Fresenius Medical Care AG (FMS) 2007 Q3 法說會逐字稿

I think we can start, to stick with the schedule. Good afternoon, good morning, ladies and gentlemen here in the audience as well as everybody actually joining us on the Web. Thank you for joining us for Fresenius Medical Care's meeting today which will cover our Q3 and nine month 2007 results and achievements.

By now you should have received all the respective material. With us today as [Fairgood] mentioned at the beginning is Ben Lipps, our Chief Executive Officer of Fresenius Medical Care, who will give you a business update on Q3 and the first nine months of Fresenius Medical Care; and Larry Rosen, our Chief Financial Officer, who will brief you in more detail on the results for Q3 and the nine month.

As my duty, I would like to comment on the Safe Harbor statement. As you can see, the same applies actually as you've seen before, the 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. All the risk factors and uncertainties are described in detail in the SEC filings and the filings with the Deutsche [Bersus], so please have a look at it. In compliance, as in the past with the Section 401 of Sarbanes-Oxley, we have provided a reconciliation for any non-U.S. GAAP measure that we utilize. So please make use of the reconciliations which we've provided.

So that is it from my end, Ben, so let me turn it over to you for the presentation. Thank you.

Thank you, Oliver. It is a pleasure to be here. I'd like to extend a warm welcome to everyone joining us here today, our employees and associates around the world and those who have joined us on the Internet.

As you see from the financial statements for the third quarter, we are very proud of and pleased with our results for the third quarter and for the nine months year-to-date. Our operating progress has continued. What I will cover today is the business update. Larry will cover the financials and the outlook. And then we will open for questions and answers.

Again, before I start, I'd like to thank the Management Board, all of our employees and associates for their continued dedication to producing the best quality products and services on a worldwide basis. Also, as I start here, I'd like to give you a little view of our footprint. You can see in the top of the slide that we produce our products in all of the three major businesses that we're -- regions that we're in -- North America, Europe, Asia Pacific. This is particularly important to us because of the currency movements around the world and also because of our activities in those areas. We tailor the products for the individual reimbursement or needs in those areas.

Now, as you look at the bottom of the slide, you will see that we treat about 172,000 patients today on a worldwide basis. This is in 2,200 clinics. However, we also manage another 73 clinics and treat almost 175,000 patients on a worldwide basis. That means that we treat about 175; we produce and sell products to another 500,000. So it is very important that we continue to focus on our quality and our quality systems because we clearly provide lifesaving products to over 700,000 dialysis patients on a worldwide basis.

Also, we are very proud of the fact that we have now the leading position in each one of the areas in our patient care areas of the world -- regions of the world -- the U.S., Latin America, Europe and also now Asia Pacific, where we treat about 11,000 patients.

Looking at now at third quarter, clearly we continue to have strong momentum in earnings growth. Larry will talk about the actual details here. Our revenue growth was 9% in actual currency, 6% in constant currency, and our earnings net income grew by about 27%. We are clearly on track to achieve or exceed the topping of our guidance so we feel very comfortable about 2007 and achieving basically our goals for 2007.

Now, let's look at the revenue split. We have for the quarter around $2.4 billion of revenue. The U.S. turned in about $1.66 billion. They show a growth rate of 3%. That really understates the growth we have in the U.S., there was one less day in this quarter compared to last year. And also we lost about 2% in terms of the EPO studies -- which I'll show you here later -- EPO activities in the U.S. So organically we're growing about 4% but actually it's closer to 6% looking at the EPO effect.

Turning now to international, we had $760 million worth of revenue. It grew very impressively at 14% constant currency, 23% actual currency. Drilling a little deeper into international, Europe is about 70% of international. It grew at 9% constant currency. The services were about 10% and the products were about 8%. Our growth driver or our growth achiever this quarter was Asia Pacific with 43% growth in Asia Pacific and constant currency, and it now has moved to about 6% of our total revenue on a worldwide basis. And Latin America continues to do very well. They continue to grow at double digit, around 14%. So basically, if you look at the world, our underlying growth then is quite good in each of the areas and we're very pleased with the revenue growth on a global basis.

Let's look at Dialysis Services on a global basis. Again, I talked about the 3% in North America. I want to have you focus here on the international. We had a 32% growth in services in international. And clearly if you look at that, even in constant currency, that's 23%. Now, this fits with our strategy. I think you basically got to see that strategy last year in great detail on our Capital Markets Day here in September. We really are quite excited about the growth opportunities in Europe and Asia Pacific and in many ways the service opportunity growth in those areas.

And you can see here that in Europe we're growing basically at 9%, continue to grow at a strong 9% -- 10%; in constant currency services, double digit. And Asia Pacific organically we are growing about 19%. So we are doing very well. We're very, very pleased with the results in that area and there is tremendous upside in that area with respect to opportunities. Within the next five years, both of those regions will be 15 billion plus in terms of market potential for us.

Now, let's talk about the organic revenue growth. It was 5% for the quarter. Again, this was impacted by a couple of percent by the EPO and you can see that's essentially again looking at the numbers here. We're very proud that the U.S. group now has achieved their 3% per year growth rate, which is the market growth in the U.S. as far as seeing market treatment growth. Europe and -- or international was a little lower at 4.9% than it normally runs, but if you look below that at the revenue growth per treatment, that was significantly above where we normally run -- 7% a year revenue per treatment. That means that we are clearly getting paid for the quality that we are providing in the international arena.

Now, what that says is on an organic growth end, we're at about 12% in international which is pretty much where they have been running. It is a very, very impressive revenue growth rate -- organic revenue growth rate for the services business. And if you add it all together, then we come out around 5% for this quarter in terms of organic revenue growth.

Now, let's talk a little bit more about the Dialysis Services revenue per treatment. In the U.S. compared to last year we grew 1% and overall we went from 324 to 327. If you look sequentially we've stabilized. And again, as I showed you last quarter, because of the various turbulence in the area of basically EPO dosing and EPO utilization, if you look at our underlying growth rate that basically strips out the EPO, we're continuing to grow at 5% in terms of the dialysis growth in the revenue per treatment. So, we've maintained that.

We're very comfortable that as we go through this temporary period, our underlying growth is still there in terms of our contracting and in terms of the actual payment for the services. But we think it is stabilized. As I mentioned last time, I'll talk a little more about the anemia situation, but we're very comfortable with the underlying growth in North America. It continues basically in that 4% to 5% range when you look at just the dialysis treatment, which means that we are doing a good job with our contracting, with our payors. And we got a little bump this year in terms of Medicare.

Now, our target for the year -- we talked about where will we be at the end up the year. We feel now that we'll probably be closer to a 1% growth year-over-year in terms of the actual revenue because of the couple of percent we lost in the EPO. But we do believe that -- I'll show you that we believe it will come back as we get into later this year into 2008.

Now, let's go look at the quality outcomes. Very impressive -- between 94% and 95% of the treatments that we provide we meet or exceed the prescribed therapy. And that is something that basically is in our hands. That's an expense that we are very willing to pay and we do a good job. And you can see that both international or in Europe as well as the U.S. we're in that 94%, 95% range.

I'll talk more about hemoglobin in the U.S., but I am very proud of what we see happening in Europe. You can see that the hemoglobin outcomes have improved from 68% -- and that means 68% of the patients a year ago had a hemoglobin of 11 or greater. And again, I think [Dokey] and all of the various world bodies have confirmed that there is a real benefit to try to target within that 11% to 12% in terms of mortality patient outcome.

Now, in one year, the Group has moved that to 73%. And again, I think that is a major commitment and a major achievement on the part of our Company, again working with Amgen in Europe and some of the activities that we talked about last year.

Now, the last point I'd like to make on that page is that we continue to see our hospitalization days in the U.S. continue. We're now at an all-time low of 11 days. And just to reinforce that each day we save in the hospital saves our payors -- just on FMC's patients -- about $170 million. So again, we feel that we should clearly be paid properly; at the same time we're doing our part to reduce the cost in the healthcare system.

Now, let's talk a little bit about anemia management in the U.S. I showed you last time our four year history here in terms of what our average hemoglobin is. And again, we measure this on a three month average because of the cycling. And you can see that we're still on average within our targeted 11% to 12%. But you can see over on the right hand side, we continue to see more patients are not above sub-eleven, they're not above 11. In fact, we now have only 80 patients; 80% of our patients are above equal to or above 11.

And this is disturbing, but this is really a part of the response that we've seen to all of the discussion about what is the right level. And I believe that as this continues with the various activities that are going on now, I would expect that our physicians will probably take some sort of corrective action and it will come back in the 80% to 82% range, which is probably the right place for us to operate and still provide good care but at the same time be cognizant of the upper end of the anemia range. So anyhow, we've dropped down to 80. And I believe that we'll start some time towards the end of the year or next year we'll start seeing this move back up.

Now, let's look at the products area. We've continued to have excellent growth in the products business. This is double digit again. Look at the external sales, 12% constant currency on a global basis, 18% in the U.S. And I've got to tell you that includes two parts because we have the new pharma tech in the products. And so if you just looked at Dialysis Products, we're growing 12% in the U.S., which is clearly four times the market. And we're doing very well with what we call our renal pharma and I'll talk a little bit more about that later.

Internationally, we're growing at 9% constant currency; again, far above the market. And so our products continue to be accepted. We're clearly spending the money, expanding our plans to provide the products that are being demanded or being requested at this time. So the products business continues to really truck along, doing very well.

Now a few highlights here. I want to mention North America. We saw an impressive 70 basis point increase in margins. So even though we had to deal with basically with the EPO uncertainty and situation through this quarter, we were able through cost controls basically the products business growth in some of the various things that the guys were doing was to continue to increase our margin or at least keep it in the 17% range. A very good job of cost control and doing all the right things.

In Europe, we had an organic growth of 8% and again, they sustained our profitability. And so the internationals, Larry will show you here, came in right smack in the middle of where we expected them. And the summer months were always the most difficult.

And finally, we are very proud of our Asia-Pacific group. They're making very good strides at integrating these acquisitions which you see almost added 6,000 patients to their program this year and they're growing at 100%. So on a global basis, each one of the regions are doing quite well. And so is Latin America but I only had room for three. So we'll alternate one for the next time, okay?

Now, looking at the Dialysis Products, I talked about the growth. One of the things, we're seeing some very good traction in terms of our thoughts in the bone mineral metabolism area, our therapy there, therapy concepts there. We see PhosLo sales are in line with expectations and up about 80%, 79%.

Also, if you look at Europe, one of the key drivers -- and this is really exciting -- is that our new 5008 machine continues to grow at over 100% a year and it's been very well received. So we're quite excited about that product in the international field. And it's doing very well.

And finally, if you look at the Asia-Pacific, their product growth is around 14% constant currency, which is really quite strong but it shows you the growth factor in that area. And clearly, we continue now to benefit from the increase in coverage that the Chinese government basically is extending to their citizens. They are extending it -- medical coverage -- to another 200,000 -- 200 million citizens, which is about two-thirds the size of the U.S. Now, the reimbursement is not the same but it clearly is a real opportunity for us to continue to grow there. And that's one of the reasons that we basically are increasing our production capacity foundation within China.

So, that's really where we are as far as the Dialysis Services. I just wanted to mention that we feel the FDA Advisory Panel supported the anemia practices that we in the industry and our physician colleagues have been following. We do have quite a bit of active dialogue going on with the U.S. legislators. It is clearly a very interesting year in terms of legislative possibilities in the U.S. And so we're trying to basically work with the thought leaders in that area and make some progress in terms of basically some source of reform for the medical -- taking care of the medical care for dialysis patients.

Eastern Europe -- major growth area for us in terms of services; 18%. Again, I showed you in Europe alone we had a revenue per treatment increase of 4%; very, very impressive. And if you look at some of our new therapies, we've now -- online hemodiafiltration has been recognized for reimbursement increase in Spain. And so we're really proud that we're able to develop these new therapies and then get them accepted by major payors in major countries. And finally, I talked about the growth rate of over 100% in the Asia-Pacific area.

So I think at this time I'll do a quick summary and turn it over to Larry.

Again, we keep our focus on quality. It's all about quality, either in service or in products in our business. We have accelerated our de novos this year. You'll see the CapEx is up. We're probably increasing our de novos by 20% to 30% over last year. And we clearly have the focus on organic revenue growth.

And finally, the growth drivers that we've talked about now for the last couple of years are actually still very much there. And quite frankly, they're probably growth drivers for the midterm also. And that's the product marketshare, increased reimbursement based on quality, and finally, continue to expand our clinical network; there's many opportunities in Europe and Asia-Pacific.

And finally, our renal pharma business, as we believe we are adding additional medical value here. We believe that that's going to be successful and grow. And we're seeing signs of that at this point in time.

So that's the summary then for the quarter; give you a little overview of where we see ourselves. And I think at this point, Larry, I'll turn it over to you for the dollars and euros.

Thanks, Ben, and a very good afternoon to everybody. I'm very pleased to report on another excellent set of results for Fresenius Medical Care. In Q3, we continued to build on the momentum that we established last year and in the first half of this year. And we had very good performance really in all metrics and, as you'll see at the end of the presentation, we're very confident that we're going to achieve our objective for the year.

Now, let's get started and take a look at the P&L for Q3. As Ben mentioned, our revenues for the quarter were up 9%. That was a 6% organic revenue growth and a continued good performance for the quarter and for the year.

Operating income was $397 million; a 16.4% margin and a 12% increase over last year. So clearly, we're increasing our income by more than we're increasing revenues, showing that we're getting leverage on the fixed costs in the business and really a very good performance in terms of operating income.

Interest expense was $95 million and I think you heard [Stephan] mention that we did have a one-time item of about $5 million related to the write off of some financing fees. We also had some minor upsides in terms of one-time items in the interest line. So really a clean number for interest would have been in the low $90 millions. But still quite a good performance compared to last year. We're down $5 million. That is due to lower debt levels and also very slightly lower interest rates.

Income tax expense at 38% continued to be at the lower end of the range that we've talked about at 38%, 39%. So we're pleased with that performance. And net income $181 million, so, a very good performance, up 27%. Before, the one-time items that we had in 2006 on a reported basis were up 30% for Q3.

Looking at the nine months, we achieved 7.15 billion of revenue, that was 16% revenue growth, 14% constant currencies and 7% organic growth. And we see the trends here as well -- 23% growth in operating income, again leveraged on the revenue growth that we're achieving. And we achieved 16.1% EBIT margin for the nine months. That 90 basis point increase is really attributable to underlying growth; probably approximately half of it is due to underlying growth. So above the guidance that we've given on our Capital Markets Day of about 20 basis points a year, we're clearly ahead of that in the year 2007, where about half of the 90 basis points is coming from underlying growth.

The other two factors are having RCG for the full nine months whereas last year we only had RCG for six months. And then the last factor is the completion of the RCG integration and therefore the achievement of the remainder of the synergies that we are getting from the RCG acquisition. So those three factors really are what has led to the 90 basis point increase. It is an excellent increase. We are very pleased with it for the year.

Income tax expense at 38%; again, at the lower of the range that we've targeted at 38% to 39%. Minority increase, we see the significant -- or minority interest, we see the significant increase due to the increasing number of joint ventures, both in the U.S. and also with the Taiwanese acquisition that we've done earlier in the year and also frankly, the good performance in our JVs.

So that's all led to net income of $520 million for the nine months. If you recall last year on a full year as reported basis we had $536 million, so we've almost achieved in nine months what we achieved for the full year last year. It was a 28% growth after -- or before onetime items and 35% growth after one-time items on a reported basis. So really a good performance on the P&L and all through the P&L for the nine months.

Looking a little bit further at operating margins by segment, you see on the left-hand side, North America was up 70 basis points for Q3. And 130 basis points for the whole nine months. It really reflects the improvements that we have had in revenue per treatment; excellent cost control, both in our clinics and in our manufacturing facilities. Also very good plant performance. We're running at very good levels and are achieving some positive manufacturing variances. We have divested the somewhat lower margin CVR business as we talked about last quarter. And finally, the excellent business growth that we've seen in our product business and also the mix in our product business have also contributed to the excellent EBIT margin performance that we've seen in North America.

International continued to be at a very high level. Remember that we have targeted between 17% and 18%. They have remained in that a range, comfortably in that range. We are slightly down from last year, it is primarily a mix issue where we are seeing very fast growth in the provider business and in particular in emerging markets. And of course as you begin to invest in emerging markets you have somewhat lower margins than you have in mature markets. But then we see a quick pick up in profitability. But again in line with our performance target for international, between 17% and 18% and a continued very good performance.

Now turning to cash flow and then to our leverage ratio. We wanted to highlight again day sales outstanding, our performance on receivables, basically how fast our customers are paying us. And we have seen another one day improvement overall for the Company. That was primarily driven by the U.S. business down to 57 days, clearly leading the industry in this metric. And we have seen a continued good performance in international, staying at a sustainably lower level than we have seen last year and also in previous years at 114 days.

Now turning to cash flow, we had an excellent quarter for operating cash flow at almost 16% of revenues. This reflected the DSO performance but also good performance in other working capital areas and of course, the very good earnings performance drove the good operating cash flow for the quarter. You see the continuing trend of CapEx being somewhat higher than last year. Also acquisitions are higher than we've had in 2006 and this is really reflecting our growth opportunities and our ability to seize on those opportunities really all over the world. And we are very pleased to be able to do that. And we are pleased to have those opportunities.

Even with that higher spending, you see on the bottom that free cash flow after acquisitions was still almost $100 million higher than the similar quarter last year. And again, a similar performance for the full nine months -- $890 million of operating cash flow, up 34% over last year before one-time items. If we would include the one-time items that we had in the first nine months of last year we would be up almost 100% in operating cash flow. And here again you see the higher levels of capital expenditures and acquisitions. Again that is reflected in our full year target of $650 million and is primarily reflecting the excellent opportunities that we have to invest in growth in our business all around the world.

Now looking at our debt to EBITDA, we are also very pleased with this performance. You see on the right hand side that we were at about 2.9 debt to EBITDA and clearly below the target that we set for the end of the year which was to be below 3 to 1. And clearly getting in the range of our mid-term target which is between 2.5 and 3. So we're very pleased with that performance. It's one of the things that gives us the flexibility to be able to continue to build the business, to continue to seize on those growth opportunities that we see in the market. It is being driven somewhat by debt reduction but primarily by what you see on the left-hand side, which is the strong improvements in our operating income -- our EBITDA, you see that our last 12 months EBITDA is just about $2 billion at $1.917 billion for the last 12 months. And this has continued to improve dramatically and has led to very good improvement in our leverage ratios.

Just looking at a little bit longer perspective, we see that our earnings per share has grown at 16% for the last five years. And you see the momentum that has built up over those years as demonstrated by Q3 of this year where we had 29% growth in EPS.

Now to conclude the presentation, I want to confidently reconfirm our guidance for the year. We are very confident that our revenues will be above $9.5 billion for the year and that we will achieve our net income range of [685 to 705] but clearly toward the top of that range. Our leverage ratio as you've seen is already below 3.0 and we reconfirmed the CapEx and acquisition target at around 650 million for the year.

Thanks for your attention and we will be happy to answer any questions you have at this time.

Thank you very much, Larry. Thank you very much, Ben, for the presentation. I think the same procedure as in the previous meeting. We start with questions here in the audience and I weave in some questions we got already from the Internet. And then we start opening up the audio lines. So who is going to be first? [Andreas], great.

Ben, maybe a little bit of a provocative question in respect to anemia management. Why are you not supporting a more restrictive anemia management (inaudible) because if I remember back a little, some ADTA meetings, there was quite good evidence that high flux filters from Fresenius could compensate lower EP -- higher EPO (inaudible). So wouldn't that -- one of the lines, the business if you could show maybe also with slightly modified filters, different for size and different diameters that you are -- you have an ability to compensate -- (inaudible) that you could compensate at and that would give you enormous market potential on the product side or in your clinics, that people have to move into your clinics.

Thank you. I think what is being debated and discussed in the U.S. is not that issue. The question is what should the outcome's ranges be. In other words, between 10 and 12 would be the target. Is there a problem if you go over 13 because you know the patients basically cycle through. So how much of a dose it takes to get there is not the discussion. It's strictly what should the targets be. And that's what we've been working with the FDA and the various bodies to support the data we had that shows that there is a definite improvement in mortality -- actually all the way to 13. But we have no trouble operating in the [quarter] of 10 to 12 target.

Couldn't you get the same mortality let's say at 10 with modified treatment and filters and total concept?

No, not totally, because basically how you get to the outcome if you use more or less EPO is not the issue. Now I think there has been some data presented that you can clearly influence mortality with two, essentially two factors. One of them is nutrition and the other one would be essentially [hermaticrit]. So those are the two that we found over the years have the most influence on mortality.

Next question?

The second quarter we saw some decline in EPO utilization after the safety discussions in the U.S. So how was the development in the third quarter -- how do you see that going forward maybe through Q4 and next year? Thank you.

Yes. At the end of second quarter I commented that we normally saw a cycling of plus 2% or down 2% off of a mean. And that we expected in third quarter to be at the lower 2%. And I wasn't sure that it would normally rebound -- it usually rebounds within a quarter and it starts pick up because of the 60 to 90 day half life. But right now we are at the lower range of that cycle, in other words, down 2%. The question is, when will it start to basically increase again. And I had thought it might by fourth quarter, during fourth quarter based on the history. But at this point we're just not far enough in to know whether it will rebound or whether we're going to safely stay in this particular range for another quarter.

I think I'll weave in one question from the Internet, Ben, that fits to [Marcus'] question. Did you see an increase in the number of blood transfusions in the U.S. patients given that the percentage of patients with hemoglobins above 11 decreased from 82 to 80?

I don't have that data. We track it but it's very, very, very small. So I don't think so, because transfusions is just not a good way to handle the anemia management for a patient. So I don't think that we would see any effect at this point in time.

Next question from the audience?

Holger Blum, Deutsche Bank. Just two quick ones, one on Spain. You mentioned the HDF reimbursement. What would be the upside in absolute terms? Could you share some numbers with us and to what extent we can see some similar developments in other European countries for online HDF?

And secondly, could you share the absolute PhosLo number with us for the quarter? Thank you.

With respect to HDF, we are practicing it in our clinics in Europe, essentially probably more than on average 15% and growing; just like we did in the U.S. when we felt the single-use was by far the best medical practice. And we operate clinics in a number of countries. So I would expect over the next two years, each of these countries will recognize the benefit of [high flux] online hemodiafiltration. And we will see reimbursements. I think Spain is just the beginning of that trend.

With respect to the PhosLo sales, we are running at about a $50 million a year rate right now, which is essentially, like I said, quarter-to-quarter in the '70s over what was being sold [by about] a year ago. So on a worldwide basis we are probably close to $100 million in terms of our renal drug initiative on a yearly basis. And remember our target for 2010 is $400 million. So we are still working towards that target.

Larry, I have one for you from the Internet. Does lower net debt to EBITDA ratio translate to lower interest expense going forward? And do you give any guidance for interest expense for fiscal year '08?

I think we'll give guidance for fiscal year '08 when we announce our full year results in February of next year. Generally, lower leverage ratios or improved leverage ratios do lead to some improvements in interest costs and interest margins. And yes, we have already seen some of that as we have deleveraged over the last four to five quarters.

Next question from the audience?

Looking at the brilliant development of PhosLo in the U.S., what was the stage of PhosLo in other regions outside the U.S. at stage of development and plans to launch it?

Let me be a little humble on the brilliant success, because in the U.S. that market is probably a $0.5 billion market or $600 million market, so I'm never too excited at that 10% marketshare. But anyhow, it is a start.

As far as outside the U.S., we're essentially registering it or a product that we have similar to that along with it as a family of binders in Europe. And I think we will start to see sales in Europe in 2008.

And I have one more question for you from the Internet. What sales growth for HD Admissions in North America are affected by -- was affected by the FDA ban on Gambro machines? Could you actually quantify the impact? And do you foresee HD machine's decline going forward now that Gambro bans seem to be lifted? Are they going to come back to the market?

That's certainly a fair question. We certainly benefited in the U.S. as well as I think around the world because of the cloud that emanates from one country to another when you have an import banned. And we had sales I think running in the 15% range this year in terms of machines, which is five times the market. So I truly believe that there will be an impact. And I don't know when, but we'll keep you informed; but I am pretty sure that we'll drop back down to something in maybe high single digits or in the low double digits. It probably will have an impact. We have not seen it yet, but it could.

Okay. Another question from the audience? If that is not the case, I think, Operator, we can open up the audio lines for the questions. Operator? Do we have any questions from the audio lines? We don't. That's good. Should we push our luck? I don't know. There we go.

Martin Wales.

(Inaudible question - microphone inaccessible)

Actually now we have an operator but we don't have a line, I guess. But Martin, you're fading in and out. Do we have a headset? If you would use a land line, that would be appreciated because you were fading in and out. We couldn't get your question.

Let me try, is that any clearer?

Not really, to be honest.

Well, it's the only line I have, I'm afraid. Let's try again. I'm just looking at your revenue guidance for the year (Inaudible question - microphone inaccessible).

I think it's about top line guidance. But Martin, I think we're going to come back to you because that line is pretty bad. So, I guess they're going to cover that question later with you separately. Can we take the next question, then, please?

Ilan Chaitowitz, Redburn Partners.

This is Ilan from Redburn here in [London Heights]. I've got three questions. Firstly, just wondering if it hasn't been done already, when you guys expect the final FDA labeling of EPO to come through? It seems like that might still be having an impact on your business.

The second question relates to what I can see I think is a $400 million cash drain in terms of Accounts Receivable program. Could you just explain what happened there in Q3 or what's going on and if that had any P&L impact in the third quarter?

And the final question I have just relates to the legislative outlook. Ben, you alluded to it briefly, but I was wondering if you guys could talk a bit more about anything in terms of potential bundle of payments and MSP Provision, differentiated payment rates between large and small payors and the potential for further EPO price cuts?

Okay, I'll take two of those and Larry, you'll take the cash one.

The FDA label change, there's a lot of discussion that there will be something. I don't see it as particularly negative, but it would be nice to clear the air because I do believe it has a lingering effect at this point. We're expecting to see something yet this year in that respect.

With respect to the legislative outlook, I'm certainly not basically on top of it every day, but I'll give you the view from a week ago. Essentially you know that the Congress failed to override the President's veto on the S-chip, and it is my understanding now that both the House and the Senate are working on a smaller S-Chip bill, which is actually beneficial I believe for ESRD because at this point ESRD won't become a pay-for for this bill, we think.

So right now -- and there's also a discussion between the House and the Senate on a Medicare bill. And we believe that the industry has come together, the Kidney Care Partners and basically the care providers have come together. And we do support MSP extension. We do support bundling with the proper validation of it. And we also support a more defined update system.

So that's all being discussed. And I believe at this point in time I've got to say that everybody is working pretty hard to make sure we get this done so that we essentially can provide the best care for the patients. So, at this point I'm still optimistic there will be a bill that has some impact on ESRD.

Any timing on that?

Okay. Ilan, your question on the Accounts Receivables is a good one. We have used the proceeds of our bond issue that we did on July 2 to temporarily we paid the Accounts Receivable program. And on February 1 next year as we have the majority of our trust preferred security tranches, we will refinance those using the Accounts Receivable facility. So really it was a good place to be able to put the proceeds of the bond issue. We wanted to do the bond issue at the end of June, beginning July because we saw the market as continuing to be good. So we used those proceeds to repay the Accounts Receivable facility. We will see those balances grow back up as of February 1 next year.

Jack Scannell, Sanford Bernstein.

Two questions. First is Medicare owes Congress a report on a mechanism for implementing bundle pricing where the main EPO drugs and the dialysis are bundled together. Do you know if the report has been submitted, where it is and when it might become public?

And the second question is, what is the earliest realistic date that the disease management products could actually be offered to Medicare? And what remains the barriers between -- or the barriers that would prevent it from happening?

This is Ben, I'll try to answer those. The Medicare bundling report, which was mandated I think by the 2005 Legislative Act, has been written, to my understanding, and it is being reviewed in the executive branch. And it is my understanding that it will basically find its way into the public view sometime this quarter -- is the best guess that our group has. That's about all we know about it. We've not seen it.

As far as the Medicare and taking expanded care through a -- similar to [DEMO] or disease management, the vehicle to do that is the single needs program -- or special-needs program under the Medicare advantage. And I think both could we and [DEVIDA] have activities in that area. And again, we think this is a very good program to keep alive in the future because it allows someone to ordinate the entire treatment and integrated care for these patients. So, it's in the law at this point in time. And it has a sunset provision in 2008. So we are trying, as a part of the legislative package, to keep this particular vehicle available to provide better patient care.

So I'll take a question coming from the Web. The question is do you plan to refinance debt coming due in early 2008 or does your recent dollar deal -- meaning our dollar bond deal -- fulfill your capital market needs?

I would say generally that we don't have any refinancing, significant refinancing needs where we have to go to the capital markets any time soon or for that matter, any time in 2008. But generally, in the mid-term, our strategy is to be more balanced between the capital markets and the bank markets. In the past we were very reliant on the bank markets. We've started to diversify somewhat with the bond deal that we had this year. And I think we'll see somewhat more of that depending on market conditions in the future years.

And really it depends on how opportunistically we can access the markets and how attractive we think the markets are at any one time. Again, we are not forced to go to the market but we will probably do some more deals if we think the conditions are attractive.

Tom Jones, JPMorgan.

I've got a couple of questions. One, would you just care to make some comment on the impact of foreign exchange on margins? It's very easy for us to model the top line. But I just wondered whether the continued deterioration of the dollar and the very rapid moves has -- have any impact at the operating profit line?

The second question just relates to interest rate hedging policy. From memory, you've upped the amount of your interest rate exposure that was hedged in early June. At that time the expectation for interest rates was more for interest rate rises rather than interest rate falls. We're now moving into an interest rate falling environment. And just wondered what impact that might have on your interest rate hedges?

And thirdly, on the subject of PhosLo, I just wondered if you had any comments after the FDA's panel that it held on the issue of phosphate binders in the pre-renal setting? And secondly, when do you expect to hear from the FDA on PhosLo in pre-renal? I think you filed the FDA in January time, so it should be any time soon.

Let me take the first two. The first one was what was the impact of foreign exchange, changes and volatility on operating margins. Generally, what we see when we have foreign currency changes, in particular dollar/euro or higher revenue changes and then generally increased U.S. dollar EBIT in absolute terms but somewhat or slightly less EBIT margins. Because you get the fall impact on revenues and a somewhat less impact on absolute EBIT, still going in the same direction but you see less of an impact on absolute EBIT. And therefore the margins are to -- the margin effect is slightly lower.

In terms of interest rate hedging, our target is to be hedged, that means to have fixed rate exposure of about 75% to 80%. We're at the high end of that range now at around 80%. We're fairly happy with that. We really want to be pretty conservative here and not have a lot of exposure to interest rate risk. And so we think with our debt portfolio at the right level for us is to be at about 75% to 80% fixed. And again that's about where we are at this point.

Maybe I could put it a different way then. Are those interest rate hedges just hedging to the outside? I mean, if interest rates fall, will you benefit or is it essentially fixed out now?

We would benefit on the variable portion again, the 20% or 25% variable interest rate exposure that we have. So if interest rates fall, we do benefit on that portion.

With respect to the last -- I guess it was October 16, the Advisory Panel where they discussed binders for CKD, I think in general we were pleased with the balanced outcome from the Panel. The real question is, will the FDA require pre- or post-market studies into additional clinical studies. We clearly believe this is an opportunity although from a commercial standpoint, these patients still have residual renal function. So they don't need as many binders or as much in the way of phosphate binding as dialysis patients. So it's not something that we have on our radar screen in terms of the $0.5 million market that's there for a stage 5. So if it happens, we'll certainly participate in it and it would be upside from a business standpoint.

Is there anything in that $400 million pharma figure that you talked about earlier for pre-renal?

The market we're looking at is stage 5. It's not pre-ESRD, no.

Hans Bostrom, Goldman Sachs.

Thanks for taking my questions. I had two. First of all, Larry, could you give us a sense of what the effect will be found from the refinancing of [such] securities over the next year and the (Inaudible question - microphone inaccessible)?

Hans, you're hard to understand. You're fading in and out. Can you pick up the phone, maybe?

Can you hear me now?

So I think the question -- what was the effect of the refinancing, the bond issue that we've done this year on our total interest expenses. And the answer is temporarily it results in very slightly higher average interest rates for us because we replaced the six rate issue at just around 7% with some lower interest cost debt.

But of course, as I said, the real intention of the bond issue that we've done is to refinance some very high interest debt which are the trust preferred securities which mature very early next year. So if you look at it for next year, it has a positive effect in terms of average interest cost.

The question more related to what is likely to be the effect next year given that I believe it's about $600 million worth of debt that is being refinanced. Could you give us a sense of what you would expect on unchanged interest rates from today's level, where you would expect the effect will be in terms of average borrowing costs in terms of basis points for the Group?

I think if variable interest rates would stay where they are today, we clearly will see somewhat lower rates next year. But I think that we really don't want to say any more than that. We'll give some guidance on that when we give overall guidance in February. But you could expect the average interest rate to be trending downward.

And another question relating to the indication of a 1% improvement in revenue per treatment. Just to make clear I understand how you're calculating it, is this the fourth quarter '06 over fourth quarter '07 number we're looking at -- about the $3 improvement? Or is there any other measure you're looking at?

Hans, the 1% that Ben referred to was year-end over year-end. So year-end last year we were at about [$3.28]. So yes, we're talking about around $3.00.

[Alec Cherlot], Merrill Lynch.

Good afternoon, [Alec Cherlot] from Merrill Lynch. A couple of questions. Firstly, follow-up on the Gambro question. If I understood correctly, you said that you would expect to go maybe from 15% to high single digit growth. I just wanted to understand that because I thought if Gambro comes back, not only will they hamper the existing growth but perhaps take back some of the share they lost; therefore perhaps expecting that impact at least in the first year, say '08, to be higher that what you suggested.

Secondly, if you can just give us guidance on tax. It appears to be trending lower perhaps. Is this kind of a trend we should model going forward?

And the third question, it's also a little bit of a follow-up and that's on pricing and international. It has been growing quite fast, around 6%, 7% this year. How should we model that going forward? And in particular in Q3, how much benefit on the pricing did you get from Spain on that 7% in Q3?

This is Ben. I'll take a couple of those. In terms of Q3, Spain basically, minimal effect because it is just starting. As far as the Gambro, I am trying to be balanced here. I'd like to keep all 15%, okay. But I think in all fairness when they come back -- and quite frankly they're cleared to come back but they haven't started, but I'm sure they will -- I believe that those groups that have Gambro machines, which are less than a year ago, would clearly probably want to look at their machines and see if they wanted to stay with Gambro.

So we don't expect a major impact on our machine business. But I think it would be unrealistic to assume there will be no impact on our machine business. So I think I'll stand by the high single digit and we're operating at about 15% now. So there will be some impact on us, but quite frankly on the overall U.S. numbers it won't be measurable.

So, on the tax rate, we're at 38% for this year, for the first nine months. Again, our target was 38% [to] 39%. I think for the rest of the year we're not going to see a very big difference from where we were in Q3. And in terms of 2008 and going forward, again, we will give guidance on that in February when we announce the full year results.

Pricing, international -- I'm sorry, I missed that. Our target for both international and for the U.S. is to increase our revenue per treatment about 2% a year. And we're doing better than that in international this year. We're just about half that if you look at the average for 2006 and compare it to the average for 2007. What Larry and I always talk about is where we end in fourth quarter of 2006, where we will be at the end of 2007. So 2% is our target basically on a worldwide basis.

Could you just maybe elaborate on where the pricing is coming from, maybe across regions in this year?

Yes, if you're looking at the U.S., obviously it is from commercial payors and the Medicare increase we got as of April. In terms of in the international area, I think we had seven countries out of the 29 that we operate in where we received an increase primarily for quality. And so what happens in the international area, we will see increases for anywhere from 30% to 50% of the countries on a yearly basis and they tend to be about every two years when we see the increases.

Maybe just to build on that -- among those seven countries where we had increases, they were France, Spain, Italy, and Argentina countries where we have the quite big presence. And we typically will see increases, as Ben said, in around 30%, 40% of the countries each year.

[Anna Scova], Morgan Stanley.

I have two questions. First of all, could you please give us some details on the acquisitions you made this quarter? What are your intentions about (Inaudible question - microphone inaccessible) any countries, regions that you are looking at now?

And the second question, there is increasing revenues from international services. How much further international margins dilution do you expect?

I think we're trying to decipher the questions. The first one I believe was, where was the acquisitions -- where were they executed in third quarter? I think Larry, those have been pretty balanced; about half in the international dialysis clinic area and about half in the U.S. in terms of clinics. And these are one-off clinics that I believe, and I think about [$24 million], right?

That's night, Ben. That was true in the third quarter and the first half; we were a little more towards the international region with two fairly large acquisitions in Taiwan and Korea. In Q3 it was about half and half.

We didn't understand your last question. If you could repeat that, we could try to answer it.

Yes. So, with increasing revenues from international services, how much further international margins dilution would you expect?

(technical difficulty) that we're going to stay in our target range of 17% to 18%. Again, you have a kind of balancing between the mix of countries. And also as you invest in new countries, emerging countries, then the margins tend to be fairly low at the beginning when you have very few clinics. You're spreading the fixed costs of the organization over a very few number of treatments. But then as you continue to build up and invest in those countries we see some very good progression in margins. So I think it's reasonable to expect that international margins will stay in the range that we've established; again, that 17% to 18% range.

Jack Scannell, Sanford Bernstein.

Thanks very much for taking another question. I hope I'm not getting in anyone's way here. But two. The first is that U.S. patient volume growth was maybe a little bit light this quarter. I just wondered what your views are on the longer-term epidemiological trends here and the balance between improved treatment, maybe slowing the progression of CKD but also improved treatment meaning more people survive to ESRD.

And then the second question was just around the bad debt expense and its volatility or stability. Is this something that is just fairly stable year-on-year, reflecting failed Medicare co-pay's? Or is this something that actually fluctuates and varies with any macroeconomic conditions?

This is Ben. I'll take the first one. I think we're pretty well convinced and we've seen -- I think we just published a paper on Right Start, that shows the same thing -- that if patients in stage 4 are treated better medically, more of those patients will live longer and eventually come to dialysis. Now, it will take them longer to get to dialysis, but they also come healthier. So we don't see anything in -- of a negative fashion in trying to take care of stage 4 pre-dialysis patients. We see that this is probably the right thing to do and it certainly is not going to hurt our business -- our dialysis business.

On bad debt expense, we've seen a pretty long-term trend of bad debts staying in just about in the 2% range of revenues; maybe slightly more than 2%. And generally it is due to co-pay's. And that is pretty steady and pretty predictable. What is less predictable is the product business where we see somewhat more volatility. But even despite that, where we have some variation from quarter-to-quarter, we see pretty much on a year-to-year basis that we're right around 2%. And I don't think there is any reason to expect that it is going to change too much from that level.

I'm showing no further questions from the phone line.

Okay. So if there are no further questions, I'd like to thank everybody for being here today. I wish you a safe journey back and see you next time, actually in February; actually in between the ones I don't see, I wish Merry Christmas. Thank you very much. Bye bye.