Fresenius Medical Care AG (FMS) 2008 Q1 法說會逐字稿

Thank you, Bertrand. Good afternoon and good morning, ladies and gentlemen. Welcome. Thank you for joining us for Fresenius Medical Care's first quarter results and achievement.

By now, you should have received all the material which is available also on our website, fmc-ag.com, under the Investor Relations section.

I would like to comment first 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 and the German Exchange Commission Deutsche Borse.

In compliance with Section 41 of Sarbanes-Oxley, we have provided a reconciliation for any non-US GAAP measure that we utilize. Please make use of that.

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For the benefit of all the participants, we would appreciate if you could dial in on a landline, not using any mobile phones.

With us today is Ben Lipps, Chief Executive Officer of Fresenius Medical Care, and Larry Rosen, our Chief Financial Officer, who will brief you on the results for first quarter 2008. And then, we'll also give you a business update. So, let me know turn it over to Ben Lipps, our CEO. Ben?

Thank you, Oliver.

Ladies and gentlemen, let me extend a warm welcome to you today. I'd like to welcome our board members, all of our employees and associates around the world who have joined us on the Internet.

We're truly pleased with the start for 2008, and we confirm our guidance for the full year. I'd like to say that all the regions have contributed to the successful operating performance.

In terms of the agenda, I'll talk about the business update and then turn it over to Larry Rosen, who will give you more detail on the financials.

Turning now to the first slide, I think this is page four. You'll see our revenue for the quarter was $2.5 billion, up 8% in local currency, 4% constant, and 5% organic. Net income was $186 million, up 16%. As I mentioned, the first quarter is fully in line with the company guidance, and we'd like to confirm our outlook for the year.

Now, in addition, we are assuring our future growth by accelerating our investments in R and D, plant capacities, and De Novos in both North America and in international.

Looking now at the performance in North America, I'm very pleased with the performance of Mats Wahlstrom, the board member for North American service, and his organization. They were able to balance very strong anemia management headwinds, continue to keep tight cost control, and turned in a very good performance in North America.

Looking at the products in the renal therapy group headed by Rice Powell, board member for Nother America also. Clearly, they did an excellent job. I'll show you later the growth was very strong in that region for North America.

Looking now the international segment, the group headed by Emanuele Gatti, board member for Europe/Latin America, did an excellent job in terms of growth, revenue growth. Also, Roberto Fuste, board member for Asia-Pacific, and his team turned in excellent growth.

So, in summary, it was a very good start to the year, and I'll go into more detail region by region in terms of some of our successes and some of our challenges.

Turning now to the next slide, you'll see that with respect to revenue, North America accounted for about 66% or two-thirds of the revenue. And again, as I mentioned, the North American organic growth was around 3%. Again, I think that you'll see that increase during the rest of the year. It's been held back by the EPO utilization, which I'll talk to you about here in the future slides.

Looking at international, we had revenue of $844 million, a 23% increase in actual currency, 10% in constant currency, a very strong performance in terms of revenue growth in international.

Leading the way was Europe, which accounts for about 70% of the revenue, $590 million for the quarter. Again, 11% constant currency growth in the European theater.

Asia-Pacific, we saw about -- we saw $142 million revenue for the quarter. Again, there's a reimbursement increase -- decrease in Japan. It happens on a two-year cycle. So, if you look at the growth outside of Japan, it was a very strong 13%. And of course there was -- this reimbursement decrease starts April 1st, so there's always some inventory adjustment by our customers prior to that decrease. So, Asia-Pacific, though, however, turned in in the service area a 10% constant currency growth. So, again, a very strong performance in Asia-Pacific.

Turning now to the dialysis services and looking at it on a global basis, if you adjust for the sale of the perfusion business, you'll see that the global growth for dialysis services was 6% in actual currency, 4% in constant currency. However, looking at the international segment, you can see that it was a very strong 13% growth in constant currency in the global services.

And as I mentioned, the US was at around 3% growth in terms of services. And again, I believe that this was a very good performance, again looking at the anemia headwinds that we had during the first quarter.

Looking at the next slide, which is essentially a good snapshot of our global services business, if you look under the organic revenue growth, you'll see that the same market treatment growth in international was 7%, again above the market, very strong, and 13% organic revenue growth.

In North America, we're growing at the market at around 2.7%. And again, we saw an organic revenue growth of 2%, again being impacted by the EPO. However, if you also take note that in 30% of the countries that we operate outside the US, we saw an increase in revenue per treatment. So, again, the pattern is really quite strong in international. And like I say, we're doing a very good job in the US service business also because, again, I think you'll see later that the EPO headwinds will abate as we go through the year.

Now, the other point I'd like to point out is we actually opened 44 De Novos during the first quarter, a record for us, 29 in North America and 15 in international. We're targeting to open around 135 to 140 De Novos this year. That would be a growth rate of around 5% in North America and 8% in the international region.

Turning now to the next slide, eight, we'll look at the revenue per treatment in the US service business. As you can see, we basically were able to, I believe for the first time in the last couple quarters, increase the revenue per treatment in the first quarter versus the fourth quarter. So, I believe we bottomed out in terms of revenue per treatment in the fourth quarter. We saw an actual increase of $1. If you look at it on a year-over-year basis, we still saw a decline in the overall revenue per treatment from 329 to 326, or about 1%. That includes the EPO effect. If you remove the EPO effect from that calculation, again we're growing at a very strong underlying growth of 4%, and that's consistent with where we were last year. And that's a reflection of basically the increases in the commercial rate plus the fourth quarter also -- the first quarter also had the last quarter of the 1.6% Medicare.

So, again, I think the contracting group and the service group in North America continues to do well in working basically with the payers, and we continue to see then, without considering EPO, excluding EPO, a 4% growth rate.

Turning now to the next slide, I want to comment on quality. Again, I think there's no question that we have a clear and absolute commitment to quality. This is really the lifeblood of our business. I'm very proud of the fact that both in EMEA and in North America, 95% of the time we have provided the therapy that was prescribed by the physicians. That is an absolute record for both regions, and very, very proud of that.

I'll talk a little more about the hemoglobin in North America here in a couple minutes, but I would like to indicate we put a new metric on our scorecard which is really an indication of the phosphorus control which, as I've mentioned, through 2007 this is clearly an unmet need that we need to focus on as the dialysis providers and as the dialysis industry.

I think that you can see here that only 53% of our patients essentially meet these standards, and in Europe it's a little better at 57%. And again, I think that this is one of the reasons that we're interested in this, is all of our retrospective studies indicate that this is a strong driver -- high phosphorus levels are a strong driver of mortality, of increases in essentially mortality. And so, this is a focus that we will focus on over the next couple years.

Now, in addition to this, you can also see that we continued to decrease hospitalization days which is -- again allows us to provide our payers with a less costly hospitalization cost during the year, and I think that both of us win.

As a side note, once a year we look at the mortality, and I realize around the world we don't all have the same unit metrics of how we calculate mortality, but we look at it strictly within our own metrics. And I'm proud to say that in the non-diabetic area of patients in North America, we decreased mortality by almost 80 to 90 basis points. In the diabetic area, which runs essentially about 400 basis points higher, we decreased mortality about 110 basis points. So, we continue to put the quality metrics at work and again provide better care for the patients, and I think better outcomes for the payers.

Turning now to basically figure 11, the quality outcomes looking at anemia management. As we discussed, my two favorite slides here. The left hand side shows, as we discussed, throughout 2007 that because of the halftime -- half-life effect of 60 to 90 days, there's always a lag from the time you administer EPO to the time that you see the outcomes. And clearly, with the decreasing utilization that we had in 2007, the effect finally started to show in the first quarter of 2008.

And you can see that our average hemoglobin actually dropped to 11.6, which is worse than it has been as far back as 2003. At the same time, the percent of patients that were above 11, which has been our target, clearly also dropped. So, I think we are seeing for the first time the outcomes now are responding to the doses that have been decreased over the year. I do believe, though, we are in a stable position because we clearly -- CMS has put forth the payment guidelines for both the low end and the high end, and so I think everything is fairly clear.

So, it's a matter now of working to improve the outcomes essentially for our patients by working with the physicians. And, of course, they are the sole keepers of the prescription. And so, as we work with them, provide them the data, I expect that we probably will continue to see these anemia outcomes improve during the year.

Now, if you turn to slide 11, this is basically a little bit of reassurance here that we have passed through the storm as far as the EPO. And I believe that we hit the low point in December in terms of the actual EPO utilization, which is the dose per administration, and we've seen an increase then starting in January. So, I believe throughout 2008 this will become more and more of a non-issue. Again, it will not be linear as we go through the year. Essentially, you will increase the dose and then you'll have to wait 90 days for the actual total -- basically outcomes and then basically step up from there. So, I think you'll see this by third and fourth quarter. We'll be pretty much back to where we would consider -- the physicians would consider normal.

Now, turning to the dialysis products, on a global basis we had an excellent first quarter, total revenue $869 million, a constant currency growth rate at 9%. If you look at the actual sales to external customers, it was $667 million. And again, a constant currency growth rate of 10%, clearly double the market.

North America did very, very well with a double-digit growth rate at 12%. Now, this 12% has both the renal products and also the PhosLo business or the therapy business. I'm very proud to say that the renal products continue to grow at 9% in terms of the year-over-year growth. And the phosphate or PhosLo growth was a torrid 65% this quarter compared to last year. This reflects continued increase in pricing which reflects its value. But, we also started to see market share increase in this area. And, again, I think what we're seeing is an acceptance of our therapy approach to controlling phosphorus, not just from looking at it from a drug approach.

Also, we saw 11% increase in basically single-use in the independents. We're now up to 65% practicing single-use in the independents.

Looking at the international area, we saw a 9% constant currency growth. Again, almost double the market, led by machines at 14%. And we saw peritoneal dialysis continue to grow at the mid-single digit.

So, by and large, the products area had a very strong -- also had a very strong, on a global basis, performance for first quarter.

In summary then, looking at the highlights for the first quarter, clearly we continue to see momentum in the US in terms of products. We launched the new PD Liberty Cycler. Very comfortable that we have a good focus on the anemia management and we will see that return to normal by the end of the year.

And I'm very proud of a new publication coming out on the Care2 study, which clearly shows that there's no difference in calcification between PhosLo and Sevelamer if you control basically the LDL cholesterol and the calcium.

Looking at Europe, again very strong growth, 11%. We are very excited about the reimbursement changes in Portugal. It's the first country to go to a thoughtful bundle, and this starts April 1st. So, we expect to see increase in the service area in basically Europe and Portugal.

We have 20 scientific papers at the EDTA, launching a number of new products in 2008 and 2009 around the world. So, I think we are doing all the right things in the products area.

Asia-Pacific continues to grow double-digit outside of Japan, and I'd like to mention that our revenue growth in China again continues in the 30% to 40% range market share in hemodialysis, and China is the leading market share.

The last note I have here is that we just have enrolled our first class in our Fresenius Institute of Dialysis Nursing. And what this is designed to is we're actually providing classes for registered nurses to learn dialysis and be available then to work anywhere in the world in our dialysis clinics. And obviously we've got a number of nurses lined up to join that class.

So, essentially that gives you sort of a flavor behind the numbers then of what we did here in first quarter. I'd like to turn it over to Larry, who will talk with you more in detail about the numbers. Larry?

Thanks, Ben, and thanks to all of you for joining today. I'm very pleased to report on another good set of results, in this case for Q1 of 2008, and a really encouraging start into the full year.

If we start with slide 15, we look at an overview of our earnings development. As Ben has shown on his slides, our revenue was $2.5 billion for the quarter and grew at 8% on a reported basis and 4% in constant currency. Growth was highlighted by an organic revenue growth of 5%, despite the impact of lower government reimbursement for EPO and lower EPO utilization in the US.

The driver in North America was the same market treatment growth of 3%, partially offset by lower EPO revenue and the continued growth of our North America product business, which posted a strong 12% growth rate.

In international, we benefited from reimbursement increases in several countries including Czech Republic, Poland, Argentina, and Chile, and there were a few others. The reimbursement increases coupled with same-market treatment growth of 7% resulted in a 13% organic growth rate in dialysis services. We saw a continued strong demand for our products, especially for machines and dialyzers, which translated into an organic product revenue growth of 8%. As a result, total company organic revenue growth was 5% year-over-year.

Our operating income was $389 million, an increase of 7% year-over-year. Continuing favorable scale effects and cost containment measures provided an improvement of our gross profit margin of 30 basis points to 34.1%, despite the unfavorable effects of lower EPO utilization and reimbursement.

Our SG and A expenses, though, increased by 30 basis points in percent of revenue, largely due to startup costs associated with 44 De Novo clinics opened during the first quarter compared to only 18 in the prior year, as well as increases in corporate expense due to the RSI acquisition, higher legal expenses, and higher stock option expenses.

Our R and D expenses increased by 20 basis points in percent of revenue as new product developments went into field testing. As a result of these developments and thus what you can partially view as an investment into the future, startup of De Novo clinics and higher R and D expenses, our EBIT margin was 15.5%, 20 basis points lower than Q1 of 2007.

Net interest expense of $83 million decreased significantly due to lower interest rates and a more favorable financing structure following the repayment of about half of our higher coupon trust preferred securities.

The tax rate was 37%, slightly lower than in prior year, mainly due to the favorable effect of German tax reform.

Net income was $186 million, up 16%, and in line with our growth forecast for the full year of 12% to 15%. On this basis, we're pleased with our Q1 performance and remain confident to achieve our targets for the full year.

Turning now to page 16, you see the EBIT margin development by segment. North America reached an EBIT margin of 16.4% in Q1 of 2008, an improvement of 60 basis points verse the same period in 2007. The main drivers of the improvement were treatment growth and related scale effects, also cost containment measures to balance the revenue rate reductions in the US service business, the latter being a result of reduced government reimbursement for EPO and the lower EPO utilization which more than offset the underlying commercial rate improvements, the 1.6% Medicare composite rate increase, which was effective April 1st of 2007, and small increase in the Medicare drug add-on. And finally, third, strong demand for our products, especially machines, concentrates, and dialyzers, and the increasing margin contribution from our phosphate binder, PhosLo.

In the international segment, our EBIT margin decreased by 60 basis points to 17% in Q1. While our revenue development was strong with organic revenue growth of 10%, the expansion of the service business through the startup of De Novo clinics and our increasing investment in the emerging markets, together with unfavorable currency impacts due to the strong euro, were the main reasons for the lower margin.

With that, I'd like to turn to slide 17 and give you some further insight regarding days sales outstanding or DSO. In international, DSOs increased by three days to 107 days compared to Q4 of 2007. In the international regions, we receive from time to time larger, uneven payments on our receivables, and this leads to some normal fluctuation in DSO development which we've seen over the last couple of quarters. However, we view this type of fluctuation in this range as being totally normal.

In North America, we also saw an increase of two days. This increase was due to us re-winning a share of the tender business for peritoneal dialysis products in Mexico, and the build up of receivables associated with these revenues until we reach a stable state. In addition, we've seen delays in payments from Medicaid in a couple of states in the US.

Overall, these developments resulted in a three day overall increase in DSO to 76 days. We believe these specific factors will reverse during the year and that we'll be able to achieve further incremental improvements in DSOs.

On slide 18, we show our cash flow development for Q1. We achieved cash from operations of $192 million, representing 8% of revenue. This is generally lower than what we target for, which is in excess of 10% of revenue, where we've been for many quarters now.

The lower cash from operations in this quarter is a reflection of three factors. One factor I talked about already was the increase in DSO. Second, we've seen increases in inventory levels back to more normal levels after we had exceptionally low inventories early last year due to some manufacturing capacity constraints. The last factor was tax payments. We had tax payments that were $49 million higher than last year's quarter. Included in these higher payments were catch-up effects to adjust our tax prepayments to our now higher level of earnings. These unfavorable cash effects were only partially offset by increased earnings.

Our net cap ex was $154 million in Q1, ahead of last year and in line with our planning and guidance for this year. The high spending reflects investment in the growth of the business, mainly related to the expansion of our manufacturing capacities to meet the continuing strong demand for our products and also significant higher spending on De Novo clinics. As a result of these developments, the free cash flow was $38 million in Q1.

Our acquisition spending net of divestitures was $32 million, and reflected clinic acquisitions. That spending was also in line with our expectations and left us with a free cash flow of $6 million for the quarter.

Turning now to slide 19 and looking at the development of our debt and our leverage ratio debt to EBITDA, on the left hand side of the chart you see that our debt level and our EBITDA both increased slightly resulting in a small improvement of our debt to EBITDA ratio to 2.82 at the end of Q1 compared to 2.84 at the end of last year. The main reason for the debt increase was translation effects associated with the strong euro. Our mid-term target of 2.5 times debt to EBITDA remains unchanged, and for year-end we continue to target to achieve a leverage ratio of below 2.8 times.

On slides 20 and 21, I want to discuss our relatively comfortable financial situation amid the uncertain overall environment in world markets. On slide 20, you can see that we currently have a very solid committed financial cushion of more than $1.1 billion. Our senior credit agreement provides us with additional financing capacity of $850 million, and other bank facilities with committed unutilized lines of $250 million. In addition, we still have some room under our accounts receivable program in North America.

Although we repaid the trust preferred securities which became due on February 1st, our financial situation remains very strong. And this is also confirmed when we look at the next slide, slide 21, which shows you that there is really no major refinancing need until 2011 when the senior credit agreement and our remaining trust preferred securities mature.

The account receivable program is renewed annually, and despite the financial uncertainties in the market, we've not had an issue to renew that facility last year, and we don't really anticipate any issue for this year. We're also not exposed in any major way to changes in variable interest rates as we have more than 75% of our debt portfolio in fixed interest rates.

With that, let me conclude on the next slide with our outlook. For 2008, we continue to expect revenue to increase to above $10.4 billion, representing a top line growth of above 7%. On net income, we expect to achieve a range between $805 and $825 million, which translates into increases between 12% and 15%.

We continue to focus, as mentioned, on further deleveraging with the objective of achieving a leverage ratio below 2.8 times, and our guidance for cap ex and acquisitions reflects our excellent growth opportunities and remains unchanged. For cap ex, we plan to spend in the range of $650 to $750 million. Close to 60% will be geared to expansions such as manufacturing capacity expansion and the further building of De Novo clinics. For acquisitions, we intend to spend $150 to $250 million, and combined that means that approximately 70% of cap ex and acquisitions we'll be spending for future growth.

In summary, we believe our Q1 results give us a very good start to achieve these objectives for the year.

And I think Ben and I will be happy to answer your questions at this point.

Yes, thank you, Ben. Thank you, Larry for the update. And I think, Bertrand, we can now open up the lines for questions.

Our first question comes from Ed Ridley-Day with Lehmann Brothers. Please go ahead.

Thank you. Good afternoon.

Good afternoon, Ed.

Three questions, if I may. Firstly, obviously we saw the Portuguese agreement in terms of reimbursement early this year. If you could just give us an update if there's been any further movement in any of the other European countries that are potentially discussing bundled reimbursement and what timeline you think we might get some movement, particularly in Spain or in France.

Secondly, you talked about improving PhosLo margins. If I could ask to what level, if you could give us some idea, some color, about how profitable PhosLo is at the moment or perhaps relative to the rest of your business.

In China, you're obviously growing very strongly and you're a market leader. Could you give some idea about what market share you believe you have?

And finally, a fourth question, just in terms of the -- a jump in spending on R and D. Obviously, there's a lot of investment here. Give a little bit more color exactly what that spending increase has been on.

Okay, I'll -- thank you, Ed. This is Ben. I'll try to take most of these.

As far as the next country to embrace what we call bundle or comprehensive reimbursement, I believe we're dealing out two or three years because most of the countries will watch the results in Portugal which will take at least a year to year and a half to get some baselines. So, I think we're dealing at least three years out.

As far as the PhosLo margin, we've been not in a position to divulge that. We have said that the actual renal pharma initiative would be somewhere in the range of twice the margins that we see in general for products, and that's, I think, all we've said.

What I talked about really was the growth of the business in terms of revenue. And again, I mentioned that I think we're getting some traction there.

As far as China, we have about 45% to 50% of the hemodialysis business in China. And, again, most of these countries, they develop starting first with PD, but because of the improvement in the therapy, in hemodialysis, as soon as they can afford it then they start moving into hemodialysis. So, we're seeing hemodialysis grow fairly rapidly in China, and the 37% growth is all hemodialysis.

R and D -- does -- that takes care of three of the questions. Does that get you what you need on those three?

Yes, that's very clear. Just to be clear on China, that is -- so that is 50% of the hemo market, or 50% of the overall market?

No, that's 50% of the hemo market.

Yes, okay.

Yes. Okay? And again, that's the growing dominant market long-term, although there clearly is a 20% PD market right now. But, hemo is the area that we're in right now.

As far as R and D, we've got a number of new products worldwide that will be coming out in 2008 and 2009, plus the RSI activity to develop a new platform for regenerating dialysate. We expect to see the 5008-S coming out in Europe, that 2000-AT in the US. We have the next generation of Optiflux dialyzers in the US starting to come out at the end of the year. Same thing with the FX. We just introduced the new Liberty cycler here in the US, and there'll be a next generation of basically PhosLo coming out in 2009, and we're introducing some new PD products in the US we call Delflex Balance.

So, all of these are in the pipeline to come into the market, and they all take a lot of extra effort here as you bring them to market during 2008 and 2009.

Great. That's very comprehensive. Thanks.

Thank you.

We will now move to Ilan Chaitowitz with Redburn. Please go ahead.

Good afternoon. This is Ilan Chaitowitz from Redburn in London.

Hi, Ilan.

Hi, Oliver. Hi, Ben.

Hi, Ilan.

A few -- just a few questions here. Firstly, I noticed there was a slide with your clinical outcomes, and it actually showed a decline in hospitalization days, which is very commendable. And you did have improvements in lots of other metrics, although there was a sharp decline in the hematocrit counts. How are we supposed to read that? Because it looks like the net effect of all the other improvements outweighs, if you like, the decline that you're seeing in the hematocrit counts, because I wanted to just ask you what was going on there, because I would have anticipated that you would have got more patients receiving less than the critical amount of hemoglobin so that might actually result in an increase in hospitalization days.

Another thing -- just that's the first question. Secondly, I'd like to know if you can give us some sort of steer, in the US private side and then internationally, what proportion of your contracts, sort of ballpark, have got natural inflation adjustments to them? That's the second question.

And finally, it looks like you're set for this year to deliver very strong cash flow generation, and at least on my estimates I've got you guys down for 2.5 times net debt to EBITDA by the end of this year, which is actually historic low levels, certainly from before you bought RCG. Would you consider increasing your dividend payment or would you be able to do some sort of a share buy-back, return cash to shareholders, given your strong cash flow?

Okay, Ilan, this is Ben. I'll take the first two and Larry can take the next one.

With respect to basically what we've seen in terms of the hemoglobin, again, I mentioned you should really, from a financial standpoint, take that as good news because essentially I think this is overlooked with respect to any issue of anemia management. Headwinds are going to abate as we go through the year.

From a patient outcome, this is basically disconcerting to see us drop this low, but our physicians are already looking at this. This data became available during the quarter. And so, I think you'll find that they will correct this by increasing their EPO utilization and essentially this will come back to normal by the end of the year.

So -- and as far as it affecting the hospitalization, there's a huge lag time. My guess is that you won't see -- we may not decrease at the same rate as we did this year, but I don't think you'll see us go backwards. So, I believe this is sort of the end of the story as far as EPO in the US and EPO utilization.

As far as contracts, we don't normally comment on those. We always try to get some sort of inflation basically indexed to base reimbursement, but we never comment on how many. But, clearly, that's always a goal that we try for.

And thirdly, the leverage ratio of 2.5, let me turn that over to Larry at this time.

So, Ilan, we do expect to have a strong cash flow this year. Remember that we talk about a target of above 10% and we hope to achieve that this year. However, we think together with the excellent opportunities to invest in growth and our increased wallet for investments, both in capital expenditures and acquisitions, that we're just going to get to below 2.8. That's our guidance for the year. And our mid-term target is to get to around 2.5, but we don't expect to be there this year and therefore there's not really any consideration right at the current time about instituting any kind of share buy-back program.

Thank you very much.

Thank you, Ilan.

We will now move to Alex Surla with Merrill Lynch. Please go ahead.

Thank you. I have just one brief question on utilization of EPO. When you said that you expect that to go to normal levels, or at least what doctors would consider a normal level, what would that be in relation to your slide 11?

Alex, that's a good question. The physicians, I think, are still looking at that and re-looking. I believe that in -- just on a high-level view, it's probably getting back into the 80% above 11. But, again, I think that -- remember there's a restriction on the low end now at 400,000 units per month, and there's a restriction on the high end of payments at no more than basically three months at 13.

But -- so, I think in general you'll see it come back near the 80 by the end of the month. But, that's still being looked at and debated by the physicians in terms of how you'd develop the algorithms to do that.

Okay.

And then, I have a couple of questions on your margins. Starting with North America, the revenue for treatment has gone down more than the cost per treatment, meaning the revenue -- the margin in your dialysis services in North America, I believe, was down year-on-year. Can you just confirm that? And then, a follow-up question is it would then imply a very, very high increasing profitability of your products business. And can you confirm that, and what is the driver behind that?

And the second question on margin, your corporate costs have doubled to about EUR27 million from 14 in the previous quarter. That alone would have hit your margins by 50 basis points. If we can get a little bit of sense of how much of that is the renal solutions, how much is maybe some increased legal costs due to Baxter, and what would be the trend going forward for the next few quarters on that line, please?

Larry, why don't you take those, okay?

I will.

So, margins in North America, you are right that the revenues per treatment declined a little bit more than cost per treatment. And that does reflect generally increasing performance in the remainder of North America, in particular including the very strong performance in the product business including the renal pharmaceuticals, notably PhosLo, as well as excellent cost control in terms of corporate overheads in North America.

In corporate, I don't want to quantify what each of the factors are, but the cost increases that we have are due to increases in stock option expense year-over-year as well as increasing costs for RSI and corporate R and D. And those are the main factors.

How much of the -- if you take the R and D figure, which I believe was 19 million, how much of that goes into your corporate cost line, the 19 million that you would record on your regular P and L from R and D?

Several million of that is included in the corporate cost line.

So --.

Less than half, but several million.

Okay. Thank you.

Do you want to talk about the run rate?

Yes, the run rate on corporate, we had 27 million for Q1. And I would expect to be around that level for the year, around the 25 million to very slightly higher, on average, for the year.

Thank you.

Thank you, Alex.

We will now move to Hans Bostrom with Goldman Sachs. Please go ahead.

Good afternoon, gentlemen. I had also a few questions.

Have you given any guidance for where you see your revenue per treatment panning out by the end of this year, given the deeper trends in the private payer situation?

And secondly, could you comment on the -- well, the element, if any, of nonrecurring gains in your financial nest in the first quarter and how we should model that for the coming quarters?

And then lastly, relating to the question of cash flow, just to get some granularity on that, how should we think about working capital development for the full year? Do you expect that all of this increase in the first quarter will help it to kind of normalize, or are we still going to be at a considerably higher level of cash -- working capital build up from the previous year?

Okay, Hans, great. Larry and I will share them.

As far as the revenue per treatment, we're still pretty much on track. We would expect to see the revenue per treatment end of 2008 be about 2% higher than the revenue per treatment at the end of 2007. And that averages about 1% increase of the year.

Larry, why don't you take the question of non-financial --?

Yes, let's --.

Pluses and minuses. Okay.

Let me take the second and third question. I think the second one was are there any non-recurring gains in the financial net and what were they. The answer is no, there really were not any. We had lower interest expense due both to lower variable interest rates overall and also the repayment of our trust preferreds on February 1st, which had very high coupons compared to our average interest rate, so that helped us to reduce overall expense for the quarter.

In terms of working capital development for the year, I mentioned that DSO did pick up in Q1. However, we would expect it to normalize over the year, and eventually towards the end of the year we think we'll make some incremental progress verse -- for the year-over-year comparisons.

The inventory build up that we had verse early last year should stay in place, but the comparison should be more favorable as we build up the inventories over the year. So, I would expect no real huge cash needs for additional working capital requirements as we go throughout the year.

And to follow up on the question on the financial net, what -- on current rates on the variable side, what would you expect the reduction in basis points of your average borrowing cost to be year-over-year?

Well, last year we had around 6.75, and I think I said in February that we'd be between 6% and 6.25% for the year. We now think it's going to be more like 6% on average for the year this year.

So that would then be consistent with a rate that is -- a expense that is similar to the first quarter for the coming quarters, is that a sensible guidance?

Generally. Roughly similar, yes.

Okay.

And also one question I didn't ask related to the effect of Easter. If you have quantified -- maybe you mentioned it before and I missed it, but quantified what the impact would have been from that.

This is Ben. Yes, I think Easter came early this year and it certainly would have only had effect on the product sales in Europe. And -- but basically we had such strong sales that my guess is it's not an impact on us in terms of any significant impact.

As far as the service business in the US, it really does not impact the service days. We need to treat them, and so it's strictly a European type of situation.

Thanks very much.

We will now move to Tom Jones with JPMorgan. Please go ahead.

Oh, good afternoon. I had four questions.

The first one, your operating expense per treatment in North America, it ticked up sequentially about $5, I think. Would you be afraid to give us an idea of how much of that stemmed from your increased EPO utilization?

The second question is on the cap ex. Both maintenance and cap ex growth are growing quite substantially at 49% and 36%, I think, year-over-year. I sort of understand where the growth cap ex is coming from, but I wondered if you could give us a bit more color on where the maintenance cap ex is going and why it's such a big jump year-on-year.

Third question. I wondered if you'd give us an update on what's going on with PhosLo in Stage 4 CKD. I think you filed that in January of last year. I just wondered if you might be able to give us a bit of an update there.

And lastly, just wondered if you could maybe just give -- share some thoughts on what's going on in Washington at the moment. Some of your competitors are clearly still downplaying the profitability of the dialysis industry. Normally, I find that things are still moving around in Washington. I just wondered if you would care to share any thoughts on that going forward.

So, let me take the first couple. The operating expense per treatment in North America, your question was how much of that came from EPO, and the answer is only a very small part. Most of the increases came from typical cost increases that we see in the first quarter, higher payroll taxes and benefit costs. We also have a lower number of days in the first quarter to spread fixed costs. We've also seen some pick up in utility and fuel cost increases.

So, on average, if you remember the chart that Ben presented with the EPO utilization for Q4 and Q1, we did see a very minor increase in utilization, but that accounted for a relatively small portion of the cost increase.

In terms of maintenance and cap ex spending, we had quite a heavy quarter in the maintenance line. And maybe we shouldn't classify it as maintenance, but we're putting in the new system, the new clinic system, in the US and we had quite a heavy spending quarter for that, and that was the main reason for the increase in the maintenance cap ex this quarter.

And the growth cap ex was very much due to the increase in De Novo spending, and to a lesser extent, spending on capacity increases or manufacturing capacity expansions.

Tom, as far as the Stage 4, we and the other providers of phosphate binders are continuing to discuss with the FDA in terms of what are the indications for the Stage 4 applications. So, nothing new there. The discussions are continuing.

With respect to Washington, it's -- I think you're probably fairly familiar also with what's going on in Washington. My overview is that we continue to see reimbursement interest. There's -- it's much alive in the -- as maybe a legislative priority this year. In terms of when I say ESRD reimbursement, I'm talking about increases in the reimbursement and also reforms. However, because it is a very short year and we don't believe it's going to be a large bill, we think -- we're guardedly optimistic that we may be in that bill, but there's nothing that you could really count on for certain right now because of the time schedule.

So, a lot of interest in ESRD reforms. They understand we need reimbursement increases, but at this point it's a little too close to call.

I mean, the general investor perception is that your chances of getting anything out for the -- on the composite rate 2008 is somewhere between zero and zero. Would you have a slightly more bullish view on that, or would you think that's pretty close to the mark?

I think if you're talking a composite rate in 2008, it's probably closer to zero than it is 15%, okay? But, if you're talking about a package that would include something for 2009 and going forward, I think that's got a higher probability than that. So, we're really talking 2009, I believe, going forward, although I believe there's a very strong need for the rural providers for an increase in 2008 and maybe we could put that into a package that would fit in with the reform package. But, clearly I think there is a need for a reimbursement increase as soon as 2008, if it were possible.

Great. That's very kind. Thanks.

Thank you, Tom.

(OPERATOR INSTRUCTIONS). We will now move to Gary Lieberman with Stanford. Please go ahead.

Thanks. Good morning or good afternoon.

Hi, Gary.

Ben, I appreciate you not wanting to talk a lot about commercial pricing. But, I guess if you could just talk about it in more broad terms. There's been a lot of news, I guess, in the broader press and maybe from some of your competitors about pressure on the commercial front specifically with trying to bring out of network rates in network, and it -- I mean, based on the fact that your revenue per treatment was up in the quarter, it would at least on the surface look like you're not seeing a lot of pressure. But, if you could just maybe comment more broadly about what you're seeing, that would be helpful.

Yes, I think -- I don't want to indicate that we're not seeing pressure. I mean, I think everybody -- when you're negotiating rates, there's always a give and take and there's always an interest in the lower rate. But, I believe the payers understand that that doesn't necessarily lead them to a savings because if we do less in dialysis, their hospital costs will go up. So, I think they understand that.

Now, as far as out of network, I have indicated last year that we don't use that as a financial model, but we certainly feel that we need to be treated fairly. And if not treated fairly, then we don't have a problem with using that.

But, by and large, I believe our best approach is to try to work with the payers and come up with some sort of acceptable contracts with them, and I believe the industry is also trying to do that. And so, I believe that there's no more and no less pressure than last year, but there clearly is something that you have to be vigilant. And I believe we offer a good package in terms of quality and in terms of savings to them in terms of hospitalization costs.

So, nothing's really changed from my standpoint, Gary, from where we were in February when we talked about it, or even last fall. Does that -- I don't mean to try to be vague, but that's really kind of where I see it. Do you -- is there anything else I --?

No, no, that's very -- that's helpful.

I guess maybe if you could -- just one follow up to that in terms of the -- your normal process and sort of schedule of negotiating commercial contracts throughout the year, is everything sort of business as usual in terms of you negotiated about the same amount of contracts that you would typically renegotiate in the first quarter and going forward? Do you sort of see that on a similar schedule as you've seen in prior years?

Yes, I don't think there's any dynamics that have changed there. I think that it's pretty much the same as it has been. Again, I do believe, though, that some of the larger players such as DaVita and ourselves offer the commercial payers some real quality advantages and some services that will save them money in the hospitalization side. And I think we're getting that across as we set up basically contracts with them as we go forward.

So, I see nothing different. They're showing up in negotiations at the same frequency they were last year.

Great. Thanks a lot.

Thank you.

We will now move to Michael Jungling with Merrill Lynch. Please go ahead.

Yes, thank you. Good afternoon. I have three questions, please. Firstly on patient growth, in the US it appears that patient growth for the PD market may be improving maybe around 5%. And if I look at your numbers for the HD market growth rates, it's about 2.7. Can I ask what -- is the PD market accelerating, and if it is, is it a precursor that it may also drive an acceleration in patient growth in HD?

Secondly, on the dialysis products, Ben, you keep on cautioning us that we should not expect dialysis products to continue to grow at these rates, but every quarter you're surprise on the upside. And I would like you to comment, if you can, where the upside is coming from, what is surprising you?

And thirdly, on your European dialysis business, can you comment what uptake you're seeing in the use of EPO bioequivalents from (Schada) and Novartis in the ESRD setting, and how this may be impacting the opportunity you've got with your relationship with Amgen. Thank you.

Okay. The first question, for the last eight or nine years, EPO has been declining in -- or not EPO but PD has been declining in the US. And I think at this point, the best I could say is that it may have stabilized, and at maximum be growing at 1%. So, I don't know the source of the 5%, but I don't see that in the US. But, it's not declining like it used to. So, I believe PD in the US will stay about where it is and it'll be -- if it grows 1% or 2%, that's probably all that it will do.

As far as does it impact the hemo side, I don't think so. Can I follow your reasoning again? I'm not sure that I follow your reasoning.

That's -- and the reason I'm asking you is because Baxter reported in their first quarter they saw procedure growth or patient growth to 5%, the biggest they've seen in many, many years. And given their position in PD and your indication that you're seeing PD growth as well, I would have thought that the market is showing signs of improvement.

Yes, I guess I'm not seeing -- again, I talked about the PD growth in Europe and I don't know that we're seeing -- in the US, we're seeing PD growth. So, if they're seeing 5%, then I still believe that basically the overall market is not growing more than 1% or 2%. So, again, I got to see how they're measuring that. But, at this point in time, that would then be coming -- we didn't grow, so that'd be coming from our growth if that's the case in the US.

Now, the 3% I talked about was growth in the international business, when I talked about PD growth.

We will now move to Julian Dormois with Exane BNP Paribas.

No, no, no. Hold on. Hold --

There was a second question, which was EPO biosimilars in Europe. Okay. I guess the long and short of that is I probably can't comment too much on that because, again, our relationship with Amgen I think is very successful in terms of us working with them.

But, I can't comment on the biosimilars. I think it's too early to really get a feeling for what market shares each one with come up with. But, we have been -- basically it has no big impact on us, but we've been working quite well with Amgen and it's providing -- basically our whole goal here is to improve the anemia outcomes in Europe using the same level of utilization.

There was one more question on the product business.

Okay. The last question, the products business, I think basically yes, we've continued to see it grow. It's been at the top end of our expectations. My question was that it would be as a products business growing in the high single digits, which is did grow in the 9%. So, what you're seeing is the expansion of the PhosLo business plus a very strong business in terms of growth of the products business. Now, it's growing three times the market because of machines and because of continual movement to single-use, and that's essentially what's driving the products business in the US.

Okay, Bertrand, I think now we can take the next question.

Our next question comes from Julian Dormois with Exane BNP Paribas. Please go ahead.

Yes, good afternoon, gentlemen. Many -- a couple of follow up questions, and especially relating to the very last one regarding your product business. And especially in the US, we had a lot of comments from GE, from Johnson and Johnson, saying that a lot of clinics and hospitals tend to decrease their cap ex and their investments. Have you started to feel that kind of impact on your machines business?

And the second question relates to the dialysis care business international segment. We've seen some kind of decrease in the growth of the number of treatments, especially compared to last year. It was 8% in Q1 of this year and, on average, 17% for the full year 2007. Is it a run rate for 2008, or did I miss something external in 2007 that led to a double-digit increase?

Okay, as far as -- the discussion as far as cap ex in machines, I don't see that. We continue to see our machines, on a worldwide basis, grow double-digit. And again, the cap ex required for a dialysis unit, for the machines, is less than 15% to 20% of the cap ex for the unit, so I just think that that's not an issue we're seeing.

As far as the same store growth in international -- or same treatment growth in international, I'll try to answer what I know and Larry maybe can add some color. I said last year, and I think we varied between double-digit and 5%. Again, it depends on -- I can't tell you the countries we're in, but our goal there is to operate with the same store -- or a non-acquired treatment growth in the 5% to 10% range. We're smack in the middle of it here at 7%. But, it will move around quarter-by-quarter as we go through the year.

Larry, did you want to add some color to that?

Yes, I mean, the only other comment is we had the big acquisitions at the beginning of the year in Asia, in Taiwan and Korea, and that helped the growth rate significantly last year. And we just continue to see excellent growth in the international service business, and I think that's where we're going to see a very high single-digit, low double-digit growth for the foreseeable future.

Okay, that's very helpful. Thank you.

Yes, I'd like to add one more flavor of color here in terms of your GE comment. This is one of the opportunities that FMC has, and that's why we're building a large number of De Novos in the European theater is that where there are constrictions on the availability of cap ex, we can offer the entire package, which we've done in the UK. We won a tender for 15 -- 14 clinics in the UK. So, this generally works for us if there is a cost -- a capital cost constraint, and that's why -- that drives outsourcing, which grows our business.

Okay.

We will now move to Martin Wales with UBS. Please go ahead.

Martin?

Martin, we can't hear you.

Oh, I think he dropped out, so --.

Okay.

Can we get the next --?

The line is still open.

Hello?

Oh, Martin, hi.

Hi. It's Martin Wales from UBS. Sorry, I missed a little bit of the call. But, just -- I imagine my question's been asked, but just to come back to the (inaudible). I presume it's been your ability to get prices driving your revenues given the absence of much evidence of volume growth, and of course that is your strategy. Firstly, is that true?

And secondly, can you tell us something about the next generation PhosLo and what differentiates it from the existing one, and when you're looking to launch it?

Okay, Martin, this is Ben. Yes, again, it's -- if you look at the value that we provide with PhosLo versus some of the other pricing, we're still in the 30% range. And so, there is significant opportunity for us to continue to price ours at the proper value. And our strategy in 2007 was to hold our market share, which was about 40-some percent in the US, and essentially increase the price for the value.

As we move into 2008, we would expect to see both now, not only an increase in the value of the product but also increase in the market share. And we started to see a little of that the first quarter. So, that's essentially what we're talking about.

Now, the next product that we will bring out will be in 2009. And I think at this point I won't go too much into the details of it because it's a little premature. But, we have the next product and probably the one behind that also on the drawing boards.

And just more broadly on the renal drug initiative, that's where -- I guess that's where you're going on the phosphate binding side. But, obviously you're still missing some of the key drugs there or access to some of the key drugs in kidney dialysis. Should we expect to hear more from you in terms of acquiring perhaps a bit of a dialyzer or something of that nature, or --?

Well, as I --.

And in what timeframe?

Yes, as I mentioned basically last year, I think we have a significant challenge this year to be able to show the medical community that there's a better way to treat basically excessive phosphorus than they've been doing for the last 15 years. So, we're going to focus on that this year. I believe we will be successful, and in 2009 we will probably take the next step. But, if we happen to be successful earlier, then we might stay and take that step earlier. But, right now, basically we know what we have to do in 2008, so we're pretty much focused on that.

Okay. What is the next step?

We'll tell you when it happens, okay?

Okay. Thank you very much.

Okay. You're welcome.

Thank you, Martin.

We will now move to Jack Scannell with Sanford Bernstein. Please go ahead.

Hi. Good afternoon. Two questions, the first relates to your slight margin compression outside of the US which you attribute to a growth through an increased number of new clinics and associated startup costs. Now, I'm just wondering if you could talk about the timing of that. Is this a sort of unusual bolus that's happening now that's then going to roll off? If so, over what time period, or is this actually something we should think of as a longer-term issue?

And then, the second question simply relates to some of the content of the discussion in Washington, DC. I think both DaVita yesterday evening and you have alluded to the fact that there are actual discussions going on. I just wonder if you could -- now, clearly, one never knows the outcome of these discussions, but are the things that are being discussed similar to, for example, CHAMP or the Medicare proposals that we've heard around bundled pricing, or what is the content of those discussions?

Okay, I'll take part of the first question, again, and then I'm going to give it to Larry.

Again, I want to reemphasize, though, a 17% operating margin in international growing at double-digit is actually very, very good. Okay? Now, it's -- so, our target is to be in that 17% range. However, at the same time, let me turn it over to Larry. He can explain the difference between 17.6 and 17.0 in terms of last year. Go ahead, Larry.

Yes, I think in the international business, we could expect to continue to see generally faster growth in the service business as compared to the product business which is a bit more mature, where we've been active for many, many years. And that growth in the service business, the high growth is occurring very much in a lot of the emerging markets both in Europe and Asia and Latin America.

As we begin the investments in those markets, we tend to have a relatively high fixed cost per treatment because they have a low number of clinics, and that mix effect is what slightly decreases margin. However, over time, we do then eventually get scale effects and we see those countries, and we already have many of the still emerging markets at a very good level of profitability, comparable to mature markets as well.

And so, I don't think -- I think if your question is is there a long-term trend toward ever declining margins in international, I think the answer to that is clearly no. And we will continue to be at the high level that we're currently at, as Ben mentioned, at 17% or somewhat above.

With respect to my knowledge of what's going on in Washington, I think the activity appears to be with the Senate Finance Committee, and the fact that there appears to be a physician fee fix again by July 1st. If there is no physician fee fix, which is low probability, but if there isn't then there won't be probably any medication -- or Medicare bill.

However, if there is a physician fee fix, we believe that the requirements to basically have a reimbursement for dialysis and some of the reforms that the House would like to do, and I think the Senate also supports, we would like to see those in this bill. But, it's just very, very difficult to know. I don't think any of us are privy with what they are thinking. They're keeping it fairly close.

So, it's a little bit hard to handicap this at this point in time. But, at least the conversation is going forward and I think there's a consensus that we should see some sort of reimbursement increase, maybe not with this bill but clearly in the 2009 legislation.

So, that's about all I can add to it. We should know fairly quickly, I think, in July whether indeed there is a physician fee fix and whether we're included in it.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS).

I think we have time for about two more questions.

We will now move to Holger Blum with Deutsche Bank. Please go ahead.

Yes, hi. Holger Blum, Deutsche Bank. Didn't get everything on the call. Sorry if questions have been answered.

So, could you maybe give us a guidance whether Q1 is indicative for the full year run rate for corporate costs and interest income, or whether there were any special effects in there or going forward?

The second question I think it was tackled upon. If you could come back to the US market and the margin which have improved in the first quarter, despite the fact that we have seen year-over-year a worsening of $3 in revenue per treatment and just $1 improvement in cost per treatment. Thank you.

Thanks, Holger. Why don't you take this, Larry?

Yes. Holger, good questions. We have talked a bit about them, but generally the run rate in corporate will be -- will -- the first quarter was generally indicative of what it will be. We had 27 million, and we do expect in the range of 25 million or slightly above in the coming quarters in the year.

In terms of interest income, we do also expect -- barring significant changes in variable interest rates, we do expect the first quarter also to be generally indicative of the full year and what we can expect there.

I think your second question was on US margins, and even though cost decreased by less than our revenues for treatment, how could we increase the US margins. And the answer that we've given is that the -- had an excellent performance in the product business including PhosLo as well as excellent cost control for the corporate overheads that we have in North America.

Thank you.

Thank you, Holger.

The last question comes from Michael Jungling with Merrill Lynch. Please go ahead.

Great. I have two further questions, please, one for Ben. Ben, I just wanted to clarify this bioequivalents in Europe. Has the opportunity for you changed over the last three, four, five months after seeing the impact of bioequivalents, i.e., is the EPO opportunity that you have with Amgen the same, better, or worse than it was perhaps three, four, five months ago?

And then, the second question is on the EPO usage. You mentioned you will see stabilization in the United States, and I'm very curious. Should we be following the impact of the safety of EPO in the oncology space? Did you see any impact as a result of the ODAC panel, or are your doctors very distant from the discussions of what is happening in EPO in cancer patients? Thank you.

Okay, now I understand the questions better. As far as the bioequivalents, it's still way to early to assess the safety of bioequivalents, from my standpoint, in Europe. We're very pleased with our relationship with Amgen in Europe. I think it's going quite well, and I think it's good for Amgen as well as ourselves. But, the best part about it is it's also, I believe, going to be good for our patients because we're working with them to improve the outcomes with the limited economic payment schemes around Europe. So, so far we're very pleased. Nothing about the introduction has changed that.

With respect to the EPO in the US, I think our physicians have pretty much segregated the discussion in the oncology area from ESRD. We had a special panel on ESRD in October, and so I think that's basically separated. I think we're going back to looking at what we need to achieve in ESRD and that's why I believe that we'll -- over the year, it will come back to a stable situation, and it's basically behind us. So, I think that's where we are, Michael, in both those areas.

So, if we see perhaps a further negative commentary on the use of EPO in breast cancer or ovarian cancer, what cancer it may be, you feel those negative safety concerns that may pop up will have no relevance at all on the use of EPO in ESRD?

I think that's the case. I think we've passed through that, and everybody knows they're two different applications of EPO.

Great. Thank you.

Thank you.

Thank you, Michael.

So, I think that was the last question, Bertrand. I think then we can actually close the call, if that's the case.

And I would like to thank everybody actually for participating in today's call. If there are any remaining questions or anything, please get in touch Investor Relations. We really appreciate it.

So, thank you very much. Talk to you next time. Thank you.

Thank you for joining us today.