Fresenius Medical Care AG (FMS) 2007 Q2 法說會逐字稿

Good morning. My name is Elizabeth and I will be your conference operator today. At this time, I would like to welcome everyone to the Fresenius Medical Care conference call.

(OPERATOR INSRUCTIONS.)

I will now turn the conference over to Oliver Maier. Please go ahead sir.

Thank you Elizabeth. Good afternoon and good morning ladies and gentlemen. Thank you for joining us for Fresenius Medical Care's conference call today, which will cover our Q2 H-1 2007 results and achievements.

I'm pretty sure that all of you should have received a copy of the Q2 material which is also available on our website, fmc-ag.com, under the IR section.

Let me also point out that this conference call is being broadcasted via the web.

Let me start to comment on the Safe Harbor statement. This presentation includes certain forward-looking statements. Actual results could differ materially from those included in the forward-looking statements due to various risk factors and uncertainties. These and other risks and uncertainties are detailed in the Company's reports filed with the Securities and Exchange Commission, with the SEC and the German Exchange Commission Deutsche Borse.

As in the past, in compliance with section 401 of Sarbanes-Oxley, we have provided a reconciliation for any non-U.S. GAAP measures that we utilize. Please make use of that reconciliation section in the back of the presentation.

For those who are participating via audio link, please note that you are in a listening only mode during the presentation portion. You may ask questions during the Q&A session via phone.

From my end, as a housekeeping item, please let me say that we, and I guess also all other participants, will appreciate if you don't use a mobile phone to dial in, not even a speaker phone or a headset for asking questions, since that helps the audio quality of the call which is in the best interest of everybody.

For questions via the Internet, you can sign onto our website, fmc-ag.com, also under the IR section as mentioned before.

With us today is Ben Lipps, Chief Executive Officer for Fresenius Medical Care, who will give you a update of the business strategy and the strategy in general, and Larry Rosen, our Chief Financial Officer of Fresenius Medical Care, who will brief you in detail on the results for Q2 and our expectations for the full year 2007.

That's it from my end so let's start the call and let me turn it over to Ben Lipps.

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

We're very pleased with our second quarter and first half financial results, and we continue to see excellent results from our operating divisions around the world. I also would like to cover the agenda a little bit -- Larry will cover the financials, I'll cover the business update.

However, before I start I'd like to thank the management board, our employees, and our clinical associates for their dedication to the high quality in both products and services that we see, again, around the world.

Turning to the next slide, you'll see an overall footprint of Fresenius Medical Care. As you can see, we now provide dialysis to more than 170,000 patients in more than 2,200 clinics. We clearly provide service and are the leading service provider in the four major regions of the world -- U.S., Latin America, Europe, and Asia-Pacific.

Turning now to the next slide. Q2 clearly was a very strong quarter. Revenue came in around $2.4 billion, up 11% year-over-year, 9% constant currency, and we had a very strong deep percent of organic growth.

With respect to earnings per share, we saw a 30% increase in earnings per share, again excluding one-time items in 2006. If you look as a reported basis, it was a 37% increase in earnings per share.

Larry will give you more detail on our upgraded guidance, but clearly with the strong operating results around the world we felt that it was mandatory that we upgrade the guidance.

Turning now to the next slide, you'll see that we had very strong revenue growth in all regions. North America turned in $1.66 billion in revenue, up 6%. However, that's not the whole story. We divested the profusion business in second quarter, primarily so we could focus on higher margin business such as the dialysis pharma which is going well. The revenue in the profusion business is about $100 million a year, so organically North America grew then at 7% year-over-year.

Turning now to international. We saw $744 million worth of revenue, up 15% in constant currency, 23% in actual currency. Services led the way with 24% growth in constant currency, products with 10% in constant currency. Again, clearly above the market.

Looking further at the international segment and looking at Europe, we turned in $516 million worth of sales in the European area, again with a very strong constant currency growth of 11%. And Europe constitutes 70% of our international business -- services growing at 13% constant currency, products at 9%.

Looking at Asia-Pacific, very strong first quarter -- second quarter for Asia-Pacific -- 36% growth. Clearly the acquisition of Excelsior gave us a boost, however the actual organic growth in the service area of 8% and the products 11%.

And Latin America turned in almost $100 million of sales, again with excellent growth -- 18% constant currency in the products and 15% in the service.

So as you sit back and look at the performance in second quarter, every region grew above the market and each of the segments, both service and products, grew in double digits.

Turning now to a global look at the dialysis services. Next slide. Our revenue in this area was very close to $1.8 billion. $1.5 came from North America and almost $300 million came from international.

International had a very strong growth rate of 24% constant currency, 13% organic growth, and 11% acquisitions. Of the 11% acquisition the Taiwanese acquisition, Excelsior, accounted for about 80% of that.

Turning now to the next slide. This slide gives a good snapshot of our global service business. Our organic growth rate in the service business for second quarter was 7% constant currency. This was led by 13% in the international area and 6% in the North American area. Again, a very strong performance.

Turning now to the same market treatment growth, you can see that the international had the same market treatment growth of around 7.3%, very strong above the market, North America 2.8%. Again, we're making progress towards our goal of 3% in 2007.

Looking at the revenue for treatment growth, you can see that the international division turned in 6% constant currency revenue for treatment growth. Clearly, over the last year seven of the 29 countries that we operate in we saw revenue for treatments growth in that area. There is a little mix effect in here but it's still a very much -- a very positive performance for the international service group.

Looking now at the number of treatments, we did about 6.6 million treatments this quarter. It puts us on track for the 26 to 27 million treatments that we expect to do during 2007.

Turning now to the next slide, it's basically the dialysis services, United States revenue per treatments. Our revenue per treatment in dialysis services for the United States grew from $317 per treatment Q2 2006, to $327 per treatment. That is a 3.2% increase year-over-year. However that does not tell the whole story because our EPO utilization between those two points was pretty much flat in terms of dosage. So the actual underlying growth in terms of revenue per treatment with the dialysis portion is actually above our target at 4.8% per year.

Again, as far as the EPO goes, since we -- let me give you a little picture, a little bit of flavor on that. Normally we'd have seen an EPO dose oscillation and obviously there's a lag factor because of the natural phenomenon, but the amplitude of that has usually been in the 2 to 2.5% range. We're clearly seeing the same thing, however, the actual wavelength of that amplification has broadened out here and it's not as predictable as it was. And I think that's primarily because of the EMP in 2006, and EPO black box essentially here and the media discussion here in 2007.

However, we are reasonably confident that as we go to fourth quarter, we will start to see that we will be on the ascension part of this oscillation and we still expect to at the end of 2007 see our revenue per treatment increase versus fourth quarter of 2006 by 1.5% to 2%.

Looking at what is the $327 to -- $329 to $327 first quarter to second quarter, primarily what that is is about $1, $2 less in terms of actual lab testing, because first quarter's always heavy in terms of lab testing and also we had a $2 reduction in essentially EPO.

If you look at it, we were able to balance then $2 of that with the Medicare increase and essentially the contracting increase that belies that 4.8%.

So all in all we feel comfortable. We continue to expect to achieve at the end of the year the 1.5% to 2% increase in revenue per treatment at the end of 2007.

Turning now to the next page, which is again looking at the global dialysis services and our quality outcomes, clearly you can see that we provide, on a worldwide basis, 93%, 94% of our treatments meet or exceed the prescribed therapy.

Europe continues to improve in terms of anemia outcome. We now have almost 72% of our patients above 11, which is a very critical medical indicator. And also Europe continues to have superior nutritional status. And, again, as I've mentioned in the past, I doubt if there's anything we can do in the U.S. until there's some regulatory changes in the nutritional area.

However, I would like to point out the hospitalization days. We continue to decrease the hospitalization days both in the European theater and also in North America. And, in fact, since 2003, we have decreased the hospitalization days by two days per year per patient.

To give you some idea of why not only do the patients benefit but the payers benefit -- one day per year reduction in hospital days per patient with FMC-only patients at 120,000 is worth between $150 to $200 million to the payers, be they Medicare or actually for the commercial payers.

So again, I think not only are we doing the right thing for the patients, we're clearly doing the right thing for the payers.

The next slide talks about our media management in the dialysis services in the U.S. And again, I'd like to spend a little time on this slide, there's a lot of information. But there's been a lot of questions on anemia management in the U.S. during this 2007.

First of all, I'd like to reiterate our confidence in our U.S. anemia management practices. They're evidence-based and they -- we believe they provide the best patient outcomes.

Also, I'd personally like to indicate, in all my dealings with Amgen I have found them to operate a very highly scientific and highly ethical -- with highly ethical standards. And I'm pleased with the program that we have and I -- if you go down here and look at the left hand side, you'll notice that a majority of our patients continue to target the 11% to 12% range -- 11 to 12 g/dl target range which we, as well as K/DOQI and a number of stakeholders, believe is the right range for our patients. And you can see on the right side, however, we have seen with our three-month average a slight decrease in the -- or an increase in the sub-11 or a slight decrease in number of patients that are above 11. This is a worrisome trend and if you look at it in this June it's actually almost 23% of our patients now are sub-11 whereas our target would be closer to 18.

So we believe that during the next couple of months, as this becomes more evident in terms of our patients, I would expect our physician associates to essentially correct this problem. And I think all of us are well aware of the importance of trying to keep as many patients above 11 g/dl as possible. So I think that, again, we have the data, we're following it, we've seen some changes but I am very confident by the fourth quarter we will begin to see this curve start to move back in the right direction.

Okay, turning now to the next slide. I'd like to focus on global dialysis products. We have had a excellent year so far this year in products. Our external revenue grew at 18% in actual currency, 13% in constant currency -- clearly by any stretch of the imagination above the market around the world.

North America, external sales grew by 21%. About 16% of that is the -- what we would call the real mechanical product such as dialyzers, machines, et cetera. And essentially what we have here is our machines grew by 24% year-over-year. We have signed a multi-year contract with DaVita. Again, we very much value DaVita as not only a partner in patient care but also one of our best and largest customers.

And as far as dialyzers, we saw an 8% growth and in PhosLo we actually saw a 20% growth year-over-year in our revenue in the PhosLo binder business. Now, that's underneath -- that's also in our products business, so 21% growth, 5% is PhosLo of the 21 and 16 products.

Now, as far as our single use, we're now seeing almost 64% of the independents practicing single use dialyzers and of that we have about 90% of the business.

Let me just point out a little bit, we're making progress on our 2007 strategic goals for our binder business. We've had three objectives for the year. One of them is to inform the medical community of the value of an integrated approach to phosphate removal and the importance of calcium balance during dialysis. We've also been targeting receiving the proper value for this therapy. And while doing this we wanted to maintain our -- basically our prescription market share and we have done all of those successfully and we're making progress in 2007.

Turning now to the international products business -- 17% growth in actual currency, 10% in constant currency. Clearly, double the market. Machines led the way with 21% growth, perineal dialysis growing at 8%, and dialyzers at 5%.

So we've had a very strong -- continue to have a very strong franchise in the products business around the world.

Turning now to the next slide, I would like to just basically go a little more broadly here and talk about quickly three key regions for us. We have basically three key growth regions at this time -- United States, Europe, and Asia-Pacific. And we see tremendous growth opportunities in each of those areas and we, clearly, will focus our resources as required to continue to grow in those areas.

And I think on slide 13 we're talking about reaching North America. I think I've spent enough time talking about North America. I would like to point out though that with the successful integration of RCG, we have been able to -- and you'll notice in terms of our cost containment, we're now making progress and we have very strong cost containment program and so the margins in North America are at a record high at this point in time and we expect them to continue to do well in North America in the margin area as well as growing at the other projects.

Okay, next, North America I'll talk a little bit. I think any who's picked up a newspaper is probably aware of the legislative regulatory actions going on in North America. Again, we at FMC are acting with our colleague providers, with the stakeholders across the board in North America. I won't spend a whole lot of time talking about it except I know that last night the House Ways and Means Bill passed. It clearly has some positive aspects for patient care and it has some negative aspects, which we believe that will essentially be mitigated because we believe sponsors of these bills actually do have the intention to improve patient care and we believe that we can work with them to essentially take care of whatever rough edges exist today.

Now, as far as the negative aspects, I think there's just a couple I'd like to point out. In discussing the bundle we certainly believe we should an inflation adjustment index. It was not in the first pass. And also there was some funding removed from dialysis basically which will hurt clinics in those areas where there's a high proportion of Medicare patients, and especially if operated by FMC and DaVita.

Now clearly, I'm sure that's not the intention. The clinics are clearly in urban areas and many rural areas where DaVita and FMC treat almost 70% of the patients.

So the long and short of it, we're early in the legislative process. There clearly are mechanisms going forward this year in terms of coming up with essentially an ESRD reimbursement program that would create a staple, adequately funded, and quality focused program.

Turning next to the reach in Europe. Very excited about the opportunities in Europe. Our revenues will be close or exceeding $2 billion in 2007. We're treating about 8% of the patients in 17 countries and about 6% of the total patients.

One of the criteria that we use as a vertically integrated company before we enter the service business is that we have market share of at least 40%, and I'm very proud to say that in all 44 countries we have a market share above 40%. So clearly this area is open to us.

I think the other point I want to point out on this slide is our 5008 hemodialysis machine is doing very well with the number of sales up 109%. And we clearly have had a very successful launch.

And also Europe has the highest sustained profitability so it's a very exciting region for us.

The other thing is we now have registered PhosLo in six countries in Europe.

Turning next to the next slide, I'd like to point out our estimates of patient growth. You can see that we have a sustained growth in Europe in terms of prevalent patients of around 6% per year. Clearly what that means by 2010, we'll have almost 580,000 patients in Europe, which is clearly 75% more than we have in the U.S. today. So clearly, this is a very attractive region for us and we're well positioned to grow in this region as you can see.

Turning now to the next slide 17 just to give you some number indicators. The management of the European theater plan to achieve close to $1 billion in revenue in the service side of the business by 2010, which means that we'll need to be in the range of around 500 clinics and we'll be treating about 40,000 patients.

Now, the reason this area is even more attractive to us is we see some fundamental changes starting to happen in the reimbursement system. We see certain countries considering a bundled rate combined with advanced quality systems, and that clearly allows us then to participate in the complete gamut of revenue all the way from renal pharma to the actual administration of the dialysis and to the product. So we're quite encouraged by Europe then as a potential growth area.

Now turning to Asia-Pacific. Again, this is a major growth opportunity area for us. We expect to see $500 million in revenue by the end of 2007. We have had a record 300,000 treatments this quarter. I believe our integration of the Taiwanese acquisition is going well and we have just purchased a production site in China for basically producing products for China and also for the Asia-Pacific area.

Turning now to the next slide, it shows our patient growth projections for Asia-Pacific excluding Japan. And you can see by 2010 we're expecting to see about 430,000 patients in this region. About the same essentially size that we have today in the U.S. in terms of patients.

We have plenty of room for growth here, we're only treating about 4% of the patients.

Okay, now as I move to my last slide. Before I move to that slide I would like to open up a little parentheses here and say that the reason that I'm very confident in what we're doing and where we're headed is that we have an extremely capable and experienced management board with more than 150 years of dialysis experience. All of us have worked together at least five years and some of us for as long as 10 to 20 years.

Mats Wahlstrom and Rice Powell, co-CEOs in North America, and their teams have clearly executed very successfully on the integration of RCG, while they managed a number of industry challenges. They also support a majority of the other dialysis providers with high quality innovative products.

FMC in Europe and East Africa and Latin America, led by Emanuelle Gatti, CEO of this region, has become the number one provider of dialysis treatments, number one provider of products, and it's a leading therapy innovator for the entire dialysis community in Europe.

Emanuelle and his team have a track record and the experience that will keep FMC growing at an impressive rate in Europe.

With respect to Asia-Pacific, Roberto Fuste, CEO of Asia-Pacific, has developed a team during the last 10 years that has grown Asia Pacific from $60 million in annual revenue to over $500 million in revenue this year. Clearly, they're up for the challenge and the opportunities which lay ahead.

And finally, our anchorman, board member with law and compliance, has developed with the management board a global world-class compliance program, which provides us with the corporate ethics so required in this business.

Now, let me finish my slides and I'll turn it over to Larry. Again, in summary, for the second quarter, very strong quarter -- product sales were good, we've had expansion opportunities in Europe and Asia, we're active in the legislative process. And Larry will talk more about our full-year guidance.

At this point, Larry, I'd like to turn it over to you.

Thanks Ben and good afternoon everybody. Thank you for joining our call today. I'd like to cover our financial performance for Q2 and for the first half.

In short, we continued to see very good momentum across almost all areas of the business. We continue to be optimistic about the full year.

Now let's turn to page 22, where we focus on the P&L for Q2 of 2007. Here you see that revenue was $2.4 billion for the quarter, and grew at 11% in actual currency and 9% in constant currency.

Growth was good, was due to good performance of all our regions, including revenue per treatment improvements year-over-year in North America, and reimbursement increases in Italy, Spain, France, Argentina, Chile, and Venezuela.

In addition, dialysis services achieved a very good organic growth. We also saw a continued strong demand for our products, especially for machines and dialyzers, which translated into an excellent organic product revenue growth of 9%. As a result, total organic growth for the Company was 8% year-over-year.

The revenue growth provided leverage over our fixed cost base. Together with our cost containment measures, enabled us to achieve 110-basis point improvement in our gross margins from 33.7% in Q2 of 2006, to 33.8% in Q2 of this year.

This more than offset increases in personnel expenses, as well as higher spending for the legislative and regulatory matters which were the primary reasons for higher SG&A expenses and percent of revenue year-over-year.

As a result, we saw further improvement in the EBIT margin on a comparable basis with the prior year at 16.3% in Q2 of '07, compared to 15.5% last year.

Operating income was $391 million, up 16% year-over-year, before the one-time items in 2006.

Tax rate was 38% and therefore in line with our expectation for Q2. And we expect generally to stay in the range of 38% to 39% in the remaining quarters of this year.

Net income was $179 million, up 30%, excluding the one-time items of last year -- a tax loss related to the divestitures, RCG integration costs, and some leftover expenses for the transformation of legal form totaling all together $8 million.

On a reported basis, the increase in net income was 38%.

So, all in all, a very solid Q2 with strong top and bottom-line growth.

Moving on now to slide 23, you see the EBIT margin development for our segments. Looking at the left chart first in North America, we reached an outstanding EBIT margin of 17.2% in the first -- in the second quarter of 2007. An improvement of 140-basis points versus the same period in 2006.

There were several drivers of this improvement. First, year-over-year revenue rate improvements, which supported an organic revenue growth of 6% for the North America service business, a higher revenue rate as a result of improved commercial pay rates of 1.6%, Medicare composite rate increase, which was effective April 1, and the increase in the Medicare drug add-on. Back in the aforementioned costs containment measures in our clinics, strong demand for our products, especially machines and dialyzers but also the acquired phosphate binder drug, PhosLo, and last but not least excellent performance in our manufacturing plants.

In the international segment the slide that you -- or the chart that you see on the right side here, our EBIT margin decreased from 18% to 17.5% but is still at a quite attractive level.

This development was mainly a result of higher growth in dialysis care with lower than average margins. Especially as we make initial investments in developing countries, margins are lower but then increase as we expand and achieve scale effects.

The product business achieved a solid above margin organic growth rate of 8%, mainly driven by sales of hemodialysis machines, ED products, and dialyzers. Dialysis services showed an organic growth of 13% in constant currency, with reimbursement increases in important countries in Europe and Latin America, like Argentina, Venezuela, Spain, France, and Italy.

Acquisitions, especially those in Taiwan and Korea, further fueled the 24% constant currency service revenue growth.

On slide 24, you see the sequential EBIT margin development over the last two and a half years. Here, you see the seasonal trend of Q1 typically being the low quarter of the year and Q2 typically being a strong quarter. But you also see the momentum that we gained during the last couple of years and it's continuation into 2007. Compared to Q1 of '05, we've improved EBIT margins step by step by 2.6%, or 260-basis points, by Q2 of 2007.

This was not only a result of the RCG acquisition. Our Legacy business in North America performed very well and we also saw very strong growth and improvements in the international segment.

With that I'd like to turn to slide 25 and give you some further insight regarding our cash flow, and in particular the development of DSO or days sales outstanding. We achieved a DSO improvement of two days with the international segment down to 112 days. It increased by one day in North America where we saw payment delays from state Medicaid programs and that was due to the introduction of new reimbursement forms so kind of a technical issue. And if not for that technical change, we would have actually seen an incremental improvement of a further one day compared to Q1 of '07.

To that, we have the increase of one day and this also caused our global DSO to increase by one day to 75 days total. Still, we regard these DSOs as best in industry. We expect to catch up those technical Medicaid delays in Q3 and Q4, and, despite our already low DSOs, focus on achieving further marginal improvements going forward.

On slide 26, we show the cash flow development in the second quarter. Cash from operations was $225 million. At 9.4% of revenue it was unfavorably influenced by the aforementioned payment delays from the U.S. Medicaid program. We estimate that this effect was about $35 to $40 million, but we do expect to catch up on that effect during the second half of the year.

Apart from this, we saw an improved cash flow generation in the international segment.

Our CapEx was $132 million in Q2, and this was significantly ahead of last year. The increase reflects the growth opportunities that we have in the business, and the spending on the expansion of our manufacturing capacities to continue to meet the continuing strong demand for our products.

As a result of these developments, the resulting free cash flow of $93 million was somewhat lower than the same period last year.

Acquisition spending was $24 million. It was primarily for bolt-on clinic acquisitions in North America. And that left free cash flow after acquisitions at $69 million for the quarter.

Now on slide 27, you see the cash flow development for the first six months. And, as you can see, despite those payment delays we experienced in Q2 we still have a very solid cash generation.

Cash from operations of $508 million represents a respectable 11% of revenue -- remember that our goal is to always achieve over 10% -- and an increase of 26% over operating cash flow in the first six months of 2006.

Primary drivers of the increase were increased earnings and good working capital management. We are specifically pleased with this development as it underlines the quality of our earnings.

Our CapEx was $240 million in the first six months of 2007, and this was clearly ahead of last year. Again, the increase reflects our spending to increase our production capacities, the strong demand for our products, and also generally the excellent growth opportunities that we have in the service business.

The resulting free cash flow of $268 million in the first six months of 2007 was 11% higher than in the same period last year.

Our acquisition spending amounted to $114 million. This includes the key acquisitions in Taiwan, including the Excelsior business, and also a major acquisition in Korea. Those two totaled $41 million.

Most of the remaining spending was for acquired clinics in North America and in Europe.

This left the free cash flow after acquisitions of $154 million for the first half.

Now going to slide 28, to give you some insight here regarding the debt and leverage ratio development. If you look at the chart on the left side of the page you see a steady and good increase in our EBITDA, with $1.867 billion for the last 12 months up to and including Q2 of 2007.

We also (inaudible) our debt development with debt of $5.66 billion at the end of Q2. That increase compared to year-end 2006 by $83 million, primarily as a result of the dividend payment that we had in Q2 of $188 million, and our spending on business growth for increased manufacturing capacity and clinic acquisitions.

The chart on the right shows our deleveraging, with a debt to EBITDA ratio of 1.8 at the end of 2005. And then following the acquisition of RCG, we have the debt to EBITDA all the way up to 3.8, but since then have been very effective at deleveraging and have ended Q2 at 3.03 times. Almost at our goal and target for the full year.

We're approximately one year ahead of the initial plan that we had at the time we acquired RCG. And we're clearly on track to achieve our target and guidance for the end of the year 2007 and our mid-term target of 2.5 times EBITDA.

Now on slide 29, we look here at our very strong earnings per share growth and development. If you look on the left side of the page you see a very steady and sustained increase in EPS reaching $1.82 per share at the end of 2006. That resulted in a 17% compounded average growth rate for the last five years.

All these per share numbers are adjusted for the share split which became effective on June 15.

When we look at the right side of the page, you see that the momentum has even accelerated with EPS growth of 37% for Q2 of 07 versus Q2 of '06. And, clearly, the drivers are the strong overall improvements in our worldwide operations together with the effect of the RCG acquisition, despite the fact that we've had increased interest expense because we fully debt financed the RCG acquisition.

Now let's go to slide 30, my last slide, and some good news -- we are upgrading our guidance based on the very good performance during the first six months and our confidence for the rest of 2007.

We now expect revenue to increase to above $9.5 billion, representing a top line growth of 12% or more. Compared to our previous guidance around $9.4 billion, the increase is driven by currency effects, especially an appreciated Euro versus the U.S. dollar, as well as underlying improvement in the operating business.

On net income we're upgrading guidance by $10 million, both at the bottom and top end of the range to a range now between $685 and $705 million. And based on reported net income for 2006, this represents an increase of 28% to 31%. On a like for like basis with 2006, it would represent an increase of 19% to 23%.

(Inaudible) comparison adjusted net income for 2006 for the one-time costs but does not correct for the stock option compensation expense as this expense is included in both years 2006 and 2007.

In respect to deleveraging, we confirm our goal of getting to below three times by the end of the year. As you've seen we're almost there.

And for CapEx acquisitions, we plan to spend around $650 million for the year. At around 7% of revenue, this continues our increased spending for capacity expansion and (inaudible) clinics and also for some system upgrades.

With that I conclude my remarks and let's open up now for questions.

Thank you very much. So I think we can open up the lines for questions.

(OPERATOR INSTRUCTIONS.) Ed Ridley-Day with Lehman Brothers.

--just also comment on how you are continuing to benefit from Gambro's absence in the U.S. market particularly in the dialysis? And maybe give us an update on what you think your market share in HD is now in the U.S.?

And also I might have missed it, but could you give us an update on your -- the penetration of single use diaylzers as well.

Okay, thank you. This is Ben, I'll take that one. We didn't hear, I believe the question was what's the Gambro situation, how does it benefit us in the U.S. We continue to supply most of the machines in the U.S. and, again, as you saw our machine sales, I think, were in the 24% range. The market's probably growing at 3%.

We have signed a long-term contract with Gambro for basically -- not Gambro, with DaVita consistent with our agreements. So we're comfortable that we'll continue to supply a good portion of the machines in the U.S.

As far as single use, we are up to 64% now in the independent market and we supply about 90% of those dialyzers.

Was there a third a question that I missed?

No, that's very helpful. Thank you.

Jack Scannell with Stanford Bernstein.

Hi, I've got a few questions, one sort of short term and one long term. The short-term question is related to CHAMP, the legislative vehicle for the ESRD legislation. Now, I just wonder whether in your view CHAMP is likely to continue to be the legislative vehicle or whether the ESRD related components of that may end up getting stuck onto something else and whether there's any practical way of tracking that for those of us who don't live in Washington, D.C.

And then secondly, a long-term question about some emerging market growth. I mean if we look at the major populous rapidly growing nations, the kind of brick nations, it's really a question as to how you think about value capture in those markets. Do you see emerging domestic competition in some or all of the segments where you might like to act, whether it's consumables, machines, or running clinics?

Jack, listen, I'm certainly not an expert on what's going to happen in Washington and you're probably more of an expert than I am. It's my understanding that the House has passed a bill last night and that the Senate is working on the S-Chip bill which does not have provisions for ESRD in that bill.

And so the thinking of our Washington contacts would be that somehow in caucus they would tend to reconcile the two bills and that we would see something in September that would be basically a reconciliation between the bills. And that's basically all I know at this point.

As far as the emerging markets, clearly there's a clear need for dialysis. The prevalence rates are -- in China they're about 50 per million, in other areas they'd be somewhere 200 per million, 300 per million. And so what happens here is as their economies develop -- this becomes a little bit of a surprise but it becomes one of the first order interest they have is to take care of their elderly family and provide dialysis. So we see that as emerging.

Now, as far as competition, we don't believe the technology exists for machines or dialyzers so it's usually the more disposable products such as basically bloodlines and concentrate, and in some areas PD but even that's fairly technical.

So we don't see homegrown competitors growing up in those areas.

Okay, thanks very much.

Tom Jones with JP Morgan.

Sorry, can you hear me now? Sorry about that. I've got three questions really. One, I just wondering if you might be able to give us a bit more color on your capacity expansion plans particularly with reference to machines. We've heard a lot recently about your dialyzer expansion but I just wondered kind of where you are on the machine front given things are going so well in that space.

The second question I just wanted to ask, just given up there on your feelings through the course of how managed care pricing went and maybe your outlook for the rest of the year.

And the third question's probably the nastiest one. We saw a little seed containing to the CHAMP tech of something that may be of interest going forward in that there seems to be a little developing trend towards treating large chain dialysis providers differently from small chain providers or independents. What do you think of that? Is it legal? I mean, how do you see that panning out going forward? Is that something there's going to be a lot of opposition to from the industry or something you're just going to take on the chin?

Okay, let me take that one last. We clearly don't believe it's the right thing to take it on the chin, and really we believe that the problem is that this was intended and we believe -- we're not sure of the exact intentions but clearly it's not in the favor of dialysis clinics that have a large number of Medicare patients in those clinics. And so we feel this is probably bad legislation with respect to taking care of patients in the cities and in the rural communities, because both DaVita and ourselves basically provide treatment for about 70% of those.

So, as I said, I believe that will be essentially adjusted here as we go through because I don't believe that's the intention of the sponsors to anyway hurt patient care.

Now as far as machine capacity, that's interesting. We assemble machines both in the U.S. and in Europe, and we clearly have a flexibility here because you can put on more ships, you can work it seven days a week, 24 hours a day, and so we've been able to up our capacity very significantly in the last two years to meet whatever needs there are for the -- basically for the machine.

So, it's not like requiring the bricks and mortar that you would require to produce more dialyzers.

I think those were the two -- pricing in managed care. I think we wanted to point out that the actual increase in revenue per treatment, excluding the EPO effect, was around 5% and that clearly did have a Medicare increase in it on the composite rate. So we're still believe that we're providing a good balance to the commercial payers. I showed you we're saving $150 to $200 million worth a year of expenditure, so I think we still have a good approach here in terms of expecting an adequate increase in the, as you call, managed care or the commercial payers on a year-by-year basis.

Now, just back on the machine piece, is there any -- do you think you're going to come up against a buffer in terms of there's only so much you can do with making your staff work harder and longer? And I mean at what point do you come up against--?

Well, we never worry about working longer and harder. Okay. But I can tell you if there's someone out there that wants to buy our machines, we will have them for -- we will have the machines for them. In fact, as I mentioned, our new 5008 system in Europe, which we brought out for hemodiafiltration and a number of new therapies, we are growing that at 100% a year.

So I can assure you that if there's business for machines out there, we will supply it and clearly we'll take care of those customers because this is a five to eight year purchase that they're making and we'll stand behind it with our service group and our partners.

I'll just add to that. Another way to say that is that we're really not anywhere close to being capacity limited for machines, and it doesn't require significant amounts of capital for us to increase our production of the machines. Those require us to have the space and have the skilled people, but we are pretty much not limited in terms of capacity on machines.

And Tom, this is Ben, if you hear of anybody that would like to buy machines, listen just e-mail me and we'll be right on top of it. Okay.

Give them our phone number.

Yes, give them my phone number, okay.

Okay, that's great.

Ilan Chaitowitz with Redburn Partners.

Hi good afternoon. Just a question on corporate expenses. I was surprised to see you had some ramp up a bit. Is that as a result of any exceptional activities or is that due to some cost shifting from the international business? I'm just trying to get a feel for what's going on there.

And also, with regard to the international margin, is that -- are we roughly at about the levels of profitability we can expect for this year or were there any one-time effects that would have depressed the margin in the second quarter?

Ilan, I'll ask Larry to handle both of those. Larry, why don't you take those?

Ilan, we've got a couple of factors in the corporate expense that are probably more important now than they have been in the past. They've always been there but are more important now and are causing it to be a little more volatile than you might expect.

The factors are that we've got some corporate R&D projects where we expect an R&D project to have benefits all over the world and we are including it in corporate expense. And there's a minority of our R&D expense that gets included as part of corporate.

In addition, we have increased the amount of corporate expense for legislative and also litigation activity support, and so those things together have generally added to the normal administrative corporate costs that we would have.

Nevertheless, we've had in Q2 around $24 million and I would generally expect the level to kind of even out or average out around the $20 to $23 million per quarter or around $80 to $90 million for the year.

So I think that's probably a good guidance for how that line is likely to be.

Great thanks.

On international margins, we would expect that international margins are going to stay at the very high and attractive levels they are, in a range between 17% and 18%. So this quarter we were right in the middle of that range at 17.5%. And I don't think that's anything unexpected (inaudible) for us.

Thank you very much.

Balaji Gandhi with Oppenheimer and Company.

I just had two questions. First was related to pricing. Ben, you had mentioned that the components of the pricing being down $2 sequentially. Just trying to understand the lab piece of that. So you do more testing in the first quarter is that pretty standard?

Yes, generally in the dialysis field we do yearly tests first quarter and so there's a number of tests you do once a year, you do them first quarter. And that accounts usually each year for about $2 that you get a bump up in first quarter.

And then we saw the EPO sequentially drop by about $2 and we made $2 back much in the group with the contracting and with the -- basically the Medicare increase that started in April. So that's sort of the overview of the couple of dollars that we (inaudible).

So the $2 reduction in EPO was that related to the pricing changes that Medicare made or was that just lower utilization?

No, that was just lower utilization. Those come into effect starting third quarter.

Okay, so is any kind of percentages you could put around the lower utilization in EPO?

Yes, I think I mentioned that, again, in May is that we see this oscillation plus --basically plus 2% to 2.5% above the mean and then down by 2% and 2.5%. So in any one cycle you might see something in the 4% to 5% range but we're clearly in that. The question is when will it turn back up. And I'm saying probably fourth quarter. That's essentially what we're seeing is a couple of percent. But we've seen that swing now for a number of years because we haven't changed our program.

Okay, great. And actually two more questions. One was on the DaVita contract that you signed. What was the timing of that?

Well, there's a lot of confidentiality I believe involved in that. And I can't -- it's multi-year and I can't really say. We're just real pleased to be working with them on the contract.

Okay. I mean so maybe you can't answer this either but did we see the full effect of it in the quarter?

I'm sorry?

Did we see the full effect of that contract in the quarter?

No, it's out in time. I'm talking about going forward.

Okay, got it. And then the last question was on PhosLo. So I think I heard you say 20% growth in the product.

Yes, we saw a 20% revenue growth. And, again, we're pleased with that because we're beginning to get the value proposition up for this product and for this therapy. We didn't see much growth in terms of actual prescriptions. Our goal there was to hold our prescriptions while we get basically our medical message out this year and get our value proposition up. So that -- the 20% is a value proposition.

And then how much of that is internal clinics versus external?

Boy, I don't know. We treat it as a product so it's essentially -- there's no bias one way or the other, okay.

And what about markets? Any particular market that you're seeing better penetration there?

I can't really comment because if you look at it, what we're really trying to do is get our message across that there's a much better way to take care of phosphate binders than using some of the non-calcium binders. And so you want to look at it as a holistic approach. So we're still in the information phase this year, okay.

Now we have got approvals for six countries in Europe so we'll start to see some of that growth in 2008.

Okay, thank you.

Gary Liebermann, Stanford Group.

Thanks. I was hoping maybe you could talk a little bit about the upcoming FDA cardio renal panel and maybe give us your expectations for either what you think will be discussed and or what you think the outcomes might be of the panel.

Yes, Gary, this is Ben. Unfortunately, I'm probably not as knowledgeable in that as a number of other people, maybe even yourself. It's my understanding that we met with the FDA, and I think we covered that in May, and they asked for us through the manufacturers to provide a label or label changes that reflect the dialysis or renal side where they got lumped in with the oncology. So that basically I think is still under preparation.

So, we hope to point out the differences between really the oncology application and the renal and with the -- basically walk through doesn't really -- isn't medically sound. But that's about all I know at this point. I know there will be a lot more, it will become public as we get near September, okay.

Okay. And then if I could just follow up with what you're seeing more broadly in terms of managed care contracting. Has anything significantly changed in the way you're negotiating contracts or in terms of price increases that you see going out over the next year or 18 months.

Well, again, none of the negotiations in the managed care area are ever easy. I think that I pointed out we, clearly as an industry, are providing value in terms of savings in hospital days, and saw honestly and we showed year-over-year we had a 5% increase in terms of reimbursement.

So Gary, we're comfortable that we will continue to buy value there and see increases in reimbursement, but I can't tell you it's any harder today than it was two months ago. But we think we've got some good things to offer. So, did I walk around that one enough for you?

No, that's helpful, thanks a lot.

Alek Surla with Merrill Lynch.

Yes, just a couple of questions. Perhaps on the private contract, if you tell us how exactly they are constructed. In particular, what's the relationship between kind of Medicare being a benchmark and your private contracts? So, for instance, the 4% drop in the EPO reimbursement, would that then enter your private contracts when they're up for renewal next year?

There really is not a tie in terms of your commercial contracts and I can't go into detail, they're all somewhat different. So they don't really play through in terms of one to the other.

And what do you think are the chances that Medicare would be ready to do a bundled payment by 2010, or can they be forced by sort of Congress to actually go there and do it by 2010? Because they seem to indicate that they may -- they feel they may not be ready by 2010.

I honestly was expecting to see their proposal for a bundle before Lesley Norwalk left. But I don't believe it's come out yet. And so until I think we see that and get some visibility on it it's awfully hard for me to speculate what their plans are because they kept that fairly quiet. So at this point I don't think I can add much to that.

And a follow up on that FDA panel. So that would be on both CKD and ESRD patients? They will clearly maybe differentiate between the two is your feeling?

Again, I've not seen the agenda and we clearly in our response to them that we sent, and I think it's on our website, we clearly pointed out the difference between a CKD patient and an ESRD patient who has no operating kidney. So, we clearly believe there's some medical differences and it probably will be discussed because that's where most of this discussion started in the beginning.

But I believe if we didn't put it on the website, I'll check but I think we did release that.

And the final one is on your progress with your contract with Amgen in Europe. What kind of reception have you seen from customers with the new sales force entering that space?

I believe you're probably talking about our European activity with Amgen, is that correct?

Yes, with Amgen.

Actually, Dr. Gatti is here in the room with me and gave me a thumbs up. From what I saw at the ETA I think it's a combination of two very strong patient-oriented companies and the data that we will mine between the two of us I think will be outstanding. So as far as I can tell it's going quite well. Emanuelle, do you want to throw in a comment on this.

Okay.

So the answer is yes I believe it's going quite well.

Okay, thank you.

(OPERATOR INSTRUCTIONS.) Martin Wales with UBS.

Hi, good afternoon. Two questions. Firstly, (inaudible).

You're fading in and out actually Martin, can you get closer to the phone is that possible?

Okay, firstly, in terms of the growth in revenue for treatment internationally, your highlighted reimbursement increases from European countries, what else is behind that quite (inaudible) increase?

I'll take that one. Primarily it is the reimbursement increase but it's also mix. Clearly, we try to grow where we have the most favorable reimbursement, or actually the most favorable profitability and those tend to be countries where we have higher reimbursement and so it's the reimbursement increases but also there's a mix effect between the countries.

Secondly, and I apologize (inaudible) but in terms of your Amgen contract in the U.S., I guess something dramatic happened with their reimbursement in the U.S. (inaudible) or adjustments that we made automatically?

Well, that contract is confidential and I really can't get into it. Again, at this point I'm sorry it's not something that we could discuss today.

All right guys, thank you very much.

[Ann Fielsa] with Morgan Stanley.

Actually it's Dan Mahony. Good afternoon everyone. Ben, could you just give us an update. You've had a disease management demo project running I guess for a couple of years now at least. Could you give us an update where that is? And I think I read somewhere that there's a chance you could roll that out to a few more states by the end of the year.

Yes, we have about 900 patients enrolled in it. We are coming up on 18 months worth of patient data. And I just talked with the guys last night, I had hoped by that time we could clearly look at the NV&R and see where we were coming at in terms of medical ratios. But it looks like we're still a little premature. We are rolling it out in additional states because quite frankly the -- it's been very well received by the patients and by the doctors, by the physicians, and so we're extending it. But I don't have the final medical loss ratio or medical ratio that would say how it's going to perform financially at this point.

And do you have a sense of when you might be able to share some of those data with us? Is it Capital Markets Day later this year maybe?

Well I -- were you on my phone call last night?

I'm just angling for something.

Well, I sort of quizzed the guys that could they get something for us for that time and they promised me that they would look at that because we will be almost two years into it and clearly we should be able to get something to you. So I think we'll try to have some presentations at the Capital Markets.

And under the terms of that demo, if you determine that you're actually saving money and, of course, you share 50/50, I think I remember the governance from that, what sort of scope do you have in terms of if that looks really good say by December, how many patients could you roll into that demo? Is there a limit on that or can you roll as many as you like?

There's no limit on that. As I mentioned when we started this a couple of years ago, we would try to get to about 1000 and really assess -- we're doing also a bundle within a dialysis bundle, really try to assess what is the business opportunity here. Is this really something that FMC wants to get involved in because we're the insurance company on this particular project and so we will assess it and basically in 2008 probably decide whether we want to continue to expand it or not.

And how interested is the government in that program because I know there's been a lot of talk about drug bundles, but are they more interested in a more capitated model or is it sort of everything's on the table, no one's really sure where they'd like to go?

I can't comment on their interest, I just know that they've been very good partners with us, the demonstration group that we're working with, and so far it's been a very good working relationship. I don't know how that is compartmentaled in within the government so I can't answer that, but I know we've good partners that we've been working with.

Excellent, thanks very much. Look forward to an update in late September then.

(OPERATOR INSTRUCTIONS.) Holger Blum with Deutsche Bank.

Two questions; one on your margins. I mean you clearly had great improvement in the quarter and it was really the gross margin with the start of pickup of high quality of the numbers. Any specials in there to what extent that is sustainable because usually we had some just operating margin improvement, a bit of operational leverage. But if you have that much upside, maybe before (inaudible) some other factors on the plus margins what can we expect here for the future?

Second question would be in Europe, you mentioned with something like bundling is emerging. Could you update us here on the status and how do you see the opportunities and to what extent you can leverage that experience into U.S. market or to what extent are there differences in the proposed solutions for the bundled rate. Thank you.

Larry, why don't take the gross margin, I'll cover the--

Well, Holger, in terms of the gross margin that we achieved in Q2, I would say that it's not an exception, it's kind of a permanent improvement that we have been able to achieve. It goes back to scale effects of clearly the revenue growth that we've had both in manufacturing for our products, but also in terms of increasing the number of patients and spreading fixed infrastructure costs and organization costs across the clinic business.

Clearly the synergies that we've been able to realize from the RCG acquisition have also driven gross margins up. So, I think, Q2 has been reasonably indicative of what we can expect.

Holger, as far as change in reimbursement in Europe, I don't think there's any direct relationship between Europe and the U.S. in terms of bundles, but it clearly offers us some nice opportunities to expand our business in Europe. Emanuelle, would you like to make a comment on how you see that developing in that area?

Thanks Ben. Hi Holger. I think we always try to explain that we see the development of the European countries in stages. And at the moment we see an acceleration in certain countries, that I will mention later, into the space of bundling. This country we are the first ones to start privatization. So now after certain number of years of experience they want to improve the system and grow into bundling. Bundling could mean simply the bundling of a dialysis service plus the drugs used during the dialysis treatment to just a minimum or adding people and hiring and doing more in-depth. It could be also including other (inaudible) for example, needed by the patient also during the time. If there's a (inaudible) and it's not written in the dialysis (inaudible).

We see a move that already happened this year in Eastern Europe. For example, Hungry has included in their reimbursement a rate support team reimbursement and we are discussing presently as dialysis community with the Portuguese authorities who like to increase the system in a way that includes primarily most of the drugs.

This comes together with a combination of quality indicators and quality objectives. Quality indictors normally mean that if you don't reach those objectives, the indicators in who will have some trouble to explain why you didn't reach them. Quality objectives is a kind of a continuous quality improvement system and they will become later on in years quality indictors.

So the goal is, of course, to sort of treatment quality but also to keep the pricing stable and I think we are good positions because with our database we can really track every patient. And at the moment we are very well positioned with the Amgen contract, for example, that allows us to treat and treat more patients. And also we have the phosphate binders, we're just needing (inaudible) to complete the full package and we're working on that.

Emanuelle, thank you. Holger, does that take care of your questions? Did we answer it for you?

Yes, thank you. Maybe just one follow-up. If lets say EPO would be included in a bundle, is there any impact from generic EPOs that would change the picture or the rate somehow?

I think -- let me try that real quick and Emanuelle can follow up. I think one of the things that being the largest service provider in Europe and in these regions we want to make sure whatever we use in our clinics is well documented with respect to its safety. So that is the only caveat I think Emanuelle, and you and I both agree on that caveat.

So it's not a matter of expense as it is a matter of safety at this point in time.

Okay, thank you.

I think we have time for one more question, I think there's only one question left.

Alek Surla with Merrill Lynch.

Thank you for taking the follow-up question and the last one. The question was on this CHAMP act and the ASB plus 2 reimbursement for EPO for large companies. Now, it's probably -- the most probable outcome is that this is not going to go through in the way it was set up. But just for the sake of argument if it does go through as it was proposed I would have two questions. How do you interpret this? Do you think that you will get a special drug add-on for large clinics under the MMA act to compensate for this two-tiered structure? And do you understand this to be a temporary two-year measure until 2010, when then bundling was at least under the Act planned to kick in?

I wish I could answer your questions. This is Ben, I really can't because I believe the intent here is probably needs to be changed and so we focused on what is the intent of the sponsors and I don't believe it's to penalize clinics that have -- face a large number of Medicare.

So I think at this point in time we would rather try to modify the actual bill rather than try to figure out how to work with it if and when it does come.

Okay. Sorry, there was no other questions from me.

And at this time I do show there are no further audio questions in queue. Do you have any closing remarks?

I'd like to thank everybody for joining us for the second quarter call and hope to hear you next time around in Q3. Thank you very much.

We're looking forward to seeing you at the Capital Markets Day. Thank you.

Thank you.

Thank you. This concludes today's Fresenius Medical Care conference call. You may now disconnect.