Fresenius Medical Care AG (FMS) 2009 Q2 法說會逐字稿

(audio in progress) Thank you, Katie. 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 second quarter and first half year results and achievements.

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

Let me start as usual to comment on our Safe Harbor statement. This presentation today 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 described in detail in the Company's reports filed with the SEC and the Deutsche Berger.

Concerning our Q2 2009 press release and investor news 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 us an update on the business development, and Larry Rosen, our Chief Financial Officer for Fresenius Medical Care, who will brief us on the results in detail for the second quarter and the half year for 2009.

This is it from my end. Ben, the floor is yours.

Thank you, Oliver. Ladies and gentlemen, let me extend a warm welcome to you, our Board members, and all the employees and associates around the world who are joining us on the Internet. As Oliver said, in terms of the agenda, I'll cover the business update, Larry will cover the financials, and then we'll open it for questions and answers.

Turning now to slide 4, let me say that I'm very pleased with the solid performance we had in Q2, and the performance of our team around the world, despite the strong currency fluctuations that we've seen, and also the cost pressures that we carried over from 2008.

But before I start through the numbers, I'd like to share with you a decision that we made relative to continuing some very important new therapy programs during this six months. As I mentioned in the last two analyst meetings, it would take us about six months to, essentially, work out some of these costs, and we expect them to be improved the back half of the year.

And so, we felt that it was very important to continue these programs, the focus on quality. I'm very pleased to mention that over the past year, we've seen our mortality in both Europe and in the US improve by over 100 basis points, so we're clearly making progress in our clinics -- our physicians and everyone working together.

But there are three interesting new therapy programs that we've been basically working with for (technical difficulty) three or four years. And these are the clinic nocturnal program in the US, that has about 1,000 patients, growing rapidly around 30% per year, our online hemodiafiltration therapy, which we're offering in Europe -- we have over 12,000 patients on this therapy. Again, we are allowing it to expand at almost 50% this year.

And the third program was our demonstration project, or our integrated care, or now as it's known, our accountable care model, where we essentially are allowing it to grow at about 30%, and where we are looking to improve the coordination, and therefore the outcomes for the patients in these programs.

Even though it's preliminary data at this point, I'd like to just share it with you before I get into the numbers. We were looking basically at, could we do something to improve the nutritional status of these patients, and I'm pleased to say the preliminary data shows that in the clinic nocturnal, where we dialyze three times a week in our clinics for (technical difficulty) hours, we now have over 93% of the patients with a albumin greater than 3.5, and you know, that's quite a bit more, I'll show you later, normally.

In the online hemodiafiltration, we're essentially at the 90% level also in terms of albumin, and in our study on demonstration projects, we're at 93%. And there, we give basically supplements to those patients that need it.

So we're very pleased that we have three ways to improve the nutritional status. The other area we were looking at in terms of clinic nocturnal and essentially online hemodiafiltration is, can we have more of our patients reach (inaudible) standards with respect to phosphate concentration and removal. And I'm pleased to -- even though these are early data, I'm pleased to indicate that in the nocturnal program, we now have between 55% and 60% of our patients there, and in the online hemodiafiltration, between 60% and 65%.

The long and short of it is, we have continued these programs, and we feel that they are something that you just can't slow down, or you can't start and stop, and I'm very pleased with the results to date.

Now, as far as the rest of the area of quality, all of our plants are running around the world near Six Sigma in the products area, so again, I feel that our focus on quality has not slipped at all, based on a very turbulent year with respect to the economic environment around the world.

Now, moving to slide 5, I'll talk a little bit about the revenue. I think you've seen -- we basically reported it today. In dollars, we increased 4% revenue to $2.76 billion. In constant currency, that's 9%. Net income, up 5% in dollars. And clearly, if you looked at that, the dollar strengthened versus the euro by about 13%, and so if you look at it in terms of euro income, year-over-year it's up about 21%.

The good news also is, our organic growth is at the high end, around 8%. And of course, the EBIT, Larry will talk about it later. The margin reflects basically higher personnel costs, pharma costs, and some raw materials, which we talked about the last couple quarters, which we have plans to mitigate the second half of the year.

Moving now to the next slide, slide 6. You can see pretty much for the half year, we're on the same track. The euro has stayed -- about a 13% increase over the dollar. We reporting in dollars, then we have a 3% increase in revenue to $5.3 billion, but at constant currency, it's 9%. And net income is up 6% in dollars, and if you looked at it in euros, it would be about 20%.

And again, for the half year, our organic growth stayed in the 8% range, so we're very pleased with our overall business, by regions and also in terms of our growth for 2009.

Turning to slide 7, you can see the revenue by region. I'll point a few (technical difficulty) numbers here. North America had a very good quarter -- almost $1.9 billion, a growth rate of 9%, which is the high end of their target. International, almost $900 million. And again, in constant currency, that's a 9% growth. And we've seen a very strong growth in Latin America -- in constant currency, again, double digit.

We continue to have about the same mix of services and products. About 74% of our revenue is in service.

Moving now to slide 8. I'll talk a little bit more about the global service business. Again, we had a very strong revenue growth in North America -- 9% growth in North America. International continues to grow at double digit, in constant currency, around 13%. And we essentially have about 190,000 patients that we're treating in our approximately 2,500 clinics.

So again, the revenue hit the high end of our target with respect to growth in constant currency in the dialysis services business.

Turning now to the next slide, which will give you a snapshot of our performance and the key metrics in the global service business, we -- as I mentioned before, we now have an organic revenue growth for the second quarter of 9%, 8% in the US, 11% in International. We've also achieved our target in North America to have a same market growth rate of 4%. In the US, it's 3.6%, which has been our target for the year, so we're very pleased with the same market growth. And in the International region, we continue to operate between the 5% and 7% same market treatment growth, coming in at 6%.

Looking at the revenue per treatment, our target for this year was a 2% constant currency growth in International. We've achieved that, even with a number of very difficult headwinds. In fact, we have seen revenue increases in nine of the 33 countries that we operate in. And again, that is a testimonial to our quality, and our payors understand clearly that quality, and how it benefits them in other hospitalization costs.

In the US, we had a 5% increase, and I'll cover that a little bit more here in the next slide. We did complete 24 de novos. The bad news is, we still have about 50 of them waiting for certification in the US. The good news is, CMS and the various regulatory bodies have noted the difficulty that we're imposing on patients in terms of traveling and scheduling, and they have made a commitment to, essentially, speed up the certifications. So we really feel that everybody is getting behind these, so we hope as we go through 2009, we'll be able to bring some of these online, and that clearly will be a help to us in terms of our operating costs, because they're kind of sitting there right now all ready to go, treating a couple of patients.

Moving now to slide 10, I want to talk about the revenue per treatment in the US, a very strong quarter. We saw a 5% increase in the revenue per treatment comparing 2008 second quarter to 2009 second quarter. As you remember, we had mentioned that our target for 2009 was a 2% average year over year, because we felt that basically with all the issues in terms of black box warnings and everything on EPO that it all pretty much -- the physicians had come to their new prescribing patterns, and we thought that would be pretty stable this year. And clearly, we are ahead of that target. We're at 3% at this point in time, and that's probably -- we'll end up, then, beating that target for the year.

Now, the good news is that of this reimbursement increase quarter to quarter, 90% of it is rate, Medicare, and commercial, and 10% of it is utilization. Primarily, we're swinging at the high end of our EPO at this point, and as I mentioned, we do oscillate back and forth around a norm.

So again, a very good performance on the part of the team in North America in the revenue area.

Turning now to slide 11. On slide 11, we'll talk a little bit more about the quality. Again, I think one of the things that we always note each quarter is that we're now in the -- 95% to 96% of the time, we're providing to the patient the -- basically the prescription for dialysis that's being ordered by the physician. So we're pleased with that. That's probably where we'll stay. To do any better than 95% is probably going to be difficult.

In terms of hemoglobin levels, I put a new metric on the chart. Its metric is 10 to 11. And in other words, what number of patients are between 10 and 11 grams per deciliter. You can see we're making progress on that chart, both in International and in North America, moving from basically 60% to 63% in North America -- I'm sorry. I think I misquoted. It's really 10 to 12 grams per deciliter.

And basically, what our physicians are focusing on is those patients that are sub-10, what can we do, essentially, to improve their outcomes. And that's what, basically, what we're doing then, or what they're doing to, essentially, improve the number of patients in that bandwidth.

Looking at albumin, I think we're pretty well stuck in the albumin area with the reimbursement system being what it is, but I wanted to -- I think I talked about that. We did have three programs underway trying to improve this, because it's one of the strongest drivers of mortality in this entire -- this was identified 20 years ago.

Now, the other thing is I've to mention, that Portugal, where we're operating a bundle, we're also at 93%. So I think if we get some of these reimbursement things done properly, we'll be able to provide better patient care.

In the phosphate area, we're making absolutely -- or, making no progress. We're doing a better job in Europe, but we're stuck at the 52%. And essentially, what we're doing in that area is, we've got another project going on where we actually have a -- developed a phosphate -- phosphorous kinetic modeling, interestingly, which is just in the pilot stage. We have a few hundred patients on it in those clinics where we're operating that.

Now, we're operating between 55% and 60% phosphate patients reaching the phosphate level. And so basically, we've got a couple approaches to triangulate this, and we think that over -- this is one of the areas that we believe that we need to make some progress in the next few years.

Now, hospital days, we continue to improve in the US. Again, every 0.4 of a day is worth about $60 million worth of savings to the payors, so everybody wins, including the patient. Probably in the International area, we're in the high single digits. Don't believe that we'll be able to improve that too much, and so essentially, that's probably the target that we're going to hit for in the US also, but that's going to be sort of the end of the improvement.

Moving next to page 12, I'll talk a little bit about the products. We've seen an increase in the external revenue of 7%, North America at 10% and International at 6%, constant currency. I think the good news is, we have basically worried a little bit at the beginning of the year that with the economic turmoil going on, there may be essentially a drop in machine sales, especially in the International area, some of the tenders. But I want to say that our machine volume has stayed in the 11% range, and so we really have not seen a major impact in terms of the economy on the machines. And as far as the disposables and the pharma, which is part of the products, basically that continues to grow pretty much on target.

So the machine business and the dialyzer parts business around the world continues to meet our expectations, and essentially, grow quite well.

Moving next to slide 13, trying to basically give a little bit of an update on the US legislation. Really, there's nothing conclusive that I can say at this point. I think you've probably seen as much as I know in the press every day. But I do get the feeling that it's moving the healthcare reform initiatives, or moving in a direction of lessening the threat to the dialysis patients. But honestly, that's just a day by day thought.

So we're very active as a group in Washington, as an industry, to make sure that whatever happens, that the dialysis patients clearly are protected with respect to quality.

We still are intrigued by the accountable care organization model, which seems to have broad consensus. This is very similar to what we are doing in the demonstration area. And I think we as a company, as well as the (inaudible) and everyone have a commitment that if indeed something like this accountable care organization is available for dialysis patients, we will work with our physicians, with our product customers, and we'll see if we can make sure that this is a win-win for everyone, because we know from our demonstration project, it clearly is a win for the patient.

As far as bundling, there's rumors that basically the bundle rule will be out soon. Again, I would like to caution that if it does come out, it will go through a review and comment process, which will probably take months. And I want to also indicate that it's basically -- the devil is in the details. We're optimistic that CMS will clearly, as they have in the past, get it right, but we'll have to look at the risk adjusters, the outlier payments, look at everything. But we will work with CMS, as we have been, and I think as the whole industry has been -- make sure that this is right for everyone when we start in 2011, which is the intention, I think, of Congress when they passed it.

So at this point, I don't have much to report except we're all very active, and I think we're aligned, that we want this to work for everyone.

So my last slide, on slide 14, again, if you look at the first half year, we've seen strong organic growth. We're clearly on target to achieve our guidance for the year, and I continue to see improvement in our quality. We have not backed off on any of our quality programs around the world. We feel this is the heart of the Company.

And, I believe that we have continued new acceptance of our products, and I'm particularly impressed with the acceptance we've had with our new Liberty Cycler internally as we worked out the bugs. We, for the first time, have seen PD growth within our organization. And so, I think that clearly, we've got the right products, and they're performing well.

Now, we do expect margins will improve the second half. As I indicated, we will be trying to work out and mitigate some of the costs that we've been struggling with the first half. And actually, it's kind of fun to do, but at the same time, we've not sacrificed any of the programs that we should be doing. We will be continuing to invest in basically longer term R&D. We've got some exciting things going in this area, and we'll continue to do that. And so you'll see our corporate R&D will be a little higher than what it has been in the past. But these are programs that we should be doing for the next five to eight years.

So that's pretty much my presentation this morning. Let me turn it over to Larry, who will handle the financials.

Okay, thanks, Ben, and good afternoon to everybody. Let me start with slide 16, and provide you with an overview of our earnings development.

Revenue and earnings significantly affected by the volatile currency environment, reducing both through the translation of depreciated local currencies and to US dollars.

Further, we were affected by currency transaction effects, mainly related to product purchases from Europe and Japan.

As Ben has shown on his slides, our revenue was $2.76 billion, and grew at 4% in actual reported currency, and 9% in constant currency, and here, growth was carried by a strong organic growth of 8%.

Our operating income was $418 million, a decrease of 3% year-over-year. This absolute decrease is partially a result of currency translation effects. Just to give you an impression, in Q2 2008, the translation rate for the euro into US dollar was 1.56, and the respective average rate for this year was 1.36, an appreciation of the US dollar of 13%.

Mainly our International business, which generated $154 million of operating income, was affected by these translation effects.

Our operating margin decreased from 16.1% to 15.1%. This decrease reflected the following developments.

First, we faced cost increases in a number of areas like pharmaceuticals, including Heparin. Personnel and unfavorable currency transaction effects from the purchases of products in Europe and Japan, the higher revenue per treatment, especially in North America, covered most of these absolute increases. However, the margin decline, due to the almost equally high increase in cost per treatment.

Second, our pharma business, a mix shift and a resulting margin effect caused by generic competition to PhosLo, which decreased our sales of this own phosphate binder. The lower revenue was more than compensated by the revenues of the licensed IV iron drug, Venofer, albeit at lower margins. And finally, third, increased legal expenses.

Net interest expense of $76 million decreased, mainly due to lower short-term LIBOR and EURIBOR rates. A low tax rate of 30% was impacted by two items. First, a tax claim currently being litigated in court has been reevaluated based on positive new information that became available during the second quarter of 2009. This led to a recognition of a non-recurring tax benefit of $16 million.

Second, associated with revised presentation requirements for tax expense related to non-controlling, or what used to be minority interests, we reduced tax expense and increased by the same amount the net income attributable to the non-controlling interest for all comparable periods. This had no effect on the bottom line, the net income attributable to FME.

As a result of all of these developments, net income attributable to FME increased by 5%, to $221 million, in the second quarter.

Now, going on to slide 17, you see the development during the first six months. Again, there were significant effects of currency fluctuations.

The revenue development during the six month period was very consistent with what we also saw for the second quarter. Revenue of $5.32 billion represents an increase of 3% in actual currency over the comparable prior year period, and again, a 9% increase in constant currency, and also 8% organic growth.

Operating income of $813 million showed a decrease of 1%, again, partially due to currency translation.

Our operating margin was 15.3%, a reduction of 50 basis points year-over-year. The reasons for this reduction were generally the same as just mentioned for the second quarter. On the next slide, I'll try to provide even more perspective on the operating margin trend.

But again, finishing up this slide, again, interest expense benefited from lower LIBOR and EURIBOR rates, reflected in a decreased net income expense of $149 million, as compared to $165 million in the prior year.

And due to the recognition of the tax benefit discussed before, the tax rate for the first six months was reduced to 32%, and thus, net income attributable to FME was $419 million, up 6%, and well in line with our full year guidance.

Now, on to page 18. Here we tried to provide you an overview and even more perspective on the major impacts on our operating result in Q2. And here we list the pluses and minuses listed in priority order.

On the positive side were increases in commercial payor rates, normalized pharma utilization rates, primarily EPO, cost efficiencies in our product business and in manufacturing, in particular in North America. This also includes lower freight and distribution costs resulting from lower energy prices.

Some of the negative impacts, mainly related to the US, were significantly higher costs for personnel and other service business costs. The latter represents items like location costs, costs to comply with the new conditions of coverage, and a backlog of de novo clinics, as Ben mentioned, which are awaiting certification, and which need to operate on a low number of commercially insured patients until Medicare certification is received.

In addition, pharmaceutical costs, mainly Heparin, which is not separately reimbursed, had an unfavorable effect on the EBIT margin. Further, we saw a product mix effect caused by the revenue shift from PhosLo to IV iron, due to the generic competition for PhosLo. And also, increased corporate expenses related to IT project costs, especially for the introduction of the new medical and billing system, as well as higher legal expenses.

On to page 19, you can see here visually our margin trends, and focusing on the total group results on the bottom chart, the EBIT margin decreased by 100 basis points compared to prior year. Here, primarily the margin development in North America is reflected, as well as higher legal and R&D expenses at the corporate level, and higher depreciation and product mix effects in International.

During the first six months, the combined EBIT margin was 15.3%, a reduction of 50 basis points, and the development was largely driven by the factors already mentioned.

At least some of the margin reduction we saw in Q2 can be attributed to temporary effects which should reverse over time, allowing growth, (inaudible) and efficiency effects to again provide a slight upward bias to future margins. This is something we expect already in the second half of this year.

On to page 20. I'd like now to turn to our DSO development.

In the International segment, DSOs increased slightly by three days, to 112 days, as compared to Q1 of 2009. This increase reflected minor payment delays by public healthcare organizations, and also, to a lesser extent, private insurers. Considering the difficult environment, this was a development that could be expected.

In North America, we were able to reduce DSO by two days compared with Q1, and the reduction was a result of, first, some US states attempting to become current with their creditors to qualify for parts of the US stimulus program, and second, the positive result of our intensified collection efforts.

Combined, our worldwide DSOs remain unchanged compared to Q1. In respect to cash flow generated in Q2, we achieved a one day benefit, as DSOs increased by one day in the comparable quarter last year, while they remained stable this year.

For the first six months of 2009, DSOs decreased by two days, while we saw an increase of four days in the comparable period last year -- accordingly, a net favorable swing of six days. We believe this is a very positive development, and despite the difficult worldwide economic environment.

On slide 21, we show our cash flow development in Q2. With $282 million of cash generated from operations, we're back at our target of at least 10% of revenue as operating cash flow. We do continue to expect to achieve this level also for the full year. Drivers of the cash from operations in Q2, as compared to Q2 of last year, were higher earnings and lower increases in receivables, inventories, and other working capital items.

Capital spending was also lower compared to last year, with $139 million spent for the maintenance of existing clinics, de novos, as well as the maintenance (technical difficulty) expansion of production capacities, primarily in North America, Europe and Asia. As a result of these developments, free cash flow was $143 million in Q2.

Our acquisition spending, net of divestitures, was a positive $5 million, and reflected the acquisition of dialysis clinics, mainly in North America, and the payment of pharma licenses, offset by the repayment of a short-term loan provided to our parent, Fresenius SE. All of this provided a free cash flow after acquisitions of $148 million.

Slide 22 shows our cash flow for the first six months of 2009. We achieved cash from operations of $437 million, which, due to the slow start in Q1, represents 8% of revenue. As mentioned, we expect to catch up, and achieve for the full year the target of at least 10% of cash from operations in percent of revenue.

Drivers of the cash from operations during the first six months, as compared to the same period in 2008, were higher earnings and lower increases in receivables, partially offset by increased inventory and increases in other working capital items.

Capital expenditures were lower compared to last year, with $249 million spent for maintenance, de novo clinics, and expansion of production capacities, primarily in North America, Europe and Asia. As a result of these developments, free cash flow was $188 million in the first six months.

Our acquisition spending, net of divestitures, was $31 million, and reflected mainly the purchase of dialysis clinics in both North America and the International segment, as well as payments for licenses, offset by the repayment of the loan from Fresenius SE.

The free cash flow after acquisitions was $157 million in the first six months, confirming our ability to generate solid cash flow despite the still difficult economic environment.

On now to slide 23, and taking a look at how our debt, and the debt to EBITDA ratio has developed. On the left hand side of the chart, you see that our debt level increased by $230 million to $5.97 billion by the end of Q2, as compared to year end 2008. This is primarily a result of the dividend payment that we made in the second quarter, but also a reclassification of an intercompany liability into financial debt. Coupled with a slightly increased EBITDA of $2.15 billion, our debt to EBITDA ratio increased, not unexpectedly, from 2.69 at year-end to 2.78 at the end of June. With the free cash flow generation that we expect in the second half, we do expect, however, to achieve our guidance of below 2.7 by the end of the year.

And on to page 24, taking a look at all of our guidance metrics. We've seen that the challenges that we face, especially related to cost increases, the currency volatility, especially affected our earnings development in the first six months. Despite these factors, our underlying business remained very strong, and we thus confirm our guidance of more than $11.1 billion in revenue, net income attributable to FME between $850 million and $890 million, or an increase of 4% to 9%, and our leverage ratio to remain or to go below 2.7 by the end of the year.

Capital expenditures are estimated between $550 million and $650 million, and acquisitions between $200 million and $300 million.

That brings me to the end of my presentation, and Ben and I will be happy to answer any questions that you may have.

Thank you, Ben, thank you, Larry, for the presentation, for the update, and for the details on the numbers. Katie, I think we can now open up the call for questions.

Thank you, gentlemen. We'll now take our first question from Tom Jones from JPMorgan. Please go ahead -- your line is now open.

Oh, good afternoon, gentlemen, and thank you for taking my questions. Actually, I have three.

Hi, Tom.

Just on the US revenue per treatment number, I was wondering if you could give us a bit more color on the moving parts there. There's only two bits we can't really model, and that's your payor mix, and the managed care pricing growth.

By my math, unless you suffered some fairly significant jump in payor mix, your managed care pricing growth was up in the high single digits, which is quite an impressive performance. So maybe you could just shed some color on that.

Then secondly, on the pharma, renal pharma guidance, you talked about $300 million for 2009. I was wondering if you could just give us some -- how that breaks down between the US and ex-US sales.

And then lastly, just on acquisitions, you're sticking with your guidance for the full year of $200 million to $300 million, yet you've only spent a net number of $31 million in the first half of the year. Just give some color as to where you might be thinking about putting that money to work -- in the products business, the dialysis side, internationally, US. Just some -- and obviously, you can't talk about specifics as regards acquisitions, but maybe just a wish as to where you'd like to see that money put to work.

Thanks, Tom. This is Ben. I'll take the first two, and Larry can handle the last one.

As far as the payor mix, we have not -- I can't give you the exact number on the commercial mix, but we've not seen a decrease, and we continue to see a slight increase. So basically, you're looking at strictly pricing on that, plus the Medicare increase.

Larry, why don't you go ahead?

Those are the three parts, (multiple speakers). We had an increase in drug utilization, we had a --

That's about 10%.

-- good trend on the commercial payor pricing, and --

And the commercial mix has basically grown slightly, but it's clearly -- we're watching it carefully, and it continues to be solid and grow slightly. As part of the pharma, it's about 60% of that revenue will be in the US, and about 40% outside the US.

Okay, and on acquisitions, your third question, the first half was lower than what the second half is expected to be. I think we're looking at a number of opportunities, really, all over the world. We're seeing what seem like attractive opportunities. We're in the evaluation stage on some, and the negotiation phase on others. And I think you'll see that the number will definitely pick up in the second half. Exactly how much, we don't know, but we feel like we're going to come within our guidance of $200 million to $300 million.

And would you say that's more weighted towards the services side, or towards the product side?

Yes, clearly the services side.

Yes, and about 50-50 US versus International would be a rough guess today.

Okay. That's quite a few clinics. Oh, and just back on the managed care pricing, would you be prepared to put a number on it, or at least a range of numbers, in terms of where you are year on year?

Oh, I don't think we do that, Tom, as much as I'd like to. But again, I think we do not -- we try to be somewhere as a percent of whatever premiums are going up, and clearly, I think if you follow the industry, you know that healthcare costs continue to go -- increase, so we're clearly not at the high end of that. So we're somewhere (multiple speakers).

Okay, [gave us a good steer.]

Thank you. We go now to our next question, from Kevin Ellich from RBC Capital Markets. Please go ahead. Your line is now open.

Good morning, gentlemen. Thanks for taking my questions. Ben, I guess the first question is, could you provide us an update on the demo with Medicare, and I guess how that's going, and the possibilities of actually getting the comprehensive bundle implemented at some point?

Okay, I can certainly update you. Basically, we've decided to expand it this year, because -- again, we see very good outcomes for the patients, and we've allowed it to expand to about 28%. We're absolutely sure that this provides best patient care. Of course, it doesn't have the same margin as dialysis, because you've got a bunch of other costs. But we have some savings of about 11%.

Now, we would assume that if the accountable care concept passes, and we can essentially participate in that as a pilot, as an industry, we would be interested in, and we'd be working with all of our colleagues around the industry to see if we could include them in the pilot in some fashion.

So anyhow, we're very comfortable that it provides better patient care. The question is, when will it happen? I think we've got the smaller bundle, the ESRD bundle that we're going to struggle with in 2011. So quite frankly, we would keep the program going, and it probably would pick up three years later where we would expand it in a major way.

Got it. And then, you just said you think you'll struggle with the ESRD bundle in 2011. I guess, what's -- why do you think you'll struggle with the bundle?

Well, when I say struggle, that's probably the not (inaudible). But any time you make a change like that, you'll end up with a proposal, and then we'll all have to evaluate it, we'll go back and forth. And remember, there's a 2% haircut there. So we both -- we will need to make that up.

Struggle is probably a little strong on the negative side, but it's just another project that has to be implemented in 2011, and it's a major step. So laying on top of that a major comprehensive care would be too much. But a couple, three years later, we would be looking at it.

Got it. And then, just a couple of the moving parts questions. You know, in the prepared remarks, you guys talked about higher personnel costs. I guess, given what's going on with the job market in the US, I was thinking it would go the other way. What's really driving the higher personnel costs?

Yes, let me take that. Remember, I mentioned that last fall. We had a high inflationary period last year, and essentially, we got some of these costs embedded. I said it would take us about six months to work them out, and really, they're in two fashions. One of them, it would be agency nurses. We're growing, so we need those. And the other is the employee healthcare programs. Basically, they have not -- they still continue to increase in cost.

But again, the back half of the year, we said we would be making some progress, and I think we will. So those are essentially the two -- Larry, did you want to add something else?

No, I mean, the only thing to add, maybe on the nursing side, is that we're expecting in the second half of this year the first graduating class from our FMC Institute of Dialysis Nursing, and we expect that that is going to provide some relief on agency calls for nursing over the next quarters and years.

That's a good point.

Got it. And then just one last question on the pricing. US commercial pricing came in up 5%. Is that kind of a good run rate to think about?

I'm sorry -- pardon me? If you could repeat it. It broke it a minute. Repeat the question, if you could, Kevin.

Oh, sorry. Do you think the 5% US pricing growth is a good run rate to look at, going forward?

No, I think -- stay with our guidance. We said 2% average year-over-year, and these come in waves. So stay the 2% to 3%. As I say, I think we'll come closer to the 3% this year, average year-over-year.

Got it. Okay, thanks.

Thank you.

Thank you, Kevin.

Thank you, and we will now take our next question from Gary Lieberman from Wells Fargo. Please go ahead. Your line is now open.

Thanks. Good morning. I guess just staying and following up on the personnel costs line, it sounds like you guys expect to make some progress on that front in the second half. Will that be bringing -- primarily by bringing agency nurses down, or are there other costs that you think you can take out of it?

Well, what we see, and again, I think even first quarter, second quarter, you can start to see the trend a little bit. But a number of -- the pressure in this area is diminishing a little bit, because a lot of nurses are coming back into the field, and essentially, we think that we'll be hiring more, actually, than using agencies. So that's kind of what we've got planned.

Okay. And is that something that you guys lost focus of? Because it would seem like from what most of the hospitals have said, they're -- most of them are sort of at all-time lows, in terms of the amount of agency nurses that they're using. So I guess it's a little bit -- it's just a little bit surprising to hear you guys saying that you're seeing pressure on that front.

Well, you know, I think this was the pressure from last year. The difference probably between us and the hospitals is actually, we've seen our treatments go up significantly. You notice that we've opened a number of new de novos. Our growth rate now is the highest it has been. So I think that's probably the differentiation between us and the hospitals, is that we've seen procedures and we're at the highest level of same market growth in the last four years. So we didn't want to compromise that at this point in time.

Some of the trends that we're seeing on the -- on agency costs, and also on employee healthcare costs, have started already in the second half of last year. So -- and they're (multiple speakers) --

And then I guess, just --

-- continuing to execute --

(multiple speakers) de novo. I'm sorry.

Go ahead, Gary.

No, just on the de novo front, where would you expect that to be down to at the end of the third quarter?

As far as the certification?

I guess the -- yes, exactly. The 50 that are waiting for certification.

It's a little difficult. I think probably somewhere in -- by the end of the year, we hope to be in the 30 to 35.

Okay, great. Thanks a lot.

Thank you. We'll now take our next question from Lisa Bedell from Sanford Bernstein. Please go ahead. Your line is now open.

Hi. Turning to Heparin supply costs, could you just walk through what you're doing to try and contain that, and when you -- I mean, you did mention you think in the second half of the year, you'll have a better time managing costs. But could you just walk through that a bit more?

Yes. I think all of us during the last year have looked at conventional ways to minimize the use of Heparin, and we focused on it. The next step would be basically some sort of therapy change, and I think we put out a press release in -- when was it, Oliver? Last month? Where we actually are looking at a different formulation of concentrate, and with that, we will be supplying citric acid instead of the normal acidic acid.

And what it does is, it essentially, from our studies, and it's been offered now for almost four years in the acute field, it looks like it will mitigate some of the need for Heparin, because it anticoagulates right at the surface of the membrane.

So those programs are underway as trials. If they turn out to match our early data, we'll get some relief there.

Great. Thanks.

Thank you. We'll now take our next question from Leslie Iltgen from Bankhaus Lampe. Please go ahead. Your line is now open.

Thank you very much. I have a couple of questions, if I may. The first one is an easy one. I just wanted to know what the tax rate will be, full year. The second question refers to the topic we just had, concerning citric acid. I was doing some more calculations. I just wanted to know, or perhaps you can just confirm, how much you think you can save by substituting Heparin by using citric acid. Is 50% realistic or not?

And thirdly, I would like to know from where you expect margin improvement in H2 to come from, mainly? And last, not least, any chance that bundling will also be introduced elsewhere besides Portugal and Europe? Thank you very much.

Thank you, Leslie.

Okay, Leslie, I'll take it. Yes, there was a couple papers out and some very small studies showing about a 55% savings. However, we think it may be more in the 25% to 40% range, and that's the reason we're doing a study with a number of our customers to really get that pinned down here in the next few months.

As far as the tax rate, Larry, that's your area.

Yes, tax rate, we're expecting approximately an effective tax rate of 34% for the full year.

Okay, great.

Okay, as far as bundling in other countries, I don't have anything on the radar screen right now. We're very pleased so far with our progress in Portugal. I think it needs to be published next year, so I think we're really dealing late 2010 before we see it move to another country.

Okay, on margin improvement -- and I think in the second half, some of the things that were creating a headwind in the first half may actually give us some tailwind. And I refer here especially to currencies, where we had some negative transaction effects in Q1 and Q2, and we may see some neutral or slightly positive effects, especially as we go through the year. The comparison gets better and better, we think.

There were also some other effects. For example, on PhosLo, there were some inventory adjustments, which caused the level of sales to be even lower than the actual number of prescriptions. We expect that to level out over the year.

And certainly, we don't expect the high level of legal charges that we had in Q2 for the rest of the year.

So I think there are some reasons to be optimistic that the margin has some upward bias in the second half.

Just one follow-up, if I may. You also mentioned higher pharma costs, and you also mentioned the increased Heparin costs. Are there any other issues -- and I'm referring to the pharma costs -- that you think are worth mentioning here?

No, I mean, there's always the typical lag effect that you have on Medicare reimbursement between the ASP plus 6% adjustments and the cost. And it's always a one to two quarter lag. And we've still got some lag effect in Q2. ASP plus 6% has gone up again in Q3, and now it seems to be in line for the first time in Q3, first time in a few quarters, with cost increases or price increases that we've had on the product.

Okay. Thank you very much.

Thank you. We'll now take our next question from Rodolphe Besserve from Societe Generale. Please go ahead. Your line is now open.

Hi, good afternoon. A first question on (inaudible) International. Could you please elaborate a bit more on the (inaudible) in growth in your price per treatment, and could you not indicate some specific revisions whether you've seen the (inaudible) growing at a much slower pace? That's just before -- would you say it's more Europe or emerging countries? Or do you see the trend for the rest of the year and after 2009?

Okay, thank you. Actually, we were really proud of the 2% growth in constant currency we were able to accomplish in International. In fact, that was our target. And so honestly, we're really pleased that we could do that.

Now, there's certainly a couple of countries that, if they come through, will exceed that -- one of them is Turkey. But basically, we're pleased with this. So we're on track, and in this environment, that says a lot for basically what we provide in quality.

So at this point, I can't really say that, other than Turkey, that we've got any real issues that we're not going to be able to resolve.

Okay, sort of a naive question, but could you please give me a sort of specific explanation for the pretty good strong growth we had in the US on the (inaudible)? I need to go back to 2005 to see such a figure. So what's actually behind this?

I think when we did the merger with RCG, there were almost a year and half where, due to the FTC, we could not actually expand the -- expand our de novos. And so, we've been building de novos pretty much at a 5% rate versus the 3%. So I think what you're seeing is that basically the quality that we're providing, and the -- essentially now we've kind of caught up on the de novos, so we're back -- and the market is growing at 3.5%, is our assessment, or somewhere between 3% and 4%. So we're growing at the market. We were below the market before that. And we're quite pleased, and our target is to grow at the market.

Okay, thank you. And may I just ask you a last question, where you are actually in your chase of a successor to Larry? I think he leaves at the end of this month. Sorry, (inaudible).

Larry, I should answer that, right?

Probably a good idea.

A good idea. Well, we're clearly in the process in -- at looking for a successor. But we have -- we're not -- we have not announced one. And again, we're being fairly deliberate about it, because we need very good qualifications, expertise. And this is a company where we all work together almost daily. So it has -- you have to fit in personality-wise, too.

And so, basically, we're in the process. We'll have nothing to announce now, except I want to indicate that Larry's built a good team. We have excellent financial teams in corporate here, and in each of the regions -- North America, Europe, and Latin America, and Asia-Pacific. So we don't see there will be any slip, but we want to take our time and get the right person, and at this point, that's the process where we are.

So it's -- we're continuing with it, but we have nothing to report at this point.

Thank you so much.

(multiple speakers).

So we'll let you know as soon as we announce. There won't be a slip, although we will miss him.

I should (inaudible), in the same time.

Okay.

Thank you. We'll now take our next question from Ed Ridley-Day from Barclays Capital. Please go ahead. Your line is now open.

Hi, Ed.

Hi, there. Thanks for taking my questions. Just a few follow-ups on the margin discussion for Larry.

Just on the final question on the personnel costs. In terms of your graduating classes from the Philippines, can you give us an idea of the numbers, the absolute numbers of nurses you feel you can bring in, say, in the second half, or per period? That would be pretty helpful.

Just a follow-up on your comments on the IT system. Has that now been fully put in place, or are you still expecting a little bit longer to achieve that?

And finally, just on PhosLo, in terms of follow on products for PhosLo, I know you're working on some. Could you give us an idea about when we might hear of progress on that program?

Okay, so I'll take the first two. First on personnel, the Philippines, we started off kind of in a ramp up phase with a first class of 100, and that's what we're expecting to graduate in the second half of this year. We do expect to, and are growing it, up to 500, and -- now, that will have a really meaningful effect on us in 2010, 2011 period. And I think it would be going too far to say that the 100 is going to have a huge effect and reverse the upward trend in nursing costs. It will have some effect. But it's when we get into the 300 to 500 number of nurses that we're making available to our clinics, that's going to really have a great effect.

In terms of the IT system, some parts of the system are completed. Some parts are still being worked on and are expected to be completed in the first part of 2010.

With respect to the PhosLo, we filed the NDA for the next-generation PhosLo, and we would expect sometime in first or second quarter of 2010.

Great. Thanks very much.

Thank you, Ed.

Thank you. We'll now take our next question from Michael Jungling from Bank of America. Please go ahead. Your line is now open.

Great. Thank you for taking my questions. I have three questions. First, on International, I wanted to follow-up on the revenue per treatment constant currency. You mentioned before, Ben, that 2% is what you were hoping for, but it's the lowest number that we've seen since 2006, and a sharp falloff from Q1. Can you provide a bit more details? In what countries, outside of Turkey, we've suddenly seen a lesser ability, perhaps, to raise price.

Secondly, a question on corporate EBIT. It is quite a lot higher than I expected. I just want to confirm, what is in there that is driving that? Is it the legal expenses, or is it something else?

And then thirdly, on minorities, clearly, as you expand outside the US, the minorities are going up. But it's quite difficult to model, and therefore, it would be quite useful to get a sense of what we should be modeling for, second half 2009. And perhaps also a general comment about the minorities trend over time. Thank you.

Okay, I'll take the revenue per treatment. Again, remember, in this environment, our target this year was 2% constant currency, constant currency growth. And yes, I think we were mainly in the 4% to 5% in the past. But again, we're also finding that there is a situation where our costs will come down in this area.

Now, we have received reimbursement in nine countries -- Spain, Czechoslovakia, Slovakia, Czech Republic, Poland, Romania, South Africa, Argentina, and Chile. Now, we also have essentially a couple that we're working on in Turkey. And then there's none of them that are really, other than Turkey, are really behind in terms of what we expected. That's the only one. The rest of them are two to three year cycles.

But the 2% is less than the past, but it clearly is within what we expect at this point in time, with the economic climate being what it is, and with these governments, okay? And all of these are usually government payors.

Okay, let me take the other couple of questions. Corporate EBIT, or corporate expense, what's driving that -- it's primarily legal expense, and it's also doing more long-term research projects at the corporate level as opposed to the regions. But the primary factor was increased legal expense.

In terms of the minorities, the non-controlling interests, I think we're probably up where we are to stay, and I think $18 million is pretty indicative of where we're going to be for the coming couple of quarters. And that would be our best guess at this point.

Thank you.

Thank you very much. We'll now take our next question from Holger Blum from Deutsche Bank. Please go ahead. Your line is now open.

Yes, hi. Holger Blum.

Hi, Holger.

Just two questions. One, could you help us in quantifying a bit more the impact of PhosLo, the magnitude, maybe, in terms of top line and EBIT you have lost since the patent expiry? And second question, on cost per treatment, clearly right before on revenue per treatment in the quarter, but costs were over -- up by [$15] in North America. When can we expect that gap to widen again, and what could be the main drivers? You are sticking to the 2% (inaudible) inflation on the cost line? And what could we expect for the remainder of the year and next year, in terms of [gap in] revenue and cost per treatment? Thanks.

Thanks, Holger.

I'll take the cost per treatment -- or go ahead, why don't you take the first one?

Yes, Holger, I think it would be unwise from a competitive standpoint to quantify too much of the profitability for individual products in the renal pharma area, since we only have a few major products. Now, if we say something about one, then we would be implying kind of exactly where the profitability is on others.

So I don't think we want to say, really, more specifically than what we've said already.

On cost per treatment, our original guidance was 2%, as it was on revenues. I think we would, given all of the developments, we would see that also in the 2% to 3% range as we do now with revenues. But as I talked about before, some of the factors that we had in the first half, we may see relaxing in the second half, leading to a slight upward bias in margins.

Thank you.

Thank you. We'll now take our next question from Martin Whitbread from Morgan Stanley. Please go ahead. Your line is now open.

Ah, good morning. Thanks for taking my questions. Three or four questions, if I may. Perhaps a simple question to start with, which is, can you tell me why patient growth is growing ahead of treatment growth, for example, in North America? You report a 4% growth in patients, versus 3% growth in treatments. So can we read anything into the modality of these patients, or is it simply rounding out?

No. What happens is, we're accelerating the growth. You don't have them for the whole quarter, and you're not able to compare the treatments. So it depends on when the -- when you (inaudible), or when the patients join you, or when they're -- or the patients join you, primarily.

So it's strictly an effect (multiple speakers). It's not directly to modality or anything, okay?

Okay, fine. If we consider the 2% haircut to the bundle price, what kind of proportion can you make up from manufacturing efficiencies, etc.? And I want to specifically exclude any changes in utilization, labor effects, modality, etc. Can you elaborate on that?

At this point, I really can't, because we really haven't studied it that carefully. We did say that we thought we had an opportunity to make it up, but again, it's a little far out in time, and we really have to wait to see the quality standards, and sort of what are -- what's the whole package before. But once that's all known, we'll be glad to share it with you next year. We're still a year away from it.

That's great, okay. Final question is, can you update us on your wearable kidney? And more specifically, do you have any views on your competitors' technology? I think [Excorp] already said that they have to file a device on the first quarter of 2010.

Okay. I guess I'm not familiar with that date. I think what we -- what I've said last year is, we in 2010 will be in advanced clinical -- or, advanced trials with it, either in vitro or in the -- some form of clinical trials. We're pretty much on schedule. We've had a lot of things to deal with this quarter, so we haven't -- I haven't put a lot of -- I don't have a briefing right now exactly where we are. But it's pretty much on schedule for sometime in 2010, to be in clinical or the last of what we would call validation trials, in vitro.

Okay. I'm going to presume some of your increases in corporate costs are relating to some of the --

Right.

-- the developments there.

Yes. We -- actually, they're in the entire blending the Sorbent into our systems, and developing the new equipment, which will come out in 2010 with Sorbent. So it looks like a very attractive area for us, and we're putting whatever effort is required to get products out in 2010, not necessarily the wearable.

Fine, okay. Can I ask just one final question, seeing as I'm here? Can you just remind me? I don't know if you said this, what the main source of your high legal expenses are? And that's great. Thanks very much.

Larry, why don't you --

Yes, the primary source are legal expenses. To a lesser extent, longer term research projects, just like the one we just discussed.

And can you elaborate what the source of the high legal expenses is? Is it ongoing costs of relating to conditions of coverage? Is it relating to potential acquisitions? Is it relating to unusual patent disputes, etc.? Can you give any color?

Larry, you want to handle that, or you want me to?

Sure. The increased legal expenses are primarily in the area of patent and patent litigation, and also the tax area. And we've seen this quarter one of the fruits of that intensified work in the tax area in the one-time benefit, the non-recurring benefit that we saw on the tax line this quarter. So certainly our intensified efforts are paying off in both of these areas.

Okay, that's great. Many thanks.

Thank you, Martin.

Thank you. We'll now take our next question from Andreas Dirnagl from Stephens. Please go ahead. Your line is now open.

Yes, good morning. It's Andreas Dirnagl from Stephens.

Hi, Andreas.

Look, just a -- good, Ben, how are you? A couple of questions. Larry, can you just remind me, for the increase in Heparin costs, clearly there is a year-over-year increase. Was there a significant increase sequentially?

Not in Q2, but of course, there has been an announced price increase for Q3.

Correct, okay. Then also, Ben, on just the whole issue of certifying your de novo, can you just clarify, is it a Medicare certification issue that's holding it up, or is it state certification, or both?

Well, many times, Medicare will ask the state to do the certification for them, so it's Medicare certification, but they will somehow -- they somehow farm it to the states. And again, there have been a lack of certifiers at the state level.

So I think we got a lot of traction as an industry on that, because we're not the only ones that have clinics that aren't being certified, and it's difficult for the patients, because they're waiting for them to open, and they're basically traveling quite a distance. So I think that one will -- you'll see some real progress on that in the next six months.

And then the question, in terms of the patients, since essentially you have this clinic set up and ready to go, and as you say, the patients are just waiting. Is there any expectation that when those clinics are finally certified that they're probably going to ramp up on a slightly more accelerated schedule than you might normally see because of this waiting period?

Probably. If we were able to convince them to come to some alternate shift at the current clinic, so the answer is, yes, you're right. But you know, if you have to wait a year, it gets a little discouraging, so you look for other options.

But yes, we'll see them ramp up, and clearly we won't have to carry them with virtually no patients to treat, okay, which is the problem.

And then on the quality indicators that you provided with the new one, where you break out the hemoglobin 10 to 12, and then 10 to 13, maybe a couple of quick questions there. If I'm reading you correctly, then you've basically got about 14% of your patient population that falls outside of that 10 to 13 range. Can you either give us the numbers in terms of what's above and what's below, or at least give us kind of a bigger than a breadbox -- are the majority of those below 10?

Hello?

Hello. Yes, the majority -- I'm sorry. The majority are below 10, because remember, we have a hard stop at 13. And so you basically -- those above 13 get pretty -- basically are just transient. So the issues are really below 10, and that's where the focus of the physicians are.

And then finally, just sort of a question on the ESRD bundle. Clearly you're aware that out in the market, there has been a lot of -- sort of expectation that the bundle might be coming out soon. I was wondering if you could just make a comment. Are you expecting it in any particular timeframe, and if so -- or even if not, are you also expecting that there's going to be sort of a specific number that we're going to be able to look at, or is it going to be more of a conceptual bundle for the first go-round?

Well, it's hard for me to totally know that answer, but what I'm being told is that we would expect a proposed rule sometime in the next couple months to come out, and then that would be reviewed, and public comment, and we would work with -- basically with CMS.

Now, that, if it comes out as a number, unless you really look at the risk adjusters, the outlier payments and the quality initiatives, there is no way to really put your arms around it. So I think we're dealing with a few months before we really know what we're dealing with here, even though the proposed rule may start -- may come out in the next month or so.

But I wouldn't put a whole lot of credit on anything until we've had discussions for the next few months, except there clearly is an indication it should be neutral except for the 2% haircut. So I think it will end up in an honest space, but it will take a lot of work.

Okay, great. Thank you very much.

Thank you. We'll now take our next question from Martin Wales from UBS. Please go ahead. Your line is now open.

Good morning, and afternoon.

Hi, Martin.

Hi. Firstly, in terms of the corporate expenses, was the amount of money you're spending on the lobbying in the United States having a meaningful impact on that or not? I'm guessing it's more than you spent previously, and where do you see that spend going?

Well --

Go ahead.

Yes. It's clearly that's -- that is a -- we've increased it this year, as almost anyone in healthcare has. And that is publicly provided basically on a quarter per quarter basis.

But that's not the main driver. The main driver is legal and corporate research, and the legal, as Larry said, we really are in some of these suits now for almost six years, some of the patent suits, and we feel that we're getting very close to resolving them, hopefully positively, in our favor. But it takes a real concerted effort, and the team is doing that.

Thank you. And a couple of quick questions on the drug side. What benefits does this next generation of PhosLo actually bring (inaudible) first half of next year?

One of the things that we're looking at is, clearly it will have patent protection. And clearly, also, one of the problems in this whole area right now, but again, we're working with our monitoring program, our PKM, is the amount of fluid that you take basically to essentially swallow the pills, or to provide the pills. So we're looking at something that would be more effective with respect to -- of removing PhosLo with less fluid intake.

And would you have an interest in non-calcium based phosphate binders as they come off patent?

Well, we certainly looked at that, but again -- and again, there's a certain -- not consensus in the industry, and I'm probably in the minority, not the majority. But as we look at our modeling, there still may be room for a non-calcium. But honestly, our modeling has worked very well. We've been able to hold the calcium balance now that we understand where it's coming from, so it's a little early to say. But I probably would be saying that there might be 10% or 15% of the -- up to 30% that it might be advantageous. So we're clearly looking at that too, okay?

And a final quick question. Just give me a sense of the split between the IVRs in the US, where you cite as a significant benefit to revenues. Ex-US, will you make any comment?

Yes, Larry had tried -- Larry had answered that before, and I think he --

I think -- you know, we would prefer now as we get into multiple products in the renal pharma business, not to single out specific products, just as we don't do for specific traditional products like dialyzers and machines. So we're going to stay away from that, and just report the total renal pharma revenues.

Okay. Thank you very much.

Thank you, Martin.

Thank you. We'll now take our next question from Scott Bardo from Credit Suisse. Please go ahead. Your line is now open.

Thank you. I've got several questions, if possible. Firstly, can you comment on your scope for [SCL] acquisitions in the US? Do you think that you've reached a relative peak in your market share, or do you think there's an ability to further expand there, first of all?

Okay --

That was the first question, sorry.

(inaudible), go ahead.

Second question. Does your guidance incorporate EPO stabilization, or does it incorporate a year on year volume increase in -- for EPO?

And just thirdly, on bundling. I just wonder if you can comment, when we get the proposed rule through, if home dialysis is reimbursed at similar rates to in-center hemo dialysis, would this signal any steps for you to make an aggressive expansion into the home market that we haven't actually seen too much of so far?

Okay. I think I'll take these, Larry. Right now, we've -- as you've noticed the first half, we've had a very low acquisition program. And again, part of that is the -- where is the whole thing going to settle out around the world in terms of bundling, and in terms of various activities? And quite frankly, we feel at this point in time, we want to work with all of our customers and try to keep everybody as profitable and successful as they can, and if we had an acquisition program that was to purchase more clinics in the US in a major way, that would be at cross-purposes.

So we're expecting a stable situation in terms of acquisitions in the US. It would be a onesie-twosie type thing, but no major acquisitions.

As far as guidance, yes, we entered the year believing that -- in February, that our EPO utilization as prescribed by the physicians would be pretty stable this year, and I think we're seeing that. So that's what's in the program.

As far as bundling in home, what we find is the nocturnal clinic dialysis is very attractive from the standpoint that most of our patients are 60-plus years of age, and really, they find that coming to a clinic, being taken care of, dialyzed, and essentially having the day free the next day, this seems to work.

So we're looking at those as well as, of course, we're developing the Sorbent system for the wearable for the home. So whatever is the right therapy, we should have the technology for it in 2011, 2012.

Thanks. And just one follow-up, and some (inaudible) on bundling. If, for instance, the bundle is expanded to include Part D drugs, would it be your anticipation to include your follow on PhosLo drug over the generic drug? I just wondered, any ability that you have to do that?

And just secondly, clearly there's a focus on US service margin. I just wondered if you could comment on where you are at a point in time the European service margin, and where you think the long-term sustainability is for Europe in services.

Okay. Let me take the first question. Again, I think -- I believe -- we believe that including the binders in the dialysis facility payment bundle might provide an opportunity for better coordination of patient care, and we realize also that, really, there's a large number of the members of the kidney care community are going to have concerns, and rightfully so, about managing this responsibility, making sure that these drugs are reimbursed properly, and included -- when they're included in the bundle, which is the -- clearly, we think Congress and CMS has the obligation to provide adequate reimbursement for both the current drugs that are going in the bundle and services.

So I think that this point in time, we feel that it might be, and is in probably all of our community's interest, to not go rapidly in this area, but implement on a slow path, and make sure that we minimize any risk to patient care, since we have the first bundle to do. And then essentially, we'd be able to -- not be able to put this in.

So the answer is, yes, I think there's an opportunity, but I -- we agree with the community that we have to do -- be very careful with how we proceed here to make sure that it's done right, and it's probably the best to slow it down at this point, and to get the other bundle right.

Now, as far as the service margin in, basically, in International, you've got to kind of look at it, when you look at a country, you look at the entire products and service. They're all blended together, and I think we have -- certainly the guys in International have done a great job of keeping the margins between [16.5 and 17.5] overall margin, and I think that's the way you want to look at the International business. It's country by country, global margins that include both products, renal pharma, and services.

I think for competitive reasons, we have traditionally not broken out product margins and service margins, and prefer to continue with that. But I think the margin areas that Ben indicated are indicative for International and the US respectively.

Thanks so much, gents.

Thanks, Scott.

Thank you. We will now take our next question from Hans Bostrom from Goldman Sachs. Please go ahead. Your line is now open.

Yes, good afternoon. I had two questions. First of all, with regards to your mention of the public panel, slide 13, is it your opinion that dialysis will bring (inaudible) from any opportunity for employers to shift to this plan for [ready and short] patients, or is there no visibility on that? And secondly, I think I missed any guidance you might have given on the interest line, which was very low, continued to be very low in Q2. Should we expect this level of expense to continue for the year, for the remaining quarters, and what is your mix of variable versus fixed rates at the moment? Thank you.

Do that one first.

Okay, on interest, we expect to continue to be in the low [5s], but I think a good, reasonable forecast for the second half is in the 5.25% to 5.5% range, which is pretty much consistent with where we were in the first half.

As far as, again, my view or our view on the evolving public plan, it appears that there is beginning to be a coalescence of consensus around a cooperative plan that would not have the provider's reimbursement set as a function of Medicare. In other words, it would be essentially negotiated with this plan that would cover the uninsured.

Again, dialysis patients are all insured, so it may have little relevance to us, but it appears that the trend is moving in that direction. Again, it's anyone's guess, I think, when everybody comes -- when all the Congress comes back from vacation, where it will end, but it looks like, Hans, it's moving in an area that would be even less of a concern for dialysis.

What would be the rationale to kind of -- well, open the lock to dialysis, I wonder, given that it is, as you say, already -- all the patients are insured?

Yes. We actually don't find any consensus for that, because clearly, no one wants to shift from the private to the government in terms of expenses. The program is very expensive in itself. And I think that many of the patients have paid into the insurance, their insurance, for a number of years, and they feel discriminated already that they only get 30 months of coverage.

So I really don't see any pressures for it, from the patient standpoint, and from the government standpoint.

So again, that's sort of where we see it today.

Okay, thank you.

I think we have time for about -- a couple, two more questions, Ben.

Yes.

I think we have one follow-up from Tom, actually.

Thank you. Our next question is from Tom Jones from JPMorgan. Please go ahead. Your line is now open.

Oh, thank you for taking these two quick follow-ups. Just one for Larry on margins. I'm just wondering if you'd be able to quantify, be happy to quantify, what the basis point headwind you faced in Q2 was from transactional currency exposure? And in terms of basis points, what we should be thinking of for Q3 and Q4?

And then a question for Ben and Larry. I was just wondering how we should think about the profitability of nocturnal dialysis. I mean, are these -- given that they spend a lot longer in the dialysis clinic, I mean there's various moving parts to this, but should we be thinking of these as relatively -- sort of lower [acuity] patients who would otherwise be home dialyzing? You just happen to have it in the clinic, and therefore have maybe a sort of lower [labor] utilization costs, or are these your traditional, really sick patients that just choose to do it at night, and therefore would need the higher nursing attendance and the higher labor costs to go with it?

So some color on how we should think about the margins of that business would be helpful.

Okay, I'll take that one first, Larry, and then you can cover the -- essentially, this is just, at this point in time, like I say, a therapy clinical trial for us. We've got, I think, almost 1,100 patients. And it's costing us more than actually performing the dialysis during the day. However, we do have the facility sitting there in the evening with no -- basically no revenue coming in. So it's pretty much a wash right now.

Usually, the patients, though, are those that are active and want to essentially use the time during the day for other activities, so they tend to be more on the active and stable patients, rather than unstable. Clearly not unstable.

So at this point, it's sort of a wash, but our program is costing us some money, just because you've got to staff up and set it up.

Perfect.

Okay, let me take the question on the transactional losses on currency. In Q2, and putting it in perspective of the whole 100 basis point EBIT margin decline, that accounted for high single digit to low double digit basis points for that particular item.

And how should we think about it, assuming currency rates stay where they are for Q3 and Q4, because it begins to assume around very much to a tailwind by the back end of the year, if I'm right.

Yes, I mean, that's one of the things that we're optimistic about for the second half, is that it should be a much more favorable comparison than what we had in the first half.

Perfect.

Thank you, Tom.

Thank you. We'll now take our final question from Mr. Jack Scannell of Sanford Bernstein. Please go ahead. Your line is now open.

Thanks very much. Just one question, really. When you started discussing your disease management demo, you talked about implementing it in terms of a Medicare Advantage special needs plan. Now, Medicare Advantage is, I guess, out of political favor. You're now talking about it in terms of an accountable care organization.

Does this mean that if there is some delay in healthcare reform and it gets pushed out until perhaps 2011, you're going to find it very hard to find a commercial vehicle to implement this?

Well, I don't think so, because there seems to be more and more of an interest in a Medicare Advantage at parity with Medicare rates, which is essentially what we've been trying to do. So I think the -- I think it's still very open. They extended it for another year. And we are still assuming that we could have both vehicles, although we much prefer the accountable care model.

But right now, we're saying probably one or the other will be available. We're covering both bets at this point.

Okay, thank you very much.

Thank you, Jack.

Okay, I think that was the last question. So I think that is closing the call. Thank you, Ben -- thank you, Larry, for [asking] all the questions, especially since it was more than overtime. So thank you very much, everybody, actually, for participating today in today's call, and looking forward to seeing you guys for the Q3 disclosure in November. November 3rd is Q3.

So thank you very much for participating, and I think there's one more comment from Ben, here.

Yes. Again, thank you very much for the -- all of the interest, and again, I think we're looking forward to November, and talk with you in November.

Great. Thank you.