in terms of reporting the data. So, you can see that basically the national average in the U.S. is somewhere around 91% of the patients receiving adequate dialysis in 2004. If you look at our curve for NA, you'll see that we have grown over the years and reached probably the plateau of around 95%.

Looking at the international progress, you'll see that they have made significant progress since about 2001 and have moved right up into that area of the 90 -- close to the 95% delivery. So, we have clearly over the last five to seven years moved into the very strong position or coming near the point where we are providing adequate, prescribed therapy and probably more than that to almost 95% plus of our patients 95% of the time.

Now, let's talk about anemia management. It's had a lot of discussion in various places in the press and what I want to show you here is our history from 2000 to 2006. Our program here is to provide as many patients as we can with a hemoglobin level higher than 11 grams per deciliter. Yet, adhering to the medical and financial practices that exist in the U.S. and you can see that over the last seven years we've been very consistent and very steady keeping in the range of 11 to 12, the standards, and so we're very proud of our consistency and we're very proud of our programs that have allowed us to operate that consistently during that time.

Now, I'd like to talk a little bit about quality on the products side. We've talked about quality and really our Company produces the world-leading position in quality, in products and so what I thought I'd share you a little bit today is what is the quality metrics for the dialyzers. And as you can see here, we produce about 60 million dialyzers a year and we have extensive quality programs in all of our plants and of course if you are in manufacturing you would know about six-sigma is the ultimate goal you're trying to get to. It's about three complaints per million. And you can see that our plants, the last four years have been operating very close to the six-sigma in the rage of 20 to 30 complaints per million dialyzers sold. And this quite frankly is a world-class standard and so we're very proud of the quality, not only on the service side of the business but on the service side of the business. And you can see that again, this is independent of regions, both in North America as well as in Europe.

So, what I'd like to end my part of the presentation with, well, what are the driving forces that will give us continued growth momentum? And really, there are five. We do believe that the environment on a worldwide basis is favorable for reimbursement, especially for us because we provide excellent quality, integrated care, and we're able to show that to the payers on a worldwide basis.

We also see organic treatment growth continuing to be in the range of 5% worldwide, 3% to 4% in Europe and the U.S. but clearly in the double-digits in other areas of the country. So we think that organic treatment growth will continue to be available over the foreseeable future.

The next thing we see is that clearly there's expansion opportunities in our clinical network in both Asia and Europe and we've been fairly active in that area. Many of those require -- there are very few acquisitions so they require de novos and negotiating with the governments or the payers and with our integrated -- vertically integrated care approach, we've been winning more of those than anyone else. So, again, we see opportunity to expand our service business then in those two regions.

Next, we also see that the product market share, we expect to continue to increase product market share. We've done that this year in each region of the world. We expect to continue that and we expect that with some of the new products and with some of the capacity expansions that we've put in place that we clearly will be able to meet the needs of the market in 2007. And finally, we're off to a good start with our pharma tech strategic programs this year and we'd expect to accelerate those in 2007 and going forward.

So, at this point I think I've given you some idea of our revenue opportunities and some of our revenue results for fourth quarter and 2006. I'd like to turn it over to Larry for the financial part. Thank you.

Thanks, Ben, and good afternoon to everybody. I'll review performance for Q4 and for the full year. We'll look at the P&L, operating margins, cash flow, our leverage development, and finally we'll finish up with the guidance for 2007.

First though, let's review our guidance for 2006 and how we did against that guidance. Remember that we upgraded guidance during the year for 2006 and what we're showing here is the last guidance that we had mentioned in November. And there we had $8.4 billion of revenue and we clearly exceeded that guidance coming in at just about $8.5 billion. And the main reason was the very strong organic growth that we had in Q4 at about 11% and we had very good growth really in all regions of the world as Ben mentioned and also in the product segment and also in services.

That income clearly exceeded expectations with $584 million before one-time items, a growth rate of 24% versus our guidance of greater than 18%. After one-time items, also an excellent performance, $537 million versus greater than $513. On the leverage ratio, we came in at 3.23 for the end of the year, far ahead of our expectations and our guidance of below 3.5. We had an excellent quarter in terms of operating cash flow and free cash flow and also debt development in Q4 and we'll come back to that later and look at the reasons why we had such a great performance on the leverage ratio.

On capital expenditures and acquisitions, we ended up spending $609 million for the year. Our guidance was $550 million. The main difference was the PhosLo acquisition which we had not included in our guidance but which we closed in Q4.

And finally, some of you may remember all the way back to the spring of 2005 when we announced the RCG acquisition and at time we forecasted that in 2006 or in the first year after the acquisition that the acquisition would be neutral to slightly accretive for Fresenius Medical Care earnings. Now that 2006 is over, we've done the calculation and can confirm that in fact the RCG acquisition was slightly accretive to FMC in 2006. That means FMC earned more with RCG than it would've earned without RCG.

Let's take a look at the Q4 P&L. I have two slides on this. First, a kind of summary. It was -- it was the strongest quarter of the year and a record quarter for the Company. We really picked up momentum as you'll see later throughout the year and Q4 was the best quarter of the year. Revenues were up 33%, 31% in constant currency. And again, the excellent 11% organic growth following about 10% for the first three quarters of the year. EBIT increased by 48% to $383 million, an increase of 1.7% in the margin before one-time items. And net income increased to $172 million, a 35% increase, again, before one-time items versus 2005. We'll come back and look at some of the detail on why the margins were so good and of course the margin performance along with some other factors that we'll talk about drove the strong increase in net income.

First though, a couple of comments on non-operating items in Q4. First, on interest expense we saw a sequential decline in Q4 in interest expense to $96 million versus around $100 million in Q3. And that was really due to two factors. One was that we had a lower debt level as the cash flow was very good. We were able to deleverage a little bit so we had a lower overall debt level than we had at the end of Q3. And also we had a step-down in our credit facility margins as we went through a threshold on our debt to EBITDA. So, both of those factors led to a slight decline, a small decline but an important one in interest expense for Q4.

Our tax rate was around 38.5% for Q4. Of course, we had more absolute tax expense because we had much higher earnings. But we really came back to a more normalized effective tax rate after significant one-time effects in both Q2 and Q3 and Q4 is much more indicative of what I think we'll see for 2007 and going forward. And again, those non-operating factors also contributed to the excellent net income of $172 million for the quarter.

Let's loot at operating margins. In NA, we had a 2.6% increase, 260 basis point increase in operating margins versus Q4 of 2005. Clearly, a part of that is due just to the combination with RCG and RCG's significantly higher operating margins as compared to FMC. But that's around half or a little bit less than half of the improvement and the rest is really underlying improvement in operating margins. And it really has to do with some factors that Ben mentioned; the strong increase in revenues per treatment, very strong product revenues and also excellent performance in our manufacturing plants and good efficiency and good cost control in our clinics. So, really all those factors led to this strong underlying improvement in operating margins in North America and we had a very excellent result of 17.1% EBIT margin in North America in Q4.

In international, we saw further improvement from the already very good level of 17.4% up to 17.7%. Here also the primary factors were the excellent manufacturing performance and also the very strong sales increase in particular in the product business but also in the provider business.

Let's look now at cash flow for the quarter. I think this must be our strongest quarter ever at $443 million or 19% of revenues. It was just an excellent quarter for operating cash flow, development. It had mostly to do with the strong development in our operating results, our EBIT contribution, but also due to further improvements in working capital management.

Capital expenditures increased to $177 million as we continued to invest in growth initiatives in the clinic business and also in manufacturing capacity in Q4, so both in the product segment and the service segment. And also in acquisitions we saw a strong increase but that was primarily due to the PhosLo acquisition in Q4. Nevertheless, we still saw a 39% increase in free cash flow for the quarter. So, at $151 million. Really a very good performance for Q4 on cash flow.

Now, let's take a look at the full year. I'll go through this fairly quickly because I think we've talked about it a lot already. $8.5 billion in revenues. It was a 26% increase; about 1% was currency so 25% constant currency. And Renal Care Group, the acquisition accounted for about 15%, leaving 10% organic growth for the year 2006.

Operating income had a strong 38% increase, a 1.4% increase in operating margins before one-time items. Again, this is due to the higher revenues but also the RCG integration, achievement of RCG synergies, strong increase in revenues per treatment, our manufacturing performance and also excellent product revenue growth.

Net income before one-time items was at $584 million, up 24% over the whole year 2005. Before one-time items, up 18% versus 2005. Just looking at a kind of trend for operating margins, you see the last five quarters on the left and you really see the momentum that we've picked up. Of course, the second quarter you see the jump due to the RCG consolidation but then we've really continued to gain momentum throughout the year through the fourth quarter and if we look at Q4 over Q4, again, it's about 170 basis point increase. And if we look on the right side, we see that following a couple of years where the margin was pretty flat at 13.7%, we've had a good increase above 2004 in 2005, 50 basis points and then this further 140 basis points. So almost 2%, 1.9% increase in operating margins in the last two years and of course that's the main factor that's driven the strong increase in profitability that we've seen.

Looking at it on an even longer term basis, just some perspective on the strong and steady performance of the Company, if you look on the left-hand side, you see our EPS growth in dollars since the year 2001. The only adjustment we've made to this is the OIG settlement that we had in 2001. Otherwise, they're as-reported figures and you can see that we've had a compound annual growth rate of 17% throughout that whole period. Even in those years where the operating margin was pretty flat, we were still able to get good increases, good momentum in the bottom-line earnings due to the growth in the business throughout those years. And you see on the right side in Q4, a 31% increase. Of course that corresponds to the data that we looked at before.

Just a word on VSO performance because we've looked at it pretty consistently. We've stayed at industry-leading levels in Q4 at 76 days, 59 days. In North America it's up one day but I would view this as a kind of normal variation. I especially wanted to show this slide because we've seen a nice three day reduction in international following two quarters of increases and I think this confirms that 120 days is a good assumption for international and we'll have some variation around that figure but that's a good estimate for your modeling and for the future.

Now looking at cash flow for the year, $1.1 billion in operating cash flow, again, before one-time items. 13% of revenues. Well above our target of 10% that we've talked about in the past. Both CapEx and acquisitions increased, again, mostly to fund growth in our base business as well as some strategic initiatives such as the PhosLo acquisition. But even so, free cash flow for the whole year that you see on the bottom-line increased by 30% over 2005. So, an excellent performance in free cash flow for the year.

Both a very good operating performance and the accompanying cash flow performance have led to a much stronger than expected and much stronger than guided deleveraging and, again, you see here that we're down to 3.2 by the end of 2006 after being at 3.8 on our leverage ratio just at the end of Q1. So in the space of nine months we were able to reduce by 0.6 on our leverage ratio and again, remembering back to our original guidance for the year, we thought we would end the year around 3.6 so we've done really much better than we thought we would when we closed the RCG acquisition.

Now, finally, let's look at the guidance for 2007. We think the guidance is challenging but very achievable. We're forecasting net revenue of $9.4 billion and 11% constant currency increase above 2006. Net income at $675 to $695 million. This would be an 18% to 21% growth over net income before one-time items and the 26% to 29% growth after one-time items.

I'll make the same comment that Stefan did. We adjust now 2006 so that we no longer consider the FAS123 stock option expense charge as a one-time item because starting in 2007, it's an ongoing item. So, we've adjusted the $584 million that you see on the second line for 2006 to $574 million because we had $10 million of after-tax expense associated with FAS123.

Our leverage ratio we expect to be below 3.0 by the end of 2007 and that's roughly one year ahead of the progress that we thought we would have when we closed RCG and we gave our original guidance. Remember, we said that we would be below 3.0 by the end of 2008. So now we plan and we guide that we will be below 3.0 on our leverage ratio debt to EBITDA by the end of 2007 and well on our way towards our medium term target of 2.5 in the future.

CapEx and acquisitions, $650 million, 7% of revenue, again, a pretty strong year for spending but we see a lot of growth opportunities and we'll be investing in those opportunities that will in turn generate very good returns for the Company.

With that, I thank you. And now, Ben and I would be happy to answer your questions.

Yes, thank you, Larry. Thank you, Ben, for that presentation and I think we start with the questions actually in the audience.

Who's going to be first?

Holger Blum, Deutsche Bank. One question on the cost of treatment and revenue per treatment. You are showing a $5 improvement sequentially. Could we expect that although as achievable for 2007? And although the cost per treatment was down $1 sequentially, was it maybe due to the Amgen arrangement or are there other reasons? And the second question would be on -- yes, was it you sort of say the FBN, we've learned that the CMS proposed a bundled rate already for 2008. What do you think of that? Is it likely to happen? Finally, with all the MSPs back in the air, could you also comment on your expectations here?

Thank you, Holger. I'll try to answer those. With respect to the revenue per treatment increase that we see going forward in 2007 and continuing, our target is more in the range of 2% to 2.5% and that includes both the commercial and the Medicare and that also is a worldwide target so we think that's probably a good, safe target. We're exceeding that this year, but I think I explained the various components of it.

With respect to the cost, again, you were talking to NA. We did see a $1 reduction in the cost per treatment and that's primarily a reflection of the improved synergies that we essentially were -- the group was able bring forth in the fourth quarter because we did accomplish the $30 million of synergies but we did it in nine months. So that was pretty accelerated.

Going forward, we target our increases in the cost per treatment in the U.S. somewhere in the 2% to 3% range. But preferably closer to 2% because there's a slight margin expansion.

The bundle -- the question of where is the bundle in the U.S., what's the timing? Again, I think there's been a lot of discussion on the hill and a lot of discussion these past three months. Our expectations is that it still will need to go through a demonstration project and probably closer to 2010 than basically 2008 as far as our reading as of -- as recently as last week.

As far as MSP, again, we're -- don't want to speculate on MSP. We didn't last year. But, again, with all the pressure in Congress to essentially reduce Medicare spending, it seems like it should be something they'd want to consider. And so, from that standpoint, I can't give you any more indications on that at this point because it's early in the process. So, we won't speculate but it seems like it might be in the right direction this year.

Next question? No further question actually in the audience. So, let me give you one housekeeping item before we open the lines actually outside. Just do me and the audience here a favor and only ask two questions and get back in line so that we have the opportunity to fulfill all the requests that we have actually out there. Thank you very much. So, operator, if you could please open the lines.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Michael Jungling. Michael, your line is open.

Hi, Michael. This is Ben. We're waiting on your question if you have one.

Can you hear me, Ben?

Since I said only two he just cut off I guess. I don't know.

Go ahead, Michael.

I think we can take the next one.

Your next question -- your next question comes from the line of Hans Bostrom.

Good afternoon, gentlemen. I had a couple of questions if I may. Firstly, could you clarify the statement you made regarding revenue for treatment increase and how you then expect your cost of treatment to rise between 3% and how we could get to some form of margin improvement function? Or did I misunderstand that? Then your 2007 guidance you're expecting margin to improve to drive so much higher earnings growth than revenue growth? And secondly, I also want to get a sense of what type of scale you would expect the drug bundle to take if it were implement of May of '09? Something about the size of such a scheme like that?

Hans, this is Ben. I'll try to answer the ones that you questioned and then we'll have to get a clarification on your second question. What I was indicated that our overall revenue per treatment target growth rate would be around 2.5%. Again, we received some Medicare increase this year starting in April and that's why we're saying it's more in the 2.5% rather than 2%. As far as the cost increase, I'm talking about a 2% increase on our cost basis, not in terms of revenue -- in terms of the revenue. So you basically since the cost basis is lower, you get a margin expansion.

The other question I could hear. If you could repeat it that would be very helpful.

If you could just elaborate a bit on your own perspective of what full extent of the drug bundle rate would be -- is this something that would address every Medicare patient? Would it be like a staged program? Or what is your sense of actual patient of this?

I guess -- this is Ben. I guess that calls for speculation. As long as you take the answer as speculation I think I can give you at least the thoughts that I have.

Again, one of the difficulties of a capitated rate with ESRD patients is the case mix adjustment in terms of some patients require considerably more EPO than others or they require different types of therapy. We're getting experience with that in our own demonstration project with CMS where we take the complete responsibility. So I think that's the difficulty that the government has had in terms of how to make sure the case adjustments they use in the Medicare Advantage program apply to the ESRD program. And that's where they are.

Now, I think that what they will do then is taking the case adjustments that they're comfortable with, those will be essentially included in the bundle and the bundle may start out with less than full coverage in a number of areas but that's just a speculation on my part.

Should we expect that the objective of Medicare is actually to save money with such a scheme that can be -- how would they safeguard patient's treatment quality in such a - ?

I believe this is a form of pay for performance and I believe that CMS and the industry and the medical profession realize that there is an additional cost here which is the Part A cost and so if we do a better job in terms of the dialysis treatment, they'll actually reduce the cost for the overall program. So I think they're looking more at an integrated program rather than just saving costs on the dialysis providers.

Hans, maybe just another word on operating margins and where they're headed in the future and this relationship between revenues and cost per treatment. We've said in the past and we stick to the guidance that we expect an incremental increase in operating margin every year averaging around 20 to 40 basis points and while revenues per treatment we're forecasting now for the year in the 2% to 2.5% range and cost per treatment approximately 2%, you have to also think about the growth that we have and the leverage that we have on SG&A expense for example and also the growth contributing to lower unit cost for our product production. So, all those things together lead to this potential to have a moderate incremental operating income improvement each year.

Okay. Thank you very much.

Your next question comes from the line of Daniel Mahony.

Good afternoon. Can you hear me?

Yes, Dan. Perfectly. Thank you.

Yes. Go ahead.

Oh, great. So, I have two questions. Could you just tell us presuming Q4 holds PhosLo drug revenue, where is that reporting in the P&L? Is that in products or in services. And Ben, the slide you showed us on the darbepoetin levels, what are the error falls on those -- on that chart in terms of how many patients are actually above 12 grams per deciliter so if there was a change in darbepoetin, bringing it down from 13 to say, a lower number, what sort of impact would that have on your EPO usage? Are the patients very tight? I think we've seen -- Dr. Lazarus has shown some data on that front before.

Alright. The PhosLo sales are included in our product segment. PhosLo sales are included in the product segment.

This is Ben. As far Q4, we just closed the transaction in late Q4 so there's very little impact in product sales in Q4.

With respect to the question you're asking there's really two parts to that. What's the standard deviation on the hemoglobin level and that's about 1.2 grams per deciliter. We've published and I think it's on our website showing the actual distribution and one of the things that always missed is that these patients stay only in a range say about 12.5 or in that range for a very short time because we reduce the dose and they come back into 12. So you have to look at really the longitudinal history on these patients and clearly we've shown that in our publications. So we don't expect any effect if someone said you should operate in standards. That's essentially what we've been doing.

Alright. Thanks very much.

Your next question comes from the line of [Anthony Napo].

Hi. It's Anthony from Caxton. Would you mind breaking out the one-time items, the $29 million? Would you mind breaking that out between how much was for FAS123 and how much was for one-time items, pre-tax?

FAS123 was about $10 million and the we had $19 million for all other one-time items.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Ilan Chaitowitz.

Good afternoon. This is Ilan Chaitowitz that's calling from Redburn Partners in London. Just a few questions. Firstly, this one to Larry. Could you give us some insight into what the growth in private payer contracting has been on your private payer portfolio over the last 12 months? What's been the change in rates over the last 12 months on those on a like to like basis?

We would prefer not to give an exact amount. I would say it's above trend that we're projecting for the future. We've said that it will be around mid-single digit for this year and likely years after that. Certainly 2006 was higher than that.

Okay. Just doing a bit of math here. If you take your Q4 average revenue per treatment number and you apply that at a flat rate across for the whole of 2007, you get an increase in average revenue per treatment in the range of 2% to 2.5% that which you're guiding for. So, implicit in your guidance is absolutely no improvement in average revenue per treatment even though we're seeing very strong momentum there and what looks like it is going to continue into 2007. I'm just wondering if there's any reason why we shouldn't see that momentum continue into next year? Into this year?

If I understand your question correctly, the 2% to 2.5% is above the year end or the Q4 rate, so above the $328 when you just consider the U.S. So it's not 2.5% above the average for the year but above the end of the year run rate.

Exactly.

I'm sorry. This is Ben. I'm sorry we didn't quite understand your conclusions. If you want to play them back to us we'll see if we can answer them.

Yes. If you take the average revenue per treatment for Q4 and for 2006 and you hold it flat for all of 2007 that implies the Q4 number on the average for 2006 is a 2% to 2.5% increase. But within that there is an implicit expectation of further improvement either from -- particularly from the private payer side of things which accounted for the lion's share of your increases in 2006.

I think you really have to take the average for the year and you need to look at it. I don't think your math is -- again, you're more of an expert than I am but I don't think the math applies because the 2.5% is a yearly increase and of course we had an increase this year underlying that's the same amount.

If there's more questions we can certainly get a call offline and try to get it answered for you.

Thank you. That would be appreciated.

I expect he probably had more questions. Do you have other questions?

You have a question from Michael Jungling. Michael, please go ahead.

Hi. Can you hear me now?

Yes, Michael. We can. Welcome back.

Good. I think you were in a very tight cost saving program and you had to cut me off to save money. Anyhow, I have a few questions, firstly on the same store treatment growth in the United States, you're tracking at 2% in the fourth quarter. If you look at the VITA numbers, they're doing 4% so that's twice the rate that you are. I'm curious what the difference is. Is it primarily the result of the RCG integration or are you perhaps not quite as good as the legion is? Secondly on some dialysis, can you comment on the disease to next stage deal and the implications it has on your own home care offering? And then the third question is on renal drugs, how close are you in securing distribution rights or property rights for vitamin D and iron?

Michael, this is Ben. First of all, I want to comment as I have through the year that our growth rate, again, we call it same market growth. There's a little bit of question on metrics, but let's assume they're the same for the time being. That basically our actual run rate was closer to 3% because of some contracts we didn't renew. I can only -- if basically the VITA is doing 4% I've got to take my hat off to them and it's a nice job. So, from that standpoint, as far as the VITA next stage, I think its major contribution will be to increase peritoneal dialysis growth in the U.S. and so I think that's kind of exciting from a peritoneal dialysis standpoint. And if you're interested in why, I can discuss that with you again offline.

As far as the renal drug initiatives, we clearly are really very pleased with our relationships that we've set up with Amgen, both in Europe and in the U.S. We're also pleased to have the PhosLo binder product line around the world. At this point we pretty much have our hands full with our bone mineral metabolism therapy. We have everything we need there. And so we have nothing that I can comment on as far as any more activities right now in the renal drug area. We're off to a very good start and we're satisfied at this time.

And one follow-up question on the U.S. market. Can you comment on the likelihood of the U.S. moving towards a long-acting darbepoetin similar to the agreement that you struck with Amgen in Europe for Aranesp? Or in essence, what is the difference between a patient in U.S. going for Epogen versus the long-acting EPO in Europe?

I think this is probably two issues there. We, of course when Aranesp came out in the U.S. I think everybody looked at it to look and see if it had benefits for the ESRD patient versus administrating I.V. every treatment. And we could not find that benefit. It has benefits in peritoneal dialysis and it has benefits in essentially pre-ESRD but we could not find any benefits at all with long-acting basically EPO in the U.S.

Now, I think as far as the European theater, there are certain other issues that are at play here in terms of intellectual property but clearly you could make a long-acting drug work or a short-acting drug work if you use either one of them but it's not necessary obvious to me that either one has an advantage over the other. So, that's our position with respect to the long-acting versus what you call shorter or the first generation.

If you see Aranesp working for ESRD patients in Europe, what would cause -- why wouldn't the U.S. government say, "Well, perhaps we should move towards Aranesp in the United States?"

I think as I mentioned it's being applied in Europe for various reasons but there is really no disadvantage or advantage that it has versus the short-acting as you call it. So I think in the U.S. if the -- it's strictly a function of what is the medical advantage of a long-acting? It's not there. And so why would we change all of our algorithms and everything to essentially accommodate it? So it's strictly -- what we're doing is quite good and what's the advantage of changing it?

Finally question. I promise. If there is no disadvantage or advantage between Aranesp and perhaps Epogen, would it be cheaper for the U.S. government to use Aranesp for ESRD patients in the U.S.?

We've looked at that pretty carefully and again I don't believe that it is because we'd have to change our complete algorithms and quite frankly our data shows that if you dose more often you can actually do a better job of tightening the dose. And so, as you look at dosing say once every two weeks or once every month, you basically probably will overshoot more and there won't be an economic benefit. So, again, I really don't -- we don't see a medical advantage nor an operational advantage or a cost advantage between the two products.

Lovely. Thanks, Ben.

I would now like to turn the conference back over to Oliver Maier.

Thank you. I have one more question from the internet, Larry. It's a question actually what's the reason for SG&A expenses being up $50 million actually from the third quarter sequentially?

So we have not shown the SG&A expenses before and after one-time items. Just on a reported basis. So after one-time items and you saw the increase that we had in one-time items in Q4 and that was a significant factor in the increase.

Okay. Since there are not any more questions, I'd like to thank everybody and I'd like to close the -- actually end this meeting for today. Thank you very much for your meeting here. Thank you.