Fresenius Medical Care AG (FMS) 2009 Q1 法說會逐字稿

Good day and welcome to the Fresenius Medical Care earnings Release of First Quarter 2009 Results Conference Call. At this time I would like to turn the conference over to your host today, Mr. Oliver Maier. Please go ahead, sir.

Thank you, Elaine. Good afternoon and good morning everybody on the call. Thank you for joining us for Fresenius Medical Care's meeting today, which will cover our first quarter Q1 2009 results and achievements.

By now you should have received all the material -- the copies and the press release and all the materials also available on our web page.

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

Concerning our Q1 2009 press release and investor news and at the end of our presentation, which we use today, we included, in compliance with the Section 401 of Sarbanes-Oxley, a complete bridge for any non-US GAAP measures that we utilize and relate such to the nearest US GAAP measure available.

With us today is Ben Lipps, Chief Executive Officer for Fresenius Medical Care. Ben will give you an update actually on the business development. And Larry Rosen, our Chief Financial Officer for Fresenius Medical Care, who will brief you on the results for the first quarter of 2009. That's it for my side. Ben, the floor is yours.

Okay, thank you, Oliver. Ladies and gentlemen, let me extend a warm welcome to you, our board members and all of our employees and associates around the world and those of you that have joined us on the internet. As Oliver mentioned in terms of the overall agenda, I'll do the business update, Larry will cover the financials, and after that we will go to questions and answers.

Moving to the first chart, let me say before discussing it that we're very pleased with the performance of the first quarter and the strong start to the year. I want to thank the entire Fresenius Medical Care team around the world. They put extra effort into the situation because of the headwinds with the currencies and some of the costs that were embedded in 2008 into our system and accomplished a significant strong start to the year. Again, thank you to everyone for your dedication and support.

Looking at the revenues for the year, $2.56 billion in revenue first quarter, in actual currency that was a 2% increase. But in constant currency it was an 8% increase and represented an 8% organic growth, which is clearly at the top end of our target.

Net income $198 million. That basically was a 7% increase in net income this year. However, between 2008 first quarter and 2009 first quarter, the euro strengthened by about 13% against the dollar. So if you look at the increase with respect to euros, it's about a 20% increase in net income in euros. Again, pretty much on target for our long term goals.

Moving next to the chart 5, or looking at the total revenue by quarter by region, North America turned in $1.77 billion, a growth of 6%. However, if you take into account that there was one less day in this quarter, it was an organic growth of 7%.

Again, a very good performance for North America and this is at the top end of our target of organic growth for North America. So I'd like to congratulate the team in North America, led by Rice Powell and Mats Wahlstrom.

Moving to the international, about 31% of our revenue basically was generated by international. They continued with a very strong organic growth of 11%. And looking at Europe, which represents about 70% of the revenue, even though we saw an actual currency growth of negative 8%, the constant currency growth was 10%. Again, clearly above the market by 200% and consistent with the past.

Again, I'd like to congratulate -- and again we saw excellent performance in Latin America and Asia Pacific. So I'd like to congratulate the board members, Emanuele Gatti and Roberto Fuste for excellent work in this area and their teams.

So if you now look at, well, what's the segment split, we had about 25% of our revenue are renal products sold to external customers. It had a constant currency growth of 8%. Again, clearly above the market around the world. So we had a very strong first quarter with respect to growth if you look at it in terms of constant currency.

Turning now to a little more information on the dialysis services on a global basis, we are treating about 188,000 patients in 2,450 clinics. Around 1,700 of those clinics are in the US. About 730 clinics are in international segment, international region. Of that, Europe has about 410 clinics. So we have an excellent mix, then, around the world with respect to clinics and we're the leading clinic provider in each of the major regions of the globe.

Looking at the growth, we see North America had a 5% growth, turning in almost $1.6 billion. Again, that's an organic growth rate of 6%, excellent for the dialysis services in North America.

International continued with a very strong 18% constant currency growth rate. So again, if you look at our overall growth in the service business for the first quarter, we had an 8% constant currency growth, which was excellent for the performance of the various regions.

I'd like to turn now to the next chart. On this slide we'll get a snapshot of some of the performance characteristics with the key metrics in our global service business. Again, as I mentioned, we had an 8% organic growth in revenue.

If you look at the same market treatment growth, 4.4%, and if you -- international continued with a 7% growth in same market treatment growth. That's pretty consistent with what they've been turning in for the last couple of years, excellent growth in that area. North America is at 3%, which is pretty much in line with the market and pretty much meets the targets that we're looking for in that area.

Revenue per treatment, we saw a 7% growth in constant currency in international. That's very reassuring. We saw increases in 9 of the 32 countries that we operate in in terms of operating clinics, again, maintaining the trend that we've seen over the last few years. And again, it reflects the -- basically the concept of payment per quality, which we clearly have developed with all of the countries and payers that we're involved with.

We built 33 de novo clinics and we still have about 50 clinics waiting for certification in North America. The good news, it hasn't really increased a lot. The bad news is it didn't really decrease a lot. So we clearly will probably do somewhere in the range of 100 to 120 de novos this year. In terms of building de novos, we'll probably build 30 to 40 less.

We have a number of ways of utilizing our clinics now that's quite exciting. We provide nocturnal dialysis in almost 100 clinics in the US where patients can come to the clinic at night, be dialyzed three times a week. They get excellent dialysis because they're getting almost 18 hours of treatment versus the 12 hours normally. And so we have a number of options that are underway around the world to utilize our clinics and basically we'll be somewhere in the range, then, of around 100 de novos this year.

Moving to the next slide, which is slide 8, I'd like to talk a little bit about the revenue per treatment in the US. We've seen further improvement in revenue per treatment in the US. We have seen a 4% growth from first quarter of 2008 to first quarter 2009. Clearly, we're quite pleased with that. The best part of it, it's basically about 80% to 85% rate increases, Medicare and commercials. And at the same time, our utilization is between 15% and 20% increase and that's primarily EPO coming back to a stable level, which we've seen start at the end of 2000 and 2008.

So we see a very favorable reimbursement trend continuing. Now again, this is not by accident. This comes from a lot of hard work and basically being able to show that we're providing additional quality, as I think all of the dialysis community is doing at this point in time. So it's a good investment by the payers and it also reflects, I think, what we now have is this stable EPO utilization.

With respect to FMC, our target for the year was a 2% increase in reimbursement from the average of 2008 and the first quarter clearly meets that target with a little over 2%. So we feel comfortable that basically we'll meet our requirements and our targets for 2008 and we're off to a very good start in 2009.

Turning now to the next chart, I'd like to talk a little bit about quality outcomes. I think anyone that knows our company and knows our management team and our employees, we're 100% dedicated, with an absolute commitment to both quality in products and quality in service. And so I'll give you some of the metrics and show you where we think there's some opportunities that we're hoping to continue to improve the quality for the patients that we treat.

Clearly, we've continued to provide over 95% of the treatments we deliver or meet or exceed the prescribed therapy. Again, in international as well as in the US we clearly have about 86% of our patients now that have hemoglobin in the US between 10% and 13%. This is about 75% in Europe at this point in time international.

With respect to nutrition, we're pretty well stuck at the 80% of our patients in the US being 3.5 grams/deciliter or higher and we're better than that in international. We're about in the 85% range. This is really one of our major areas of concentration because we know that albumin and nutrition is inversely proportional to mortality and therefore we're looking for ways to improve the nutritional status of our patients.

Quite frankly, with the various legal restriction in the US, we're pretty much up against the glass ceiling. However, it's very encouraging if we look at what we're able to accomplish in Portugal and in our demonstration project where we have more latitude to do the right things for the patients in Portugal, which, remember, we started on a bundle in April of this year. We have 93% of the patients with albumins greater than 3.5.

In our demonstration project where we have somewhere between 500 and 1,000 patients and we have the latitude to provide supplements to these patients, oral supplements, which about 50% of the patients qualify for it -- we have 93% of our patients with albumins greater than 3.5. So there is a way to do it. We just need to continue to work with the reimbursement systems and get us the latitude to do that.

Now, in the phosphate, meeting the phosphate targets, we're pretty well stuck in the 50% to 60% range. But I have high hopes that our phosphorous kinetic modeling, which we've rolled out as a pilot in first quarter, will give us basically some insight into how this complicated situation can be managed and provide some help to our physicians in managing it. So I think as you see this area over the next couple of years, you'll see some really major improvements in that area.

Now, the good news is we're pretty much stable at around 10 hospital days per year in North America, which is quite good, and about 8 in international. And our mortality in both regions is now in the 14% range, which is quite an improvement over where it was over the last five to six years ago.

So all in all, we're making progress in quality. We continue to work on it every day. And we have some ideas, if we can get some of the right restrictions removed, we can probably do even more of an improvement.

Now turning to chart 10, let me talk a little bit about the products business around the world and what has happened first quarter. Again, we saw very strong external product growth of 8% constant currency in the first quarter. North America had a growth of 14% and international had a growth of 6% in constant currency.

And if you look at -- remember now, the products business includes both the products -- the renal products, conventional renal products and the pharma business. In North America we saw the conventional renal products grow at about 7%, which is pretty much in line with what we said, which is double the market. And clearly our machine business continues in the 9% range.

However, our pharma business with the introduction of [Benefir], is growing at the rate of 120%, so we're essentially growing that business and we're quite excited about some of the things that's happening in the pharma business. In the products business international, again, we're seeing about a 6% growth constant currency, but we're also seeing a 40% growth in the pharma business constant currency. So both of those areas are basically on target, growing well and growing above the market.

On chart 11 I'll try to give you just a little bit of my limited insight into the US healthcare system. And again, it changes by day. I'm certainly not saying that whatever I tell you today may be not the case tomorrow. But I wanted to at least share with you some of the reasons why we at Fresenius Medical Care, and I think the industry, the coalition, Kidney Care Partners, we're all excited about getting some additional legislation passed that will help our patients.

Just to remind you, we were active last year and by working together as a community, we were able to actually improve the dialysis situation by essentially getting composite rates promised for 2009 and 2010 and getting an automatic inflation adjustment for 2011. So we clearly have already bipartisan support for dialysis due to the fine activity of a number of people, especially the Kidney Care Partners.

Now, looking at what is the healthcare reform initiatives that are in the news today, I sort of break them into three different categories. First, insurance reform, second, provider reform, and third, reduce administrative costs with advanced IT systems.

Now, insurance reform I believe the major objective there is to try to cover the 46 million citizens who have no insurance who are uninsured. This clearly does not relate to ESRD. 100% of ESRD patients are covered, either by Medicare or by commercial. So we're clearly not in the area where this is referring to us and to providing coverage for ESRD patients.

Now, at the same time, I think the community is sensitive that there is a discrimination going on against ESRD patients because they essentially during their working careers pay into insurance funds or basically into pools or companies. And then what happens is after they basically are unfortunate enough to essentially have ESRD, end-stage renal disease, after 30 months, then, they are essentially pushed into a different system than Medicare system.

So again, that's the only disease state that that happens to. And so we feel a little bit -- a little bit offended by that particular approach. So we're hoping that maybe some of the Medicare reforms will also address that issue at the same time.

Now, provider reforms, I think everyone clearly is excited about finding a better way to provide care. And that really applies around the world. And most of the thought goes to improving care coordination. And I think there's a number of descriptions, accountable care model, medical home model, we call it essential disease management integrated care, but we're very excited about that, too, because essentially the industry has been involved and Fresenius has -- basically has a demonstration project, as does [DaVita], where we have both shown much improved patient care.

As I mentioned, 93% of our patients have albumins greater than 3.5, and so there's a real opportunity to improve patient care and essentially control the cost. Since we, the dialysis providers, only have about 30% of the cost at this point in the dialysis treatment, the other 70%, there's a real benefit to coordinate that. So during these demonstration projects, working with our physicians we've been able to improve the patient care and essentially eliminate some unnecessary admissions to hospitals.

Our goal and our desire here is that that demonstration project, we be included in the next round, which is the pilot projects that basically it goes from demonstration to pilot to finally to reimbursable coverage. We would clearly like to be involved in that. We would like for them to learn and we'd like to share our experiences. So we're hoping that the provider reforms actually will provide us an opportunity to move the next step up to the pilot area.

Now, on the IT, I don't know that there's a whole lot. We've all had to invest in IT in the dialysis community because for 17 years we never got a reimbursement increase. So you can only keep providing good care by finding efficiencies. So I don't know that we're not way ahead of the healthcare environment in the IT area, but I'm not enough of an expert. I just know that the boys keep investing in IT, as Larry will tell you, and so it's clearly we're making investment there.

So, net-net, I really do not see a negative impact to the dialysis industry with these healthcare reform initiatives. In fact, I'm optimistic that we may be able to play a part. And I certainly support, personally as a taxpayer and also as a healthcare provider, the initiatives that are being discussed in Washington and we hope to be an active participant in those initiatives.

So now turning to my last chart, which is chart 12, just give you a little bit of a strategy update. It's too early in the year to do any more than that. But essentially I think what we've seen in first quarter is clearly we see the strong business fundamentals continue to be there. We've seen the revenue per treatment increase pretty much according to what we had targeted. We're very pleased that the mortality around the world has continued to improve and we see the organic growth at the high end of our targets. And again, we're pleased with that and we're working very hard to stay in our target range.

Looking at some of the strategic progress, as I mentioned, our renal pharma business, we had a target of being in -- having revenues more than $220 million this year. I think we're on track for that. The de novos, as I mentioned, we'll probably open or build 30 or so less de novos this year. But we're pretty excited about some of the things that we're doing in using these clinics in terms of basically nocturnal dialysis.

And finally, the integrated model, as I mentioned, we're seeing great success in our demonstration project. As well as we're very pleased with the results in Portugal to date and we think that this is a step in the right direction.

And finally, with respect to the renal product launches, I won't go into those. But we continue to bring out new products. And, quite frankly, I think most of them are -- have been well accepted and we're quite pleased with some of the things that they can do medically.

So I think that is pretty much my overview of the quarter. Again, a solid quarter, good start to the year. And I'd like to turn it over to Larry, who will give you more detail on the financials. Larry?

Okay, thanks, Ben. Good morning and good afternoon to everybody. I'm very pleased as well to report on what I think was an excellent first quarter and start into the year 2009.

Let me start with slide 14 and provide you with an overview of our earnings development. Both revenue and earnings were significantly affected by the volatile currency environment, which reduced revenue and earnings through the translation of depreciated local currencies into US dollars.

Further, we were affected by currency transaction mainly related to product purchases from Europe and Japan. I'll come back to the currency impact. We talked about it a bit after the full year in February and I'll come back to it again in this presentation.

But as Ben has shown on his slides, our revenue was $2.56 billion and grew at 2% in reported currency and 8% in constant currency. Most importantly, growth was carried by a strong organic revenue growth rate of 8%.

Our operating income was $396 million, an increase of 2% year-over-year. Here again, currency translation played an important role. Our operating margin of 15.5% remained unchanged compared to Q1 of 2008.

On the positive side, the margin was impacted by first improved revenue per treatment and sales of renal pharmaceuticals. Second, an inventory evaluation adjustment. And third, lower SG&A expenses, including some lower currency losses compared to Q1 of 2008.

Offsetting impacts were unfavorable currency translation effects and transaction effects related to product purchases, especially in Asia. Second, cost increases for personnel and pharmaceuticals, primarily EPO and heparin. Third, depreciation and amortization expenses, which increased mainly related to purchases of licenses, the implementation of new medical and billing systems, and the expansion of manufacturing capacity. And fourth, we incurred higher R&D expenses for field testing of new products and additional programs per extra corporeal therapies.

Net interest expense was $74 million and it decreased mainly due to lower LIBOR and Eurobor rates. The tax rate was right around 36% and thus net income attributable to Fresenius Medical Care was $198 million, up a solid 7% and well in line with our full year guidance, despite the various cost increases and the volatile currency environment.

One administrative remark to the presentation on net income, we adopted for the first time in Q1 of 2009 the FAS 160 in our presentation for FME. The effect of this adoption is factually just a relabeling of certain line items in the income statement. Most prominently, what was net income prior to FAS 160 is now called net income attributable to Fresenius Medical Care AG & Co, KGAA, or FME. There are no earnings effects on operating income or other income and expense items.

Going on now to slide 15, you see our EBIT margin development by segment. North America achieved an EBIT margin of 15.3% in the first quarter, representing a decrease of about 110 basis points versus the same period in 2008. The EBIT margin was affected by several items.

First, an increase in personnel costs and higher depreciation and amortization expenses. Second, increases in pharmaceutical prices, including in particular EPO and heparin. Third, the continuing costs of implementing and complying with the new conditions of coverage. And fourth, one less dialysis day than Q1 of 2008. Remember 2008 was a leap year so we had one more dialysis day in the first quarter last year.

These items were partially offset by, first, increased treatments coupled with revenue per treatment increases related to both commercial payers reimbursement and the Medicare composite rate increases and increases in the ASP plus 6 pharma reimbursement. Second, increases in EPO utilization. And third, high product sales growth driven by dialysis machine sales and the IV iron drug Benefir has been talked about.

In the international segment, our EBIT margin improved by 170 basis points to 18.7% compared to the same period last year. Again, several factors. First, lower SG&A expenses related to lower foreign currency exchange losses and excellent cost control. Second, an inventory evaluation adjustment. These items were partially offset by an unfavorable currency effect from products purchased in Europe and Japan, and lower product sales in some Eastern European countries.

Combined, the EBIT margin remained, despite the challenges we talked about in Q1, at the same level of 15.5% as we had last year. And this was generally in line with our expectations.

Going on now to page 16, we want to give you some further insight regarding our receivables and collections in the form of DSO, or days sales outstanding. In international, DSOs increased slightly by two days to 109 days as compared with both year-end 2008 and also Q1 of 2008. This is well within the band we're used to seeing. In considering the difficult economic environment, we think it's a very respectable development.

In North America we were able to reduce DSO by one day compared again with both year-end 2008 and Q1 2008. (technical difficulty) that the drivers of the increases in DSO which we saw last year were going to normalize. And just as a reminder, these were the implementation of a new (technical difficulty) identification numbers which just caused some administrative delays in payments from Medicare. And second, the ramp-up of receivables in Mexico due to our successful participation the tender for PB product.

Combined, our worldwide DSOs were reduced by two days compared to year-end 2008. This included a mix effect also affected by currency and we had a decline of one day compared to Q1 of 2008. We think this is an excellent development considering, again, the worldwide economic environment.

Going on now to cash flow, on page 17, here we show our cash flow development for the quarter. We achieved cash from operations of $156 million, representing 6% of revenue. Although this is below our target to achieve cash flow in the range of 10% or more of revenue, the low start into this year was anticipated and we do continue to expect to achieve 10% or more for the full year.

Drivers of the cash from operations in Q1 as compared to Q1 of last year were higher earnings and reductions in DSOs, but they were more than offset by increases in other working capital items. And these items were increased inventories, the timing of the payment of some payable items, payroll and insurance, and the clearance of some unreconciled payments and the timing of the recognition of some vendor rebates, just to name a few of the more important items.

Capital spending was also lower compared to last year, with $111 million spent for maintenance, de novo clinics and expansion of production facilities, primarily North America and Germany. As a result, free cash flow was $45 million Q1 of '09, just slightly higher than last year.

Acquisition spending was $36 million, so free cash flow was around the breakeven level, just a small free cash flow of $9 million.

Going on now to slide 18, we look at our debt and our debt to EBITDA, our primary leverage ratio has developed. On the left-hand side of the chart you see that our debt level decreased by $66 million to $5.67 million at the end of Q1 as compared to year-end 2008.

This was impacted in a meaningful way by currency, coupled with an increased EBITDA of $2.15 billion, though our debt to EBITDA ratio improved slightly from just under 2.7% at the end of 2008 to a rounded 2.6%, 2.64% at the end of March 2009. With this development, we're well on our way to achieve the guidance for year-end 2009.

Page 19 mostly repeats what we discussed previously, but it's important to keep in mind the significant impact that foreign currency can have on FMC and is having during these quarters where we see a lot of volatility. As we're reporting our financial statements in US dollars, therefore the weakness in the euro and some other emerging market currencies against the US dollar presents challenges for our reported results.

Our major issue in this respect is translation, meaning the conversion of local currency earnings into US dollars. Our largest translation exposure relates to the euro, and I've commented on the effect already. We've seen also weakness in some other currencies versus the euro and the Japanese yen where we do some manufacturing. This causes unfavorable transaction exposures in some local subsidiaries when we do purchases from Europe or Japan.

When currency exchange rates change gradually over time, our exposure is moderated as we're able to mitigate some of the effects through initiatives such as changing product sourcing from one country to another or by entering into longer term hedging contracts. The speed and magnitude of some of the recent changes, though, reduced, at least in the short term, some of these mitigating effects.

However, as we stressed in the full year presentation and continue to stress, our underlying business is very strong and very much on target, with 8% organic revenue growth and 7% bottom line growth and therefore these effects of currency are not so much of a concern. In addition, there are also some favorable currency developments and the stronger US dollar should, at the end, benefit our valuation due to the fact that we have a very large US presence and business.

Now to wrap up, we would like to reconfirm our guidance. We do that in a confident way. We discussed the challenges that we see, especially related to some cost increases and currency. But despite these factors, our results for the first three months show that we're really on track toward achieving the guidance for the full year.

Accordingly, we confirm that we'll achieve revenues of more than $11.1 million -- $11.1 billion US, net income attributable to FME of $850 million to $890 million US, or an increase of 4% to 9%, that our leverage ratio will remain below 2.7%. Capital expenditures are expected to be in the range of $550 million to $650 million US. We continue to think that acquisitions will be in the range of $200 million to $300 million. That ends my presentation and Ben and I will be happy to answer any questions you may have.

Thank you, Larry. Thank you, Ben. Elaine, I think we can open up the line for the questions.

Thank you. (Operator Instructions) We will take our first question from Tom Jones from JPMorgan. Please go ahead.

Good afternoon, Ben and Larry. Congratulations on another decent quarter. I just had two quick questions really. On the international business, the absolute treatment growth was about 10.6%. I think that the same store growth was only 7.3%. I just wonder where the sudden jump came from in the other 3.3%. Did you just open a raft of de novos or did you make a reasonably sized acquisition in the international space during Q1? And the second question --.

Well -- oh. Okay, go ahead.

And the second question was just on the North American product sales. Does North American include Canada and Mexico? And if so, was there any meaningful currency impact in the course because both the Canadian dollar and Mexican peso had a pretty tough time backend of 2008.

Okay, thanks, Tom. Why don't you go ahead, Larry, with the first one?

Okay. The answer to your question is yes, we did have a couple of rather important acquisitions, one in Latin America in Chile, another in France, that did contribute to the additional growth in the international region. And, Ben, did you want to comment on the second one?

Yes, the North does include Canada and Mexico. And you're absolutely right, there was a couple percent and that's why basically it's not significant compared to the North America, to the US, so it didn't really wiggle it that much.

Right. And just when you say a couple percent, you mean North America and -- sorry, Mexico and Canada are a couple of percent of North America sales in total or the currency impact was a couple of percent?

I think we're dealing with about 4% to 5% in terms of revenue.

Okay (technical difficulty).

4% to 5% in the currency impact would be a very negligible portion.

Perfect. That's very helpful. Thanks.

Thank you, Tom.

Our next question comes from Gary Lieberman from Wachovia. Please go ahead.

Thanks. Good morning. Maybe a couple of housekeeping questions. In the past you've given out an average hemoglobin level. Do you know what that was in the quarter for the US business?

Yes, it was around 11.6. I just -- I put the hemoglobin slides in the EPO slides because it's pretty stable at this point.

Okay. And it looks like you had a nice increase in the percent of patients between 10 and 13. Is there -- is that just sort of a stabilization that we're seeing or is it better use of iron or something else going on?

Basically what it is, is that the top is pretty much controlled by the reimbursement, so we're working pretty hard on the under 10 and we've made some progress this quarter. And we're doing a number of things in terms of more frequent hemoglobin measurements and things like this. So it's the under 10 effect that you're seeing there, okay?

Okay. And then what percent of the debt is floating at this point?

Larry, can you take that?

(inaudible) It's around 29%.

Okay. And any -- are there any swaps coming off in the near term that might impact that?

Not in the very near term. A couple came off recently. We were in the 25% range variable and we've picked off now to 29%.

Is that kind of the range you think you're comfortable in or you think you'll see a decrease there?

Excuse me?

Is that a range that you're comfortable in or would you look to do more or less of the debt on a floating basis?

It's a range that I'm generally comfortable with. I think it makes sense given our debt portfolio that we do have a reasonably high fixed rate component in the 70% to 75% range. Obviously when rates are very low and appear that they'll remain low for some time, base rates, then you want to have a little more exposure. And so I think 70% is a level that we're pretty comfortable with.

Okay. And then just -- I'm sorry, yes, finally just on the DSOs, what do you think the trajectory is for the international DSOs? Do you think that'll increase significantly or do you think it'll be pretty stable where it is?

Our goal is for it to be stable. If it increases, we don't think we're going to see any dramatic increases, even with the current economic environment. So our goal is that it's going to remain pretty close to the stable to maybe a slight increase or decrease of a couple of days.

Okay, great. Thanks a lot.

Our next question comes from Rudolphe Besserve from Societe Generale. Please go ahead.

Yes, good afternoon, everybody. A question, if I may, on the deceleration at the international level for sales of products. Would you say it's more linked to macroeconomic environment or would you say that it's linked to an evolution in the competitive environment? And where is this deceleration actually most visible, in Europe or emerging countries? And how do you see this lying -- evolving over the rest of the year?

And the second question on -- could you give us an idea of the percentage of patients who are currently under Cobra in your clinics and how this figure has evolved over the last few months? Thanks.

Hi, Rudolphe. Basically the first quarter, product-wise, always is our weakest quarter in the international region because there's always major tenders at the end of the year. And so if you look at it -- look at the issue here, the 6% growth is probably the low point for the year. We'll see it come back up into the 9% to 10%. So I wouldn't read anything into it.

There's clearly some machine orders that, because of the currency, they're -- they'll basically be later in the year when they come through. But again, the machine business is only 5% of our overall business. So I wouldn't read anything into it. It's just sort of a normal start to the year and extends a little bit.

As far as the Cobra, we haven't really published or given out that number. But let me tell you as far as the commercial -- the payors, the commercial payors or the percent of commercial revenue, we clearly have seen no degradation of our commercial -- of our commercial base, and so we're not seeing any effect there. In fact, it's increasing slightly in terms of the percent of patients on commercial. So there's not an issue that we see at this point due to the unemployment.

Okay, thank you.

Our next question comes from Kevin Ellich from RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking the questions. Ben, could you give us an update on heparin utilization and what your plans are for kind of facing that problem?

Okay. I guess I think I'm a little bit sensitive to this one. But we continue to see -- I think in the quarter it cost us another $5 million versus last year. Clearly, we're, as a company, I think as the industry, looking at ways to minimize the use of heparin. We clearly have some programs underway.

But in our budget for the year we're assuming that basically nothing changes in terms of the actual utilization of heparin. So I think at this point, just kind of assume that it's with us for the whole year.

I guess I should have rephrased the question. Do you have an alternative that you're looking at to maybe help lower the use or the cost as the year goes on?

Yes, there's a number of optimizations that clearly we are looking at. One of them, of course, is single use helps and of course we've already optimized that. Secondly, basically we put some procedures in place in the clinics to where we tighter what is the requirement for the heparin, in other words clotting time. In the past, if you exceeded it, there was really no issue. So we've tried to look more at patient specific -- patient specific clotting times and can we minimize the heparin.

Now, again, this -- so we have a number of programs underway to minimize the use of it, but they have to be done fairly carefully because you don't want to do something to jeopardize patient care. So at this point, I really don't have anymore than I can say on it than that.

Okay, that's helpful. Thanks. And then thinking about the integrated care model and the medical home concept, just wondering how efforts in Washington are going and if you could expand on any color on how you would participate in house at the medical home?

Well, we're -- as I mentioned, again, the accountable care model and the medical home model are really the models discussed in Washington. But our integrated care is essentially exactly that. So we're -- we've been receiving pretty warm reception from the various congressmen when we show as an industry what we've been doing with integrated care or the accountable care model.

So and if you look at the Senate finance sort of outline that they published on Monday in terms of what their objectives are, we think we essentially fit right into that. And we're excited about the idea of extending the pilot models and having CMS extend the pilot models because that's our next step in this area in ESRD. So right now we're pretty much on the same path with what's being discussed in Washington.

Okay. And then just two quick questions for Larry. One, CapEx, if we use Q1 as a run rate, it would come in $100 million lower than your guidance. What are we looking at in terms of the progression throughout the year and what [strategical] increase?

I do think we'll see it accelerate throughout the year. Now, due to currency, for one thing, we might see it come in toward the lower end of that range that we've given out. But I think it's too early in the year to say that definitively. So I think we'll see it accelerate a bit. And maybe we're headed more toward the low end of the range than the high end.

Okay. And then just on the debt in the press release, it looks like you guys refinanced some of the debt with your amounts in a couple of different tranches and the average interest rates about [6.95%]. What was that debt -- what was the cost of that debt before the refinancing?

Well, it was around 5.5%, so slightly higher but still in the current environment we're pleased with the result.

Okay. Thanks, guys. Nice quarter.

Thanks.

Our next question comes from Michael Jungling from B of A/Merrill Lynch. Please go ahead.

Great. Thank you for taking my questions. I'd like to ask three questions, please. Firstly on worldwide dialysis product growth, can you give us what the organic growth was if you exclude (inaudible) for this quarter?

Question number two, on your Medicare patients in the US, [Medpac] estimates the margins for providers will reduce to about 1.2% in 2009 compared to about 4.8% in 2007. I'm just curious whether you are agreeing with those statements and whether you're seeing a reduction in profitability for your Medicare patients.

And question three is on nocturnal dialysis. Can I get a sense of what the utilization is in your clinics for night use and whether this perhaps is a higher margin business going forward, if you can, indeed, fill those patients in the third or fourth shift at night? That would be very useful. Thank you.

Okay, Michael, the answer to your first question is basically in the 6% to 7% range in terms of organic growth in the products area.

And if you look at the Medpac, basically we are certainly in support of their statement because essentially what they're saying is that our costs are going up and without a reimbursement increase, the costs would go down. So I think at this point there's no disagreement with them at all. And they came out supporting the 1% increase, which was by statute, so I don't think it has a whole lot of impact on us.

Now, the nocturnal program, we have about 1,000 patients in that program. And it's a very interesting program. We have maybe 100 clinics geared up for it and probably could go more. And so essentially we see that as a very nice alternative to patients that want to essentially have dialysis -- have more dialysis and essentially they feel better. The outcomes are quite good.

But what it does is it removes their requirement to do it at home and it's a lot easier for them to just drive to the clinic and stay there. So we think that's going to grow and everything points to it. Now, of course it improves our margins because those clinics just sit idle in the -- basically in the evening. So we like it very much.

So, Ben, on the nocturnal side, can you give some guidance, then, of the utilization rate that you see from nocturnal use maybe by the end of this year and over a three-year period? Trying to get a sense of how much difference that could make to your earnings profile. Thank you.

Yes, I think it's a little too early to role it into the earnings. We're clearly looking at it as a very interesting alternative to home. And quite frankly, with the age of a number of the patients, it seems to be a pretty good therapy. So long term, you could see it in the 2% to 4% range basically in that range, okay?

Great. And one follow-up question on the financial side. Can I get a sense of why the bad debt expense has come in a little bit from Q4?

And secondly, did we have any nonrecurring costs in the first quarter specifically relating to the IV deal with [Glenica] where those costs will be expensed in 2008? Thank you very much.

Well, the -- take your -- the second of those questions first. There are no nonrecurring costs in Q1 related to the IV iron deal.

And as far as bad debt expense, we saw on a year-over-year basis the rate is hanging right around 2%. It ticked up very, very slightly to 2.1%, but I wouldn't necessarily read anything into that for this year.

Yes, I think the US [e] went down a little bit.

US went slightly down.

We're in the normal bandwidth of bad debt.

Great. Thank you.

Our next question comes from Lisa Bedell from Sanford Bernstein. Please go ahead.

Hi. Lisa Bedell from Sanford Bernstein. Thanks very much for your discussion of US healthcare reform. One other aspect of that that I just have some questions on is around Medicare Advantage. There's been a lot of discussion of reforming that system. Could you just talk through what your exposure is to that, if you could maybe talk about profitability of those patients versus regular Medicare patients and whether significant changes to that patient population could have a material impact?

Well, I probably can't answer all your questions in that area. There's certainly a lot of discussion on Medicare Advantage. And again, one of the things that ESRD patient is not essentially allowed to go from Medicare to Medicare Advantage. And so essentially it'll have no impact, then, in terms of the Medicare patients going to Medicare Advantage.

Now, there is some question whether we should -- those patients should have the right to do that because all the other -- all the other disease states do. But right now they're prohibited. So that's one of the issues that takes it off the table for us or it makes it a positive if someone sees the reason to include our patients in Medicare Advantage because there's usually some uptick in terms of reimbursement.

And there's also with Medicare Advantage, one of the attractiveness of it is that they get more benefits than you do under Medicare. And so the patient does have benefits.

But I sort of treat that as a neutral. And I guess, therefore, as I look at Medicare Advantage in overall, I don't think it has a tremendous negative or positive effect on FMC at this point in time.

Thanks very much.

Our next question comes from Ilan Chaitowitz from Redburn Partners. Please go ahead.

Hi. This is Ilan Chaitowitz from Redburn.

Hi, Ilan.

Hi, Oliver. Hi, Ben. Just on --a few questions. On the North America EBIT margin, that did come down a bit in Q1. I was wondering for the full year are you expecting North America EBIT margin to be down flat or slightly up versus what we saw in 2008. That's the first question.

The second question is the -- we had some word from DaVita with regard to the MSP extension. And without going into any possible outcome, can you just let us know is that on the agenda on Capital Hill from what you're hearing?

And the final thing is we've seen pretty much every company in the universe in Europe starting the impact of the economy on their business. Are there any indications of where things might go or at this juncture can you see where there is some weakness hitting your business or are things just still very resilient?

Okay, I tell you what. Let me take the MSP. And then, Larry, why don't you handle the other two questions.

I think there's a logical tie between the discrimination that our patients are now suffering as part of the system because they do not have the right to stay in the commercial system where they get additional benefits or the fact that they're going to leave that system in 30 months, nobody takes the time to plan the patient care as carefully as you would know if that patient were going to be with you for their lifetime. So from the negative side, there is a discrimination there that we hope gets changed.

Now, one of the ways you could certainly exchange it is essentially extend the period of time where Medicare is a secondary payer. That's also a very good pay-go. So it just depends on where all this lands during the year in terms of the need for pay-go's and does anyone want to solve this inequity. But it's clearly being discussed as an inequity, which it is. So from that standpoint, I think people are talking about it.

Ilan, on your other two questions, first on the North America EBIT margin, we are hesitant and have not and do not give out guidance on EBIT margin for the total company or for the segment. We're giving top line and bottom line guidance for the year and updating that every quarter. So I'm going to stay away from giving any very specific EBIT margin guidance.

What we have said in the past is that if you have a year where nothing unusual is happening, that we would expect an upward drift in EBIT margins of on the order of 20 basis points per year. But what year is an average year? There's always something special going on and we've seen that every year since 2005. So we're not going to give out specific EBIT margin guidance for the year.

On the third -- your third question, the impact of the economy on the business, it's a bit of a complicated question. I think the first and most important thing is that our industry is about as insulated from the economic environment as one can be. Or let's say from economic weakness or cycles in the economy as an industry and business can be because of the chronic nature of the disease that we treat and because of the identity of most payors. And so we have not yet really seen much impact on our business from economic weakness.

The one place where we might see a bit, and I would stress really only a bit, is potentially in the machine business where people have potentially some discretion to put off decisions to purchase. On the other hand, there are a number of positive impacts from the economic weakness that we can and might expect. And those are things like reductions in fuel and energy costs, reduced location costs, even potentially reduced labor costs. So -- or let's say decreases in the rate of increase of labor costs.

So I think on balance, if anything, the economic environment is going to be slightly positive for us.

Yes, I think, to talk a little bit, Larry, on the machines, they represent about 5% of our overall revenue. The one thing that you can do is postpone if you're going to replace old machines. But clearly, the growth of patients continues, so people have to buy new machines. So we don't even expect that to be impacted in a major way.

It's only a temporary effect.

It's only a temporary effect. So at this point, that's -- we don't see that much impact.

Thank you very much.

Our next question comes from Martin Wales from UBS. Please go ahead.

Good morning, good afternoon.

Hi, Martin.

Hi. First off (technical difficulty) help me with what was going on with Benefir. You made two statements on service that were slightly contradictory, so I'm sure I'm missing something. But you indicated that 6% to 7% of your growth in dollars of products worldwide was organic, therefore (inaudible - background noise) most of the rest came from Benefir, which (inaudible - background noise) of $20 million to $30 million range of growth from Benefir. Separately you stated that it's heading for a run rate of $220 million a year. Could you help me square those two issues?

I think you were asking the growth rate of products, and I'm talking about the growth rate of Benefir, the question is what is the target for Benefir for --.

My question is what did Benefir sell because you're talking about 3% of your 9% cost of currency growth coming not from organic growth, which I'm guessing is largely Benefir given that [you already started selling that] in the US this quarter. On a separate slide you indicated that Benefir was heading for a $220 million year run rate. So I'm just trying to understand what Benefit is actually doing in your (technical difficulty).

I think probably the 6% was slightly overstated. With Benefir we have organic growth of around 8% in the total worldwide product business. Without it we would be sub 5%.

In terms of that $220 million number you're assuming you'd grow Benefir further across 2009, is that correct?

Oh, yes. Because we're just --.

(technical difficulty)

Yes, that's what -- so the (inaudible) on the products is -- my 6% is probably a little bit high, more like 5% because I hadn't looked at that. Yes, we're just ramping into the Benefir at this point in time. And in the US we started in November and we're just starting in the second quarter in -- basically in Europe.

So our goal would be at the end of the year to be around the $220 million. Of that, probably $200 million will be -- $180 million of it'll be in the US. So we're pretty close to -- that's our target. Does that answer your question?

yes. That's pretty --

We're just ramping into it at this point in time.

An increase throughout the year.

In terms of (technical difficulty) I know you haven't said much and you won't want to say too much about the economics of the deal. Can you add a little bit more color about how much money you make out of this and what you have to do to optimize your return? I'm guessing it's some kind of [inaudible - background noise] based discount approach. Maybe you could give us a little bit more color on that.

Yes, we've been fairly quiet on that. But at this point I'm not sure how to answer that. I think all we said is the overall margin of the drug business would be in the range of double our normal margin. And that, I think, is about all I've said over the last year or so.

You consolidate that sales.

I'm sorry?

You are consolidating Benefir sales, though, is that correct?

Yes. You'll do that -- consolidate external sales, you don't consolidate the internal sales, okay?

Okay, that's perfect.

Yes. So that's why you can't tie previous information exactly to what we're doing, okay?

Perfect. Thanks very much.

(technical difficulty) American region.

That's great.

Does that take care of --.

Yes thank you.

Okay, thank you very much.

Our next question comes from the Christian Packebusch from HSBC. Please go ahead.

Yes, hello, gentlemen. It's Christian Packebusch from HSBC. Thanks for the update given so far. And my first question is a follow-up on the (inaudible) US. And your private payers should be somewhere in the mid 30 percentage in North America in I assume in Q1.

And I was wondering whether can -- you can give us an update or bit of indication what, let's say, 1 to 5 percentage point shift in the payer structure towards more Medicare, Medicaid would mean to your margins in the North American region in the service unit, particularly on background of longer than normally (inaudible) downturn.

And secondly, also on the product revenues in the first quarter, you had just said a bit on Benefir, but could you please remind us on the portion of your entire product revenues in Q1 that came from renal pharma? Thank you.

Okay. Not going to do very well in answering your questions. First of all, we don't give out the information on Cobra. I can certainly check on that if you call Oliver. We can see whether we want to release it. But we generally haven't. What I did say, though, is our commercial mix has not decreased. It has actually slightly increased over the year. It's not in the range of 30%. It's more in the range of 20% in terms of patients.

As far as the exercise of 1% shift, I can't -- I don't know that number and primarily it hasn't been a number that I keep in the back of my mind because I don't expect it to happen. So it's not something that I walk around with every day. So at this point in time, if you want that calculation, if you could give Oliver a call, he can provide it to you. It's not something we expect to happen.

As far as the actual amount of sales of the renal pharma, the renal pharma includes more than Benefir and so we basically have not broken out the various components of that. And so I don't think I can give you -- I can answer that question either.

Okay, thanks.

Okay. Sorry about that.

No, it's okay.

And again, it's not that significant. As we get into 2010, your $200 million range, then we'll be breaking it out, okay?

(Operator Instructions)

We will take our first question -- it's a follow-up from Michael Jungling from B of A/Merrill Lynch. Please go ahead.

Great, thank you. I have two more questions. Firstly, on [phoslo], how far are you away from launching an improved and [inaudible] version of your phosphate binder?

Question number two is the cost per treatment. Can you provide a bridge on how we get from $277 per treatment in Q4 to $282 in Q1 of 2009?

And then question three is on the dialysis bundle, when do you think CMS will issue its proposed bundle? Is it a 2009 event as we expected previously or may go into 2010? Thank you.

Basically the signals that it would be the end of 2009, early 2010. But I think it will be in the fall of 2009.

As far as the next generation of phoslo, we expect we could -- we are in phase 3 and we would expect that that will launch in first quarter or late first quarter of 2010.

Larry, can you take the bridge on the cost?

Yes. There the most significant impact is personnel increases. The second most important one are pharma increases. And then we have some smaller items like higher depreciation and amortization expense, some higher location costs. But the two really big ones are pharma increases and personnel cost increases.

Thank you.

Okay, I think there are no further questions, if I am correct.

Yes, indeed, that's correct. There are no further questions, so I would like to turn the call back over to you for any additional or closing remarks.

Great, thank you very much.

We'd like to thank everybody for participating in today's call and for being so active in the Q&A session. And we talk to you actually around Q2 in August. Thank you so much. Bye-bye.

Thank you.

Thanks.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.