Fresenius Medical Care AG (FMS) 2007 Q1 法說會逐字稿

Good afternoon and good morning, ladies and gentlemen. Welcome. I'm Oliver Maier, Senior Vice President of Investor Relations and Corporate Communications of Fresenius Medical Care. Thank you for joining us for Fresenius Medical Care's conference call, which will cover our first quarter 2007 results and achievements.

By now, you should have received all the copies and material in the press release. The release and the presentation slides are available on our website, www.fmc-ag.com, under the Investor Relations section.

I would like to start with a forward-looking statements disclosure. This conference call includes certain forward-looking statements. Actual results could differ materially from those included in the forward-looking statements due to various risk factors and uncertainties. These risk factors and uncertainties and other risks are described in detail in the company's report filed with the Securities and Exchange Commission and the German Exchange Commission, Deutche [Bund].

In compliance with Section 401 of Sarbanes-Oxley, we have provided a reconciliation for any non-U.S. GAAP measure of that reconciliation that we use (inaudible). Please make use of that reconciliation. For questions via the Internet, you can sign onto our website, where you'll find further instructions under the IR section.

With us today is Ben Lipps, our CEO, and Larry Rosen, our CFO of Fresenius Medical Care. Ben will give us a short business update and Larry will brief us on the figures for Q1 and the outlook for 2007. With that, I will now turn over the call to Ben Lipps.

Thank you, Oliver. Ladies and gentlemen, let me extend a warm welcome to your, our board members, all of the employees and associates around the world, and to those of you who have joined us on the Internet.

We are very pleased with our first quarter financial results and the excellent start to this year, which we believe also will be a very good year. Not only did we achieve our expectations for the key financial metrics, we are leveraging the strength of our global presence and our integrated business model. In terms of (inaudible) I'll discuss the business update and Larry will cover the financials.

But before I start, I'd like to thank the management; board; again, our clinical employees and associates for their dedication and tremendous effort to provide the best quality in both products and services.

Turning now to Slide 4, as you can see in this slide, we provide dialysis to more than 169,000 patients around the world in almost 2,200 clinics. Clearly, our leadership extends throughout each of the key regions. We continue to see good growth opportunities in Europe, where we now treat 26,000 patients in approximately 350 clinics.

We are also optimistic when it comes to our growth opportunities in Asia-Pacific. Already, through our initiatives, we have become the leading dialysis provider in Asia-Pacific, dialyzing nearly 10,000 patients.

Turning now to Slide 5. In the first quarter, we continued to see strong growth across both business segments and in all regions. Revenue increased by 33%; net income grew by 28%, when corrected for one-time items in 2006; and our earnings per share grew by 37%. Larry will share with you more of the financial details in his part of the presentation. Clearly, we are on track to achieve our 2007 guidance.

Turning now to Slide 6. Slide 6 illustrates the revenue development for North America and International. Revenue in North America was approximately $1.6 billion, up 37% year over year, driven by dialysis services, hospital products, and RCG integration. Organic revenue growth for North America was 9%.

In the International regions, total revenue for Q1 was $684 million. We achieved an overall revenue growth rate of 24% in actual currency; 17 in constant currency. In Europe, total revenues were $470 million, which accounts for 20% of FMCs total revenue and 69% of the international revenue. Again, we achieved an impressive strong growth rate of 10% constant currency, well above the market. This growth was driven by dialysis services and product sales.

Dialysis services in Europe is 25% of our revenue at this point in time Asia-Pacific achieved $126 million of revenue, growing at an impressive 49%, led by product sales and our acquisition in Taiwan. The revenue growth in Latin America, which accounts for 4% of our total revenue, remains very strong, adding 17% constant currency, led by Brazil, Argentina, and Colombia. So in summary, revenue growth was outstanding in all regions of the globe.

Turning now to Slide 7. Let me highlight some regional highlights for Europe and Asia Pacific. Europe continues to be our most profitable region, with outstanding revenue growth driven by an organic growth of 8%; a strong demand for our new 5008 machine, up 45%; reimbursement increases in Italy, Spain, and France; and a very strong growth in our acute renal business, up 27%.

Asia Pacific is also delivering an impressive growth rate; again, driven by organic growth of 16%, dialyzers up 36%; machine sales up 38%; and, of course, our successful acquisitions in Taiwan and Korea, increasing our dialysis patient base by almost 7,000 patients. So again, we're very pleased with the results in these two regions and they continue to show excellent opportunities.

Turning now to Slide 8, I'd like to have us look at the revenue development for dialysis services in both North American and International. Revenue in North America for dialysis services was almost $1.8 billion in this quarter, up 40% year over year. Again, it was driven by very strong organic revenue growth of 8% and the successful integration of the RCG acquisition.

Our International dialysis services business grew by 30% year-over-year, attaining $277 million in revenue in the first quarter, with a very strong organic growth rate of 11%.

Turning now to Slide 9. This slide give you a snapshot of our global service business. First, I'd like to mention that the organic revenue growth globally was 9%; again, very impressive. The growth rate corresponds to revenue per treatment of $325 in Q1 for North America; in International, revenue per treatment for Q1 was $144, an increase of 6% in constant currency compared to last year. During the past 12 months, we've seen revenue increases in the International business in 7 of the 29 countries in which we operate dialysis clinics.

Our same-market treatment growth in International was 6.3%. In North America, we saw same-market treatment growth of 2.8%. In the United States, this number was 2.4. But I'm very proud -- we are making progress towards our goal of greater than 3% for 2007.

Turning now to Slide 10. In this slide, we look at the progress on revenue per treatment for the U.S. only. And you can see that we achieved revenue per treatment of $329, up 6% over Q1 2006. The components of this 6% increase in revenue per treatment came from -- 25% of it was from the RCG acquisition and 75% came from rate increases.

Turning now to all the outcomes, Slide No. 11. Let me give you a little bit of an update here. In North America, our hospitalization rate for first quarter was 11.6 days per patient year at risk; another improvement, year over year.

Additionally, we continue to focus on quality outcomes. For example, 93% of our patients received an intended dose of dialysis per treatment. Our overall mortality measure from Day 1 is now in the low 17% range. I will take the time, in the next slide, to discuss our anemia outcome results.

Turning now to Europe. In Europe, our quality outcomes are also very impressive, with 93% of our patients now achieving a [Kc/V] of greater than 1.2. 71% of our patients now achieve a hemoglobin greater than 11 grams per deciliter, which is an improvement of 200 basis points year over year. And our hospitalization days remain at a very low 8.3 days per year.

So again, I would like to acknowledge the dedication and excellent patient care demonstrated by our staff and clinical partners around the world.

Before discussing our USA anemia managed outcome, I would like to comment on our approach to this clinical procedure. Clearly, the physicians have the medical responsibly and our approach is to conduct studies and to assist in monitoring of the patients' anemia state. One of our retrospective studies, published in Kidney International in 2003, arrives at a case mix that statistically valid conclusion indicating that mortality decreases as hemoglobin increases to 13 grams per deciliter. Again, this study supported the existing DOQI guidelines. Consequently, our monitoring program has been designed from the very beginning to assist the physicians in achieving the desired anemia outcomes with both a high- and low-end monitoring program.

Turning now to Slide 12, I would like to show our anemia management trend and the hemoglobin levels for the period 2000 to 2007 for U.S. patients—again, looking at the first quarter of each of the calendar years. The left graph shows you the mean three month average of hemoglobin for our FMP facilities. And as you can see, it's been very steady and within the DOQI guidelines. In fact, in April, DOQI reconfirmed that hemoglobin targets should generally be in the range of 11 to 12 grams per deciliter and they also acknowledged that, because of natural fluctuations in actual hemoglobin, results will vary widely from hemoglobin targets in ESRD patients. And that's why we use the three-month trailing average.

Now, we've endeavored, over the past six years, to provide the best quality outcome for every patient, providing a hemoglobin level greater than 11, but adhering to a complex medical and practice guideline which monitors the high-end hemoglobin level.

The background for these studies are all listed on our website and you can see all of the studies that we've done here since, basically, 1996. And the consistency shown on Chart 12 shows that we clearly have demonstrated our efforts to be successful and stay within the DOQI guidelines during the past six years.

The right side of the graph shows you the percent of patients with hemoglobins greater than 11. We've clearly made progress in that area but, for the last three years, we're pretty much in the 80 to 82% range because of the monitoring from the high end. So that is where we stand today on the anemia management program and the anemia outcome.

Turning now to Slide 13, I would like to review the revenue development for North America and International on the product side. External revenue in North America was $153 million, an increase of 14% from last year. And if you exclude the effects of RCG, which is now an internal account, growth was actually an impressive 25%. The key drivers, again, were machines, dialyzers, and PD solutions.

In addition, our single-use dialyzers, sold through Care Pack product offering to independent clinics, continues to be well received and now over 62% of the independent clinics are practicing single use.

Our International business grew by 12% constant currency and achieved a level of $407 million this quarter, and clearly, it, too, was driven by machine growth, dialyzers, and PD solutions. For our total revenue, including internal and external, we're $740 million for the quarter, up 18% in constant currency year over year.

Turning now to Slide 14. Let me give you some details of the strong volume unit sales growth of our global dialysis business in Q1. Machine sales in the fourth quarter were exceptionally strong due to year-end tenders and tax incentives. And Q1 sales reflect a more normalized growth rate but are still double the market. We saw the demand for our machines on a worldwide basis be up 14% year over year.

However, even more impressively, the demands for our dialyzers in the external market grew by 16%; again, adjusting for the RCG effect.

We also saw our PD solution unit volume grow by 10%. We are in the process of expanding our manufacturing capability for the hemodialysis products on a worldwide basis during 2007, and therefore, we expect to be able to continually supply the strong demand for this product.

Turning, now, to Slide 15. What are the 2007 driving forces for continued growth? Clearly, No. 1, we see a positive global reimbursement environment. No. 2, we continue to focus on our organic treatment growth opportunities. No. 3, we expect further expansion of our clinic network in Asia and Europe by small acquisitions and de novo. In fact, we will do over 117 de novos this year.

We expect to further increase our product market share after the expansion of our production facility.

And we are implementing our renal therapy initiatives, or pharma tech strategy, which looks very good so far and we expect to see it look even better as we go through the year.

So at this point, I'd like to turn it over to Larry to cover the financials. And, again, thank you for the continued interest in our company. And, indeed, it was a very good start to 2007 and we're all very excited. Larry?

Thank you, Ben. And also, a warm welcome to all of you from my side. I'll be covering in further detail our financial results for Q1 and the outlook for full-year 2007.

Turning to Slide 17, focus on the P&L for Q1. Here you see that the revenue was $2.32 billion, grew at 33% actual currency and 31% constant currency. Strong growth was due to the integration of our RCG but also to good performance from all of our regions, including revenue per treatment improvement in North America as well as the International segments and strong demand for our products, especially for machines. But also for dialyzers and for renal products, as you've seen more in Ben's presentation.

In addition, dialysis services achieved a strong organic revenue growth of 9%. The result -- total organic growth for the company was also over 9% year over year.

Revenue growth provided leverage over our fixed costing, as demonstrated by lower SG&A expense of 17.5% of revenue in Q1 compared to 18.4% in Q1 of 2006. In addition, our gross margins improved to 33.8%, up 70 basis points year over year. This resulted in a further improvement of our EBIT margin on a comparable basis to prior year of 15.7% in Q1 versus 14% in Q1 of last year.

EBIT in Q1 was $365 million, up 49%. That also includes the positive impact of the RCG acquisition.

Tax rate was 38%, in line with our expectation for Q1, and net income was $160 million, up 28% excluding the prior-year write-off of deferred financing costs of $9 million after tax in connection with the RCG acquisition and new financing we put in place at that time. On a reported basis, increase in net income was 38%.

So all in all, an excellent Q1 performance with a strong top- and bottom-line growth.

Now turning to Slide 18, you see that the EBIT margins development was excellent for both of our segments. North America reached an EBIT margin of 15.8% in the first quarter, an improvement of 200 basis points versus the same period last year. Main drivers of the improvement were revenue rate improvements in the service business, more than offsetting cost increases, specifically for personnel costs.

Secondly, the integration of RCG, adding approximately 100 basis points, or about half of the total increase. And third, strong demand for our products, especially machines. Our external product sales increase 14% year over year and excluding the RCG effect would have increased by around 25%.

In the International segment, our EBIT margin improved from its already high level of 17.3% by 30 basis points to 17.6%. This improvement was supported by a strong organic revenue growth in the product business of 10% constant currency, mainly driven by machines, dialyzers, and peritoneal products. Further, dialysis service showed an organic revenue growth of 11% constant currency.

With reimbursement increases in important countries in Europe and Latin America such as Argentina, Venezuela, Spain, France, and Italy, both of these developments allowed us to leverage our fixed cost base and, overall, improve EBIT margins.

Turning now to Slide 19, you see the sequential EBIT margin development and the momentum that we've gained during the last couple of years. Compared to Q1 2005, we've now improved our EBIT margin step by step by 200 basis points, from 13.7% in '05 to 15.7% this year. This was only partly due to the RCG acquisition. Our legacy business in North America performed very well. We also saw significant improvements in the International segment.

In addition, this slide shows the seasonality we experience in our business, usually a slower start to the year. The effect is both a result of fewer dialysis days in the first quarter compared to the other quarters of the year and the start of a new budget season for many of our payers. That slightly influences product sales during the first quarter.

This is even more magnified in 2007 as we experienced high product sales in Germany in Q4 2006 as a result of the VAT increase from 16 to 19%, which became effective January 1, 2007, and the correspondingly slower sales in Germany in Q1 of this year. We saw some pre-buying ahead of that tax increase during Q4 and we saw the effect, then, in Q1 of this year. Nevertheless, we still had excellent growth over all in the International product business.

Now, let's turn to the cash flow development on Slide 20. Cash from operations was $283 million for the quarter and, with 12.2% of revenue, above our expectation. And it represents a 75% increase over the operating cash flow in Q1 of 2006. Primary drivers of the increase were increased earnings, including noncash expenses. We are specifically satisfied with this development, as it underlines the quality of our earnings. In addition, continued good working capital management adds to the results.

Our CapEx was $109 million in Q1 of 2007. This was ahead of last year. The increase reflects our spending to increase production capacities, meet strong demand for our products and also our investment in growth opportunities such as new de novo clinics and to support our many dialysis service growth possibilities. The resulting free cash flow of $174 million is 80% higher than last year.

Our acquisition spending amounted to $90 million compared to only $10 million last year, excluding the RCG acquisition. This included the acquisition of the Taiwan Excelsior business and an acquisition in Korea, for a total combined of $42 million.

The remaining spending was mainly for acquired clinics in North America and in Europe. This left a free cash flow, after acquisitions, of $84 million, nearly equal to last year, excluding the RCG acquisition, (inaudible) a much higher level of spending to generate the future growth of our business.

With that, I'd like to turn to Slide 21 and give you some further insight regarding the development of day sales outstanding. In Q1, we were able to further improve our global and regional DSOs. Going forward, we would expect our industry-leading regional DSOs within this range or improving incrementally.

International, the DSOs decreased sequentially from 119 days in Q4 to 114 days in Q1. And throughout the low level that we've been experiencing for many quarters, a range of 117 to 122 days. In North America, we were able to improve DSOs by a further two days, to an industry-leading 57 days. As a result, our total DSOs decreased to a record 74 days. This represents a decrease of 4 days the last 12 months. Each day is now worth around $20 million of operating cash flow.

With that, let me give you some further insight regarding the debt and leverage ratio results and development -- Slide 22. If you look on the left side of the page, you see a steady and increasing EBITDA development of $1.804 billion in Q1. We also show our debt development, with that up $5.57 billion end of Q1 2007, slightly down from year end.

The chart on the right shows our de-leveraging, with a debt-to-EBITDA ratio or 1.82 at the end of 2005. Then, following the acquisition of RCG, we started with a debt-to-EBITDA ratio of 3.81. That was four quarters ago. But since then, we've been able to reduce this further to, now, below 3.1 -- 3.09 at the end of Q1 '07. It puts us approximately one year ahead of our initial plan at the time of the RCG acquisition, where we previously targeted to improve the leverage ratio only to about 3.6 by the end of 2006. This has been due both to our improved operating performance and excellent management practice. Our target for 2007 is to achieve a ratio below 3. Our mid-term target remains to get into the area of 2.5 times.

On Slide 23, let me give you some more insight regarding the continued strong EPS growth and development. If you look on the left side of the page, you see a very steady increase in EPS, reaching $5.47 on a reported basis at the end of 2006, which resulted in a very solid 17% compounded average growth rate over the last five years. Looking on the right side of the page, we see the EPS growth for Q1 going from $1.19 per share to $1.63 per share in Q1 of this year, resulting in a 37% growth in this quarter.

Drivers for this are the strong over-all improvements in our worldwide operation in both products and services and the effect of the RCG acquisition, despite having financed the acquisition with 100% debt, incurring now the interest expense therefrom.

Now, I'd like to focus just for a minute on specific issue, and that's the interest expense and our approach to managing interest expense. You see that on Slide 24. And it shows that we've decided on a conservative interest rate management due to our relatively high leverage. And it's conservative because we target 7.5% fixed interest exposure. In fact, at the end of Q1, we were at 7.8%. We were very fortunate and hedged most of the RCG acquisition debt up to 12 months prior to closing it in 2005. At that time, rates were significantly lower than rate at the acquisition date or, indeed, where current rates are.

With that, we are, to a large extent, insulated from interest rate increases, so that a 50 basis point increase in variable rates would result than less than a 1% decrease earnings after tax -- so around $5 million on an annualized basis.

Now, let me go up to my last slide on Page 25. Based on our strong start in Q1, we're confidently confirming our guidance and outlook for 2007. We expect revenue to increase to $9.4 billion, representing a top-line growth for the year of 11%. Please remember that the 2007 growth for the full year will still be impacted by the RCG acquisition as an additional quarter will be included in our results compared to 2006.

For 2007, we expect to achieve a net income in the range between $675 and $695 million. Based on the reported net income for 2006, this would be an increase of 26 to 29%; and before one-time items, an increase of 18 to 21%.

The comparison in just the net income of 2006 were one-time costs, but did not correct for stock option compensation expense, as this expense is included both in years 2006 and 2007.

In respect to de-leveraging, we expect, again, to attain a leverage ration below 3.0.

For CapEx and acquisitions, we plan to spend approximately $650 million; that's about 7% of revenue and it continues our increased spending on manufacturing capacity expansion, Scannelvo clinics, selective growth-oriented acquisitions.

With that, let me conclude my remarks. In our view, we had an excellent start in 2007 and we're confirming a strong outlook for 2007. Now, let's open up for questions.

(Operator Instructions) Your first question comes from the line of Martin Wales.

Hi. Martin Wales from UBS. First question is probably most of us have (inaudible) price pressure and (inaudible) Have you seen that?

It was Martin, right? Martin, this is Ben. Let me try to take that. Clearly, I think a little perspective here. You always see consolidation in the pay area; we're seeing that. And that, of course, leads to compression or to, naturally, pressure on rates. However, we are in contact monthly on our negotiation with payers. And to this date, we're clearly in a neutral to positive stance in terms of all of the renewals.

Now, one of the things that I think I'd like to leave with you is that our approach-- and I believe it's also that mentioned on the conference call by [Kit] -- is that I think our industry would like to partner with the payers because, clearly, we had a wide variety of new services such as IT disease management, clinical outcomes, CKG services. So I really believe that, as we go forward, yes, we'll have- there's always pressures because of the consolidation in the prayer area. But I believe that it's manageable and has been managed and will continue to be managed by us and basically by the industry.

(Inaudible) I'm sure you won't want to give 2008 guidance. Do you agree with that analysis (inaudible) U.S. services or will you be more--?

I'm having a little trouble hearing you because some of the words are cutting out. But I think what you're asking is what's our revenue per treatment-- basically prognosis for 2007 and going forward? And as we mentioned at the last conference call, we would still expect to see our revenue per treatment in North America between grow around 2.5% from the end of one year to the end of the next year. And that's about a 3.5% average year over year.

We've got a Medicare increase of about 1.6%, and so we expect to pick up the rest from increase in revenue per treatment from the commercial side; which is, again, about mid- single digit. So from that standpoint, we've not changed our opinion. Clearly, it's-- there's always month-by-month negotiations. But we have a lot of opportunities to add services to the commercial payers and we feel very comfortable that some of those will be valuable to them.

One final question. You do seem to be more (inaudible) higher base as regards rates. Secondly, that you're more (inaudible) or thirdly, that you're a better negotiator. Which one do you think applies or do you think there's a fourth explanation?

Well, this is a little bit difficult with respect for Kit and the industry. But let me say this -- clearly, I think his rates are a little bit above ours and that could well be mixed. So there could well be something to that. Negotiations, I think we're all very capable.

And I think probably the one thing where we differ a little bit is that we've got a lot of services to offer the payers. We'd much prefer to partner with them. We can show them how to save money by actually providing some services to them.

And from the product standpoint-- remember, my background is mainly products over the years. And that's how you continue to create and basically add value to your relationship with your customer. So maybe it's a little background where one's coming from versus the other.

Thanks very much.

I think there was-- maybe I could just add one point. There was a question about beyond 2007. And you might recall that we announced when we talked about '010 and our goal for what we would achieve by 2010, and we gave a revenue target. But we also said that we expected to grow the bottom line by at least 10% -- so clearly, double digit each year. And we basically stick to and confirm that medium-term guidance.

Thank you.

Your next question comes from the line of Jack Scannell.

Hi. A couple of questions. First, related to EPO for the rest of the year. Now, we talk to a lot of nephrologists and also the [CKD] guidelines have changed and it's clear that a lot of clinics are going to go from targeting 11 to 13 band -- between 11 to 12 band. Now, in your Q1 numbers, it seems to me that there's still inertia; we still see people running on the old algorithms and things may get squeezed a little bit later in the year. That's the first question.

And then, the second question relates to if you can just give a little more granularity in the growth in your product business. So the (inaudible) in products in the U.S. Are we seeing sort of a pharma tech contribution or is it single-use dialyzers to the independents? Just a little bit more granularity there would be very helpful.

Okay. Let me go back to the EPO. I think we published, in December or early January, and clearly on our website you can see our dosing and you can see the impact from the last CMS directive of basically 25% reduction at 13. And you'll see that, by and large, it moves up and down by plus or minus 2% in terms of the dosing as we got used to that algorithm.

Now, we clearly have targeted [LB]. So there is not a question that we were targeting 12 to 13%. You've got to keep that in mind. So what you're asking is do we expect to see now that essentially we're looking past three-quarters of the year. Our feeling is that we probably in a worst case scenario might see a 2 to 3%, but honestly, that's within the bandwidth of what we generally deal with. So we're fairly optimistic.

And as we've polled our positions, about 95% of them clearly believe that they're in the practice of practicing medicine, and it shouldn't be basically dictated by all this media information. So our comfort factor -- we'll stay in the-- worst case, we see a 2 to 3% change, but that's clearly within what we normally see. And our guidance clearly is taking all that into account.

Okay. And regarding the product growth?

Yes. The product growth is basically driven by the dialysis products. So when I looked at the product growth, you don't see that mix of the new Boswell business showing up. We just got started in first quarter, and so what you see there is primarily very strong demand for dialysis machines and dialyzers. And the PD is picking up again. So that's primarily al; dialysis products. Okay?

Okay. Thanks very much.

Thank you, Jack.

Your next question comes from the line of Ed Ridley-Day.

Hi; thank you. Just following up on [Foslow]. Could you just give a little bit more granularity on that? Would you be able to break out the sort of levels of sales you're seeing from Foslow? Or has he given you comments about the successful start with that product -- any feel for eventually how much share you might be taking from [H-enzyme] or [Proshia]?

Well, we just started with that product this quarter and, again, what we see is we're seeing about the 8% growth in the business. But, again, that's looking at it month by month. So at this point in time, let me say that clearly, we're just getting started. We clearly have not lost market share to anyone at this point. And it looks as though our whole premise here in our therapy is understood and we're getting some traction. So I would expect to see that we won't lose market share; we'll gain market share. And the target would be, for this year, somewhere in the $40 to $50 million range would be our target.

That's very helpful; thanks.

Thanks, Ed.

Your next question comes from the line of Ilain Shailowitz.

Hello, this is Ilan Chaitowitz, calling from Redburn Partners in London. Just three questions to start with. First, I was wondering if you had anything to report on the likelihoods of the developments taking place on Capitol Hill with regard to an MSP extension.

Secondly, I was wondering if you could just give some outlook in some of your corporate expenses. Is the current runway to about $40 million, give or take, what we should expect for the rest of the year?

Thirdly, you continue to have excellent underlying cash flow and your debt levels have come down quite dramatically. Where are you going to be putting that cash that's used going forward? Do you see any particularly interesting acquisitions on the horizons? Gambro has been mentioned on the wires.

And finally, with regard to your revenue per treatment development, we saw in the first quarter slightly lower increase versus Q4 than we've seen over the last two years. Just is there anything that we should read into that Q1 versus Q4 for this year?

Okay, Larry and I will take these basically in tandem, here. Let me take care of the Gambro issue first. We really don't see a need from our strategic standpoint to consider acquiring the Gambro Clinics. We now have the leadership niche in the region so we're quite comfortable where we are in that area. So that won't be on our plate.

Corporate expenses -- the only thing I'd like to question is we've got some new research initiatives so you may see some of those flow through the corporate research area. But I'll leave the rest of the corporate expenses, Larry, to you.

And as far as the revenue per treatment; again, we talked about, for the year, a 2.5% from the end of Q4 to the end of Q4 2007; I think we're clearly on that target. Again, I mentioned, we see a cycling of EPO plus or minus 2%, and so you'll see some of that cycling, I think, from fourth quarter to first quarter, which is pretty natural. But clearly, we're feeling that we will meet our 2.5% year-to-year growth in the revenue per treatment.

So on corporate expense, I would say that we do expect to be roughly in line with Q1 level for the remainder of the year.

In terms of the debt level going down, we do expect very good cash flow generation for this year, and you saw what a great quarter we had in Q1. At the same time, we are increasing our expenditures, both for capital expenditures and acquisitions, not including the RCG acquisition. So we're reinvesting a lot of that cash into growth opportunities and we see many growth opportunities in the business. So we will see some minor debt reduction, but not dramatic. We will de-leverage more by increasing EBITDA than by significantly decreasing debt, at least in the very near term.

and I'll try to answer the question on MSP. Again, I do not have a crystal ball, but our general feeling is that nothing has either improved or basically declined with respect to passage of the MSP. We still feel that it has the unique position of being a pay-for type of change. And basically, with the climate fairly negative on spending money in Washington, we feel that it still is a very logical consideration for the dialysis. In fact, it's part of a dialysis bill, or a quality renal bill, that we're trying to get passed in Congress. So at this point, nothing's change since we talked, I think in February, either on a positive side or a negative side. But the climate has not changed, and on balance, it still seems like a good approach for Congress to consider.

Thank you very much.

Maybe one question we didn't answer was the sequential growth in revenue per treatment. I think what we've seen in Q1 is quite consistent with the guidance we talked about in February, which is that we're going to see around a 2.5% increase at the end of 2007 compared to the end of the year 2006. Q1 was quite consistent with that. Remember that the 1.6% Medicare composite rate increase didn't kick in until April 1. So, again, 2.5% for the year is what we're targeting and expecting.

Thank you.

Your next question comes from the line of Hans Bostrom.

Gentlemen, I have a couple of questions. Firstly, if I understand it correctly, you mentioned that you (inaudible) positive 2, 3% reduction in EPO on prescriptions in your clinics. First of all, I just want to check if that's correct. And I just want to understand how you've come to that conclusion.

And I understand from the tables you've posted on the website you have about 45% of your patients of the (inaudible) programs (inaudible) I just want to get a sense of whether the actual numbers of patients and the deviations doesn't actually play into this and potentially could see, say, a larger reduction in EPO revenue treatment prescriptions for you.

And I also want to get a sense of what potential additional impact there could be if, indeed, there is a reduction in reimbursements for (inaudible) from 13 to 12 grams per deciliter.

Can you speak up a little bit? You're hard to understand, actually.

Sorry. So I'll just take the question from the beginning. I understand -- please correct me if I'm wrong -- you talked about a 2 or 3% reduction in EPO revenues caused by the new guidelines that have been issued in April. Yet, on your website you have some papers you have yourself published suggesting about 45% of your patients are above this 12 grams per deciliter benchmark. So I just want to get a sense of how you actually are deriving that estimate of reduction of EPO revenue, if I have understood correctly.

And also, if I could add to that, what potential additional factor could be if, indeed, there is a reduction in the reimbursement with a threshold upper limit from 13 to 12 grams per deciliter. That would be very helpful, just to get a sensitivity analysis on this particular point.

And the second question I had related to the increased minority charge. Should we assume that that is solely related to the Taiwanese acquisition? And how should that develop over the remainder of the year?

And the third question is what actual impact do you see that you have from the, as I understand, contingent import plan (inaudible) into the U.S, given that Gambro is now a product company and it's quite difficult to keep track of that relationship. But if you could give us an update on that particular situation, that would also be helpful. Thank you.

Okay. We'll take-- the first one would be the minority. That's primarily due to the Taiwan acquisition.

If you could-- I mean, if you compare Q1 of this year to Q1 of last year, most of the $6.5 million or so increase is due to the RCG acquisition and the joint ventures that they had, with an additional amount coming from the Taiwan acquisition, which also includes joint ventures. And the relationship is around two-thirds RCG and one-third the Taiwan acquisition. And as far as the $7 million level that we were at in Q1, I think it's reasonable to expect us to be around that level for the year.

Okay, Hans, back, now, to the EPO. I think you've got some conceptions here that are probably not realistic or even close to realistic.

So let me kind of come through why we say the 2 to 3%. Clearly, DOQI has confirmed that the target should be 11 to 12. That's clearly where we operate. They also clearly understand, as you'll see in our papers, that there is a very wide fluctuation. And that's why, at any one time, you'll have a number of patients -- we've shown here about 15% -- above 13 and about 29% between 11 and 12.

Now, those patients don't stay there every long because we reduce the dose, and essentially, they move back in. So what we see is that the practice of the community and of the physicians targets 11 to 12, but clearly as they-- since you're dealing with such a long timeline and so many variables here, and there's so much variation, as they basically move out of that range, or start to move towards the top of that range, you start titering down.

So I don't see any situation where, basically, there would be a hard upper level at 12. You would throw so many patients below 10 into a very severe anemia management situation. And we've shown that to the FDA in a number of groups. So I don't see that happening.

Where we got the 2% was that, okay, if 5% of the doctors want to follow this, and we see the normal variation in the range of 2%, I think we even probably start doses on there -- that's where we got the 2%. We clearly don't have any indications that anyone would push this down to a 12 max because you would absolutely skyrocket the costs into the hospital area and it would be totally unfair to any of the patients who are being treated.

So back to your question, I don't even see that scenario being realistic. How can I help you with any other sensitivities you're looking for?

I'm just wondering -- if I'm corrected, there have been no change in the actual guidelines for reimbursement. It's only the clinical side that has been discussed, but not really the reimbursement side. So I just want to get a sense of how this whole scenario, and your sensitivity analysis, might change if, indeed, there is a change in reimbursement guidelines. Or is that completely irrelevant?

I think, quite frankly, that CMS did a very thorough study. We've got thousands and thousands of data points. I, personally, believe that they've done the right thing and I believe most of the industry and the physicians do. Like I say, we've polled 95% of our physicians are going to practice medicine the way they believe is right. So I think this is mainly a discussion point. As I said back in February, I don't think it's very relevant. We think anemia management's practiced properly. It's got a lot of media press, but, honestly, we don't see it changing our physicians' practice patterns.

But I'd like to be helpful to you if you want to help me-- I'll do a model with you, but it's got to be one that has some-- that I believe has some opportunity to happen. And I don't-- we said that 2 to 3% is sort of the worse case scenario that we would see.

No, the background to asking this question is that our own biotech analysis covering Amgen has reduced her forecast for EPO revenues for Amgen by a double digit percentage on the back of this new clinical data. Clearly, there is a wide gap in expectations between her forecast and your expectations on changes in clinical behavior.

I think you have to be careful. Because all of this started in the area of oncology. And so you have to look at-- talk to your analyst again and see how much of this he relates to ESRD versus oncology and CKD. Is that helpful?

Yes, I will investigate further.

I'd ask him to go check that again because it may be he's bluffing all together.

And lastly, could you in any way give us an update on the Gambro situation? To what extent do you feel you continue to benefit from any such--?

Well, that's hard. I'm sure Gambro is working very hard to solve their problems. And we certainly understand their need to do that. We have been very serious about supplying any of the needs that our customers have for machines in this area and I think they still have been able to supply dialyzers and concentrates and everything else. So from our standpoint, we have done what we've needed to do for our customers. If and when they come back, it will only impact the machine business.

And quite frankly, we've got a new product we've launched in Europe and we're launching new products and new features all the time. So honestly, I don't know that at this point in time, I could estimate what impact, if any, it will have on us.

And you don't foresee a change in that situation? Is that something that is on the horizon or is it too early to say at this point?

Well, I don't have any visibility of it except that I just believe they're a good company and they will solve their problems and come back to the market. And that's kind of what we're assuming will happen.

Okay, thank you very much.

Thank you, Hans.

Your next question comes from the line of [Sheila Sharma].

Hello; this is Sheila Sharma from Merrill Lynch. I have two questions. Firstly, in North America, same-store growth was 2.8% in Q1 but below the 4% that we saw with DaVita for the same period. Can you tell us that this is a sign that your [onco] care concept has matured? And will this make it more difficult to catch a market share going forward?

And secondly, in Q1 in North America, your revenue per treatment is growing at twice the rate as your cost per treatment. Is this sustainable for the rest of 2007?

Okay. I think, as I mentioned last year, we expect to see our growth rate in terms of same-market treatment growth basically grow and exceed the market, and it think we made a definitely step up from fourth quarter, where some of these contracts ran out. So I think you'll see even more growth in that area.

And, no, I don't think our program has matured because, quite frankly, we're just in a position after having digested RCG to really start putting some effort in this area. I would believe that everything we plan on will come through. We're a couple of years late, but we, I think, did the right thing by acquiring RCG.

Now, as far as the cost balance, let me put that to you, Larry.

Maybe one more point on the same-store growth. During the long period where we had the FTC review of the RCG acquisition, we couldn't be as active as we normally would be in development opportunities, either in small incremental acquisitions or de novo facilities. And that kind of slowed down our growth for a couple of quarters.

But you definitely see the same-store growth momentum edging back up. I think we were below 2% in the second and third quarter last year. We were a bit above 2% in Q4 and now we're at 2.8%. So you see the impact of us, again, being able to really exploit the incremental growth opportunities that we see. And I think that's consistent with the comment that Ben has made, as well.

In terms of revenue per treatment and relation to cost per treatment growth, we have expanded revenue per treatment in the last several quarters, significantly in excess of the growth in cost per treatment. As we look to the full year '07, again, we expect around 2.5% increase in revenue per treatment, and in the range of 1.5 to 2% on cost per treatment. But we'll still exceed cost per treatment increases, but not by as much as we have in the last several quarters.

Okay; thank you very much.

Thank you.

Your next question comes from the line of Tom Jones.

Good afternoon. I've got three questions, and you'll be pleased to know none of them relate to EPOs. First of all--

Thank you, Tom.

Could you just give us an idea of-- the 117 clinics that you mentioned you've got in the de novo pipe. How do they break down geographically in terms of the U.S. and international market?

The second question is just on the Korean acquisition. Could you just give us some sort of color on the number of clinics and the patient numbers that (inaudible)?

And then the third question is just more sort of to get your view, really. You've got about I think $648 million of trust-deferred securities coming due in the early part of next year. Just interested in your early thoughts on how you might go about refinancing (inaudible) wonder whether we should need a lien for that.

[Laughs] Okay. I'll give that one to Larry. And as far as the de novos, they're about 60% in the U.S. and the rest International. And, again, we've got really good opportunities. I think it's right in that 68 clinics are in North America and the rest International.

Now, as far as the Korean acquisition -- a medical foundation, 7 or 8 clinics, 400 to 500 patients. And, again, we see Korea and Taiwan as two very good countries for us to enter into the products business-- or, continue to grow the service business because our products are strong.

I think that that was two of the questions. The trust preferred -- let me give that to Larry.

Yeah, on the trust perferreds, it's something that we've been looking at a lot lately. And we're fortunate to have a number of opportunities for refinancing, both in terms of instruments and in terms of time.

And due to our better-than-expected debt reduction in 2006, we now have enough room under our existing facilities if we just wanted to use those facilities to refinance. But we also look closely, as you pick up, at the high yield bond market, both in terms of the ability to extend maturities and also to diversify the instruments that we use for financing.

So no definite decision yet, but it's something that we're looking at very closely and in any case, when we do refinance those subordinated bonds, we will almost surely have lower interest expense on the replacement debt than on the trust deferred.

Just in terms of refinancing with possibly some fixed-rate debt. Do you have any hopes for a significant improvement in your credit rating after sort of the next one to two years, or that's not really a factor in dictating the timing of that refinancing?

It's probably not much of a factor. We have just updated the rating agencies recently. We were upgraded by S&P from negative outlook to stable outlook. But I don't expect any near-term change, meaning the next one or two quarters. I think if we continue on the path that we're on, it's reasonable that we might have a change some time in 2008 -- on the positive side.

Great; thanks.

Thank you, Tom.

You have a follow-up question from the lien of Jack Scannell.

Yeah, two questions. The first is, can you give us an update on your views on Medicare's attempts to implement some sort of bundled or capitated pricing caps in 2009 -- whether you see that as on track or practical, likely.

And then, secondly, do you see any perceptible change in your capital structure or capital intensity as you shift from sort of acquisitive growth in the U.S. to International growth, which I guess may have a different degree of -- sort of acquisition versus local organic growth?

Okay. As far as the discussion of bundling in the U.S. -- again, I don't think much has changed on that discussion. Of course, MedPac came out with a recommendation, I believe, in first quarter. But I still believe that we're probably dealing with something out in 2010 and that we're all looking for the demonstration studies to basically define the bundle, here, which we think will come out this summer. So I don't think anything's changed -- either moved out or moved closer.

As far as the acquisitions in the-- as I mentioned, and I'll flip it to Larry in a second, we don't see large acquisitions that would be beneficial to us today, but we see great opportunities to use our vertically integrated structure to actually build clinics for some of the countries that are now very interested in treating dialysis patients, which is CapEx. So we tend to look at our investment as a combination of acquisitions and basically CapEx. So I don't believe you'll see any over-all change, but let me-- Larry, why don't you take it and give a little more (inaudible) on it.

No, I think that's pretty reasonable in terms of our spending. I think in the range of 6 to 7% of revenue would be a reasonable expectation. That should accommodate our ability to expand significantly in some of the emerging markets that Ben just talked about.

In terms, though, of our leverage relationships and leverage metrics, as the business grows and our operating income, specifically EBITDA, continues to grow and debt should decline a bit, we should be able to see significant de-leveraging over the next years, even as our spending on growth opportunities and maintenance continues relationship to sales about where they are now.

And, Jack, I think the only thing that would change that is we don't see that many opportunities in dialysis. You're either buying products companies or services. But we are very interested in renal pharma and we're very interested in expanding that business, so I can't rule out that there might not be an opportunity come along there that essentially we'd consider strategic and we would essentially use our financial strength -- not based on shares, but by essentially increasing debt.

Okay; thanks, you guys.

Oliver Maier; Thanks, Jack. I have, actually, one more question from the Internet. You mentioned pharma tech. How advanced are your plans to further expand further the pharma tech business? Please elaborate on this (inaudible).

Okay. I've mentioned the last couple of years we had four drugs we were interested in. Clearly, we have not much to add in the EPO area; we've essentially picked Amgen as a partner there in both Europe and the U.S.

At the point, we think we have a very good strategy with our renal pharma in the bone mineral metabolism. So we're going to focus on that this year and really bring that to fruition. And then, as we are successful there, we'll go ahead and look at the other four, or the other three, that are left. So right now, it's more executing on what we started with Fosflo rather than moving any more aggressively in this area.

Are there any more questions on the audio line?

Yes, sir; your next question comes from the line of Martin Wales.

Yes, sorry. To finish up on the EOP again. I'm just wondering if you have any thoughts or comments on United Health (inaudible) website is going to (inaudible) hemoglobins greater than 13?

Martin, can you speak up a little? I don't know if you're using a headset. You're--

I am. Is that any better?

That's much better.

Very much better.

Okay. My question, I'm afraid, was on the EPO again. I noticed on the United Health website the statement that they're going to (inaudible) hemoglobins greater than 13. I wonder if you had any discussion (inaudible) thought that was the way the (inaudible) are going to go.

Yes, we saw that on March 16; it was on their website. Again, we don't mind discussing EPO; we think it's a great drug. But from that standpoint, we see-- according to the hemoglobin levels, we do that with essentially all of our [edi-care]. We clearly, I believe, even supply it already. So this is really sort of a non-event for us in terms of listing the hemoglobins which we put on the claim.

And I think that, based on that, it's just basically following what is now being done with CMS, and I believe it's being done pretty much in the industry, after I talked to our people. So I don't see this as a major change in direction.

Okay; thank you very much.

Thank you, Martin.

And your next question come from the line of Hans Bostrom.

This is a simple, final question. What is your currency exchange rate assumption for your revenue target of 9.4 for the full year?

Right now, we are forecasting in the low 130s for the U.S. dollar to the Euro.

Okay; thank you very much.

Okay, there seem to be no further questions. It looks like there's one more, actually, from the internet, then. I think you've answered that before, but maybe to make another clear statement on it. If you could talk about managed care pricing trends for '07 and even '08. And are you seeing any difference in terms of contracts and duration of contracts for rate increases?

I think we did discuss that, and again, just to go back to the beginning, I think that because of the consolidation in the payer area, there clearly is more what you want to call compression. But that's pretty natural, and we expect that.

At the same time, we clearly have a lot to offer and we find that our contracts are in positive-- or, in neutral to positive. So we've not changed our view that we will see something in the range of mid-single digits in the commercial area. And we believe we have a lot to offer by partnering with the payers. So that's the sort of a rehash of what I said earlier.

Great; thank you very much, Ben. Since there are no further questions, we'd like to thank everybody for participating in our call. If you have any further questions, please don't hesitate to call the IR department, either here in (inaudible) or in the U.S. We appreciate you guys joining. Thank you very much; bye bye.