Fresenius Medical Care AG (FMS) 2010 Q1 法說會逐字稿

Good day, and welcome to the Fresenius Medical Care Earnings Release of First Quarter 2010 Results Conference Call. At this time, I'd like to hand the conference over to Mr. Oliver Maier. Please go ahead, sir.

Thank you so much, Maryanne, and good afternoon and good morning, everybody. I would like to welcome you to our First Quarter Results Conference Call.

I'm joined today by Ben Lipps, our Chairman and CEO, and Ben will address our strategic priorities and give you a general business update. Our Chief Financial Officer, Mike Brosnan, will then discuss our first quarter results in greater detail and address our growth outlook for the full year. We will use slides for the presentation today, which have been posted on our website, and a link that was sent to you separately by email.

I would like to remind you that our comments today will be governed by our Safe Harbor statement, which means through the course of our presentation today, we make certain forward-looking statements and actual results could vary materially. We will use non-GAAP financial measures to help you to understand our underlying business performance, although the measures reconciliations are provided in our Investor News.

So with that, I would like to turn the call over to Ben. Ben, the floor is yours.

Thank you, Oliver. Ladies and gentlemen, welcome, a very warm welcome. I'd like to extend that to our Board members, our employees and associates around the world, and those who are joining us on the internet. As Oliver said, I'll cover basically the business update and Mike will cover the financials and then, we'll open it for questions and answers.

Turning now to page 4, before I start I'd like to say we're pleased with the good start to the year. It was a very good quarter. We're on track for achieving our targets, our guidance for the year and I'd like to also emphasize that we continue to have excellent quality in both our products and our services. And I'd like to thank the Board and all of our employees for their extra effort in making sure that we continue to provide the best quality products and services for use on the patients with dialysis.

And now, as I move into some numbers, we recorded revenues of $2.88 billion for the first quarter. That was a constant currency growth of 10%, excellent constant currency growth, 13% actual currency, and an 8% organic. We're pleased that that has continued for the last few quarters. I'd also like to say that we had, as Mike will show you, very strong underlying operating performance. We were able to digest a devalued -- currency devaluation in Venezuela and still end up with a 7% increase in net income. So all in all, we're quite pleased with the start to the year.

Turning now to page 5, let's look at the revenue by region. We saw excellent revenue growth in all the regions. North America turned in $1.96 billion, had a very strong revenue growth of 10% and an actual organic of 8%. That continues the excellent track record that we saw last year.

North America accounts for about 68% of our revenue on a global basis. And if you turn to international, we had a very strong quarter -- international revenue growth $922 million. We had a constant currency growth of 8%. Again, significantly above the market. And our organic growth in international was 6%, again excellent.

Now, looking at Europe, which is about two-thirds of the international, we had a 15% revenue growth in actual currency, 7% in constant currency. Asia-Pacific turned in a very good 9% constant currency and the leader in terms of constant currency growth was Latin America at 11%. So, to sum it up, each of the regions performed very well with respect to revenue growth and we're quite pleased with the start to the year.

Turning now to page 6, let's talk about the dialysis services on a global basis. We saw very strong organic growth, 9% on a global basis. North America achieved revenue growth in the services of 12%, again, a high-watermark, and also 9% organically. If you look at international, we continue to grow quite strongly in actual currency at 19% and we've turned in a 9% constant currency revenue growth. That was led by Europe, which turned in a 12% constant currency growth. And so, both of the regions ended very well with respect to growth.

We now have 2,580 clinics that we either manage or we operate and we're very close to treating 200,000 patients in our clinics -- I think 199,000. So, we're off to, again, a very good start in the service business, both internationally and in North America.

Turning now to page 7, I'd like to talk a little bit about quality. I think anyone that's listened to our calls over the years know that we have a very strong and absolute commitment to quality in both products and services. And I'm proud of the fact that we continue to provide, in both EMEA and in North America, over 95% of the time we provide the treatment that the physicians prescribe. And, really, that's quite an accomplishment; we've continued it now for a number of years.

I'd like to point out one other point on this chart. You'll see there's improvement in each of the areas, but I'd like to highlight the nutritional improvement that we've seen in North America, as measured here by the albumin greater than 3.5 g/dL. Essentially, I think I mentioned last year that we got the approval from the government OIG to provide supplements on a selected basis.

And that program now has been underway for almost a year and it has basically contributed significantly to the improvement in nutrition on our patients in North America. Now, again, we're not where we are in EMEA, but we're getting close and that program has been an excellent and is an excellent program.

Now, what has happened is we saw about a 60 basis point improvement in mortality in North America again this year. And so, we're down in the 14% mortality range, which is really excellent. In the international area, with the strong growth in basically introducing our systems, we saw a 270 basis point improvement in mortality.

Now, this also reflects, in terms of hospitalization days, we're now, I think, very solidly under 10 days per year per patient in North America and we're in the 8 range in international. Again, that is a very significant savings to our payers around the world and I think it's well appreciated. So, we're very proud of the programs that we have in our clinics that are focused on quality.

However, I'd like to turn to page 8 and talk about a couple of innovative programs that we're doing -- that we're basically conducting at our expense around the world with respect to improving the outcome even further. And the one that is in the US that I've talked about a number of times but it's continued to do very well is the clinic nocturnal program. And basically, we're extending the amount of dialysis from about 12 hours to closer to 20 hours.

And what we're seeing there is a continued improvement in the nutritional status and if you look here, we have over 93% of our patients actually now achieving the 3.5. In fact, next quarter I'll have to put a new target. I think we'll use what is the percent of patients above 4.0, which is generally what you and I are running around with at this point in time.

And so, you can see a very significant improvement there. We're not -- we're reducing phosphorous because we're dialyzing longer. But the patients are eating about 25% more because their nutritional state is improved. Very pleased with that program. We'll continue to expand it and it's doing quite well.

Our online hemodiafiltration, we're up to almost 14,000 patients in Europe. And again, it's doing very well. You can see the nutritional status is again at 87%. And again, I think this program is leading the way. We have over 50% of our patients that have a nutritional status above 4 g/dL. So, we're on the right track. We're very pleased with these programs. We'll continue to report on them.

I think we've published just recently some information on the nocturnal program in the US and there was a significant reduction in mortality. We've been operating it long enough now that I think we had two-year mortality, and we saw a 20% to 30% reduction in mortality. So again, I think all of this is moving in the right direction and we're very pleased to be essentially conducting these programs in North America and in Europe.

Moving now to slide 10, let's talk about the reimbursement in the US. Again, we -- as you know, last year we were stepping up as we moved through the year. And we said as we entered 2010, we would target an increase in reimbursement for the average of 2010 compared to the average of 2009 between 2% and 4%. We're right on that path. I think we're at about a 3% increase in reimbursement from the average of 2009 to the first quarter. We're 5% over last year at this quarter, significant growth. And the good news about that, it's 74%, 75% basically contracting rates and 5% utilization.

So, we're on target for the year. We saw a slight dip of, it looks like $2.00 on this graph but it's really rounding here, it's a $1.00 plus a dime or something. That's really hard to measure that close. So again, we feel like we're basically right on the path that we said we'd be on. So, we're pleased with that for the first quarter and essentially it continues the path that we were on last year.

Turning now to page 9, I'll get into a little more of the performance here on a global basis in terms of the financial metrics. And as I mentioned, our organic growth clearly was at a high-watermark at 9% in the services area. The US touched and exceeded 4% same market growth this year, which was really a significant achievement and essentially, I think, at this point in time the growth rates are pretty much one target and we're quite pleased with them.

Now, one of the things I'd like to point out here is that you see a 1% constant currency growth in the rate in international. And again, that's tempered a little bit because last year at first quarter the Portugal bundling basically kicked in, and so we got a major ramp-up in terms of revenue per treatment. So again, we're targeting -- we're targeting to see a 2% to 4% increase in both international and North America and I think we'll clearly be on that - be on that path for the year.

We're basically producing or putting in effect somewhere between 80 and 100 de novos. We're pretty much on target for that. And I want to mention that we've come back pretty close in the US to our benchmark in terms of clinics that are awaiting certification. We're -- I think at the end of first quarter we had 44 and generally, we're in the low 40s. So, that problem has been addressed by the government to some degree and we're pleased that they're -- that we had cooperation on both sides there.

Moving now to slide number 11, I wanted to just comment I think everybody is totally familiar with the Healthcare and Education Reconciliation Act that was passed in March. So, I don't need to comment too much on that. But I think there's really an opportunity here for the ESRD community to apply for essentially some of the pilots that are being -- will be offered through the Innovation Department.

And clearly, I think this is a total industry objective. We're all working together to try to see this happen because I think from the demo projects that have been conducted in the US, and this is my favorite slide that I've showed now for the last two years, basically we have seen a significant improvement in the outcomes for these patients by focusing on essentially nutritional supplements, individual care, and hydration management.

And the good news also is that we actually reduced the cost by about 12% by coordinating this activity. So we hope that we, as an industry, get a shot at this. We will probably be one of the first successful programs, I guess, in this area, accountable care models. And so, we hope that we're able to demonstrate our response to the new legislation.

Moving now to page 12, let's talk a little bit about the products. I want to mention first of all what we call here is total revenue. In the past, they usually just talk about external revenue. But I wanted to tell you just a couple of things we were doing the last couple of quarters. Essentially, our total revenue, which includes our internal revenues that we sell to ourselves and also the -- sell to the external world, was 7%, and we also have a basically external revenue of 5%.

Let me focus first on international, and then I'll come back to North America. The leader with respect to machine sales clearly is Asia-Pacific and Europe. We've seen a significant increase in our machine sales in the first quarter, strong PD demand in international, and we also saw a strong dialyzer demand in international. So, the international basically product sales were quite strong, 7% in constant currency, 16% in actual currency. And so, we're essentially growing market share and quite pleased there.

Looking at the -- or looking at North America, you see the 1%, say, whoa, what's this all about. Basically, what we've done in North America is we've had an internal focus on two products. One of them is the Liberty Cycler and the other one is Venofer. And the reason we've been doing this is until we really have at least 90% of our new patients coming on one of our products or have a 90% conversion internally, we really don't have absolute confidence that we've got everything worked out and these are great products.

I'm proud to say that both of those have achieved that in first quarter. And so, the focus, as you look to first quarter, has been internally. If you look at the actual internal sales or the total sales of the Liberty Cycler at PD, it grew by 13%. You won't see that in the external. And if you look at the pharma, it's by 17%. We've had a major acceptance of the Venofer within our system.

Externally, we had the total disposables grew at about 4% and the pharma externally grew about 4%, again, above the market. So, we are very, very comfortable that the Liberty Cycler has launched. It's an excellent product. We've got great acceptance of it. And we're also very pleased with the acceptance of the Venofer product. Our safety profile continues to be excellent with respect to adverse events and we're looking forward to working on protocols as we move into the bundle with the Venofer product.

So, in summary, this has been an interesting quarter, I think a very successful quarter. We've continued to advance our strategic programs, as well as you'll hear from Mike we've done a fine job on a number of other financial things.

So, in summary, proud of the fact that we continue to have excellent quality, products and services. We continue with our pilots. They look quite good. Mike will talk about the underlying performance. Mike will talk about the cash flow. The R&D, we were pleased with the Liberty status, the 5008 status, the [T machine], and we're starting to bring some of the ascorbic products that we'll hopefully bring to market during 2010.

And in summary, I'd like to reiterate our guidance for the year at -- and at this point, I think I would like to turn it over to Mike, who will then cover essentially the financials in more detail. Mike, it's yours.

Thank you, Ben. And I'd like to extend my welcome as well to the folks on the call today, our employees, management, our Supervisory Board and interested investors.

I will start on slide 15 and walk you through in a little bit more detail the operating results for the first quarter of 2010. As Ben has already commented, our revenues were $2.9 billion, up 13% in terms of actual currencies. We had about a 6% depreciation of the dollar in the quarter-over-quarter, so the constant currency growth is still double digit at 10%, and the organic growth, as Ben has commented, was 8%.

All of this results in a very strong top line performance for the Company for the first quarter of this year. That top line performance translated to additional operating income of $423 million, or a 7% growth year-over-year. The operating margins did decline when you look at quarter-over-quarter and I'll talk about that in more detail in my next slide. But operating margins for the first quarter were 14.7% compared to 15.5% last year.

Two comments I'll make. The first is that you'll recall in the yearend analyst discussion that I guided you with regard to our performance in 2010 that we did have a devaluation of the currency in Venezuela, the bolivar, and that that would take place with regard to its onetime effect in the first quarter of 2010. So, consistent with that guidance, we're seeing that effect in the first quarter.

And then, accounts in the quarter were about 50 basis points. What you will also see in the year-over-year is that we did have some adjustments to our inventory carrying values in the prior year. And the combined effect of those two items account for about 130 basis point swing between 2009 and 2010.

Interest expense continues to operate very favorably for us, $67 million of interest expense in the quarter, an improvement of $7 million on a year-over-year basis. That is the consequence of really two driving factors. One is a decline in LIBOR rates, the short term rates that govern a portion of our debt obligations, and a reduction in our overall debt. That's about two-thirds associated with rate reductions, then one-third associated with reduction in our carrying value of debt on our financial statements.

Income before taxes is up 11% to $356 million. Income tax expense is 35.8%, up from 34.3% in the first quarter of 2009. Here again, when I provided you guidance at the end of the year, I indicated that guidance incorporated the devaluation of the bolivar, and I provided guidance on the effective tax rate for 2010 as between 34.5% and 35.5% for the full fiscal year.

So, that guidance contemplated the effects of the devaluation in the first quarter. And the performance that you're seeing here is consistent with what I anticipate our performance will be on effective tax rate over the course of 2010, within the 34.5% to 35.5% range. The -- all of this resulted in net income of $211 million or 7% growth on a year-over-year basis.

Turning to slide 16, you can see the operating margin development for North America, international and total company. Commenting briefly on each element of the slide, in North America we did have a 30 basis point improvement in the year-over-year results. That was largely driven by the continued improvement in our revenue rate per treatment, which Ben has already commented on, mitigated slightly by the increased cost associated with pharma because, as Ben commented, a portion of that revenue rate increase relates to increased utilization, as well as personnel cost increases on a year-over-year basis.

I would comment that relative to the guidance we've provided you at yearend, we indicated that operating expenses would be roughly 2% to 3% higher on the average operating costs for 2009. And what I'm seeing here in our first quarter performance is consistent with that guidance as well.

In the international segment, the margins on the surface are dropping from 18.7% to 16.4%. You can see the highlighted block on top of the 16.4% in the Q1 2010 performance, bringing you up to 18%. That is, in effect, what our operating margin performance would have been in international taking out the effect of the devaluation of the bolivar in Venezuela. The large portion of that adjustment in the first quarter is a onetime cost associated with the adjustment of the balance sheet.

Looking at the change on a year-over-year basis in international, the effect of adjustments we made in inventory would account for the overall swing. And if you adjusted the prior year for that, your margin in international would actually improve from 16.5% to 18% on a year-over-year basis.

Looking at the effect this has on total company results, there is a swing in margins of about 130 basis points; 50 basis points is attributable to the devaluation of Venezuela in the first quarter, which would bring you from 14.7% to 15.2%, as you see on the chart in front of you, and the adjustments to the inventory carrying values in 2009 accounted for about 80 basis points. So, there's 130 basis point improvement in the overall operating margins after considering those two effects.

Turning to slide 17, I'll talk a little bit about days sales outstanding and then move into cash flow from operations. Days sales outstanding, again, a very strong performance. You'll recall that we had a substantial reduction in DSO in the calendar year of 2009 and we have held our DSO for the first quarter of 2010 at 72 days for the Company on a worldwide basis.

North America is at 52 days, which we believe is the lowest in the industry and continues to reflect very strong collections experience in the United States. And international is up slightly from yearend, but at 111 days we believe is a very strong performance in economic markets we're facing around the world.

Turning to slide 18, you can see our cash flow performance for the quarter. Again, this continues to be very strong and I did guide at the end of the year that the 12% performance we had as a percent of revenues on operating cash flows was very strong and that I felt in terms of guidance going forward that I would return to cash flow from operations greater than 10% on an ongoing basis.

And I would repeat that guidance here in the first quarter. Of the 12% of revenue that you see, the $349 million for the first quarter of 2010, about 40 basis points of that is attributable -- or $40 million of that is attributable to earnings effects, and the rest is attributable to improvements in our inventory days. We improved roughly two days in terms of our scope of inventory in fiscal 2010 over '09. And the balance is timing issues associated with cash taxes paid in 2010 were less than 2009, and other changes in the liabilities on the balance sheet.

CapEx is about $12 million less than last year and I think as we indicated, our guidance is $350 million -- $550 million to $650 million in CapEx for fiscal 2010. Q1 represents something substantially lower than that run rate, though I would expect that our CapEx would increase in the next three quarters, filling out the full fiscal year. Acquisitions at $82 million is pretty much on track with the $400 million of acquisition spending I indicated we would have.

Moving to slide 19, I will take a minute on this slide just to talk about what I anticipate our refinancing activities will be in the back half of 2010. You continue to see strong performance in terms of our leverage ratios. Our EBITDA continues to improve and as I commented earlier, our overall debt has come down about $270 million to $5.3 billion at the end of the first quarter. Obviously, this was driven by our strong cash flow performance at the tail end of 2009 and the continued performance that we see in the first quarter of 2010. The leverage ratio has dropped from 2.46 times to 2.3 times EBITDA.

With regard to expectations for this year, our credit agreement does mature in the first quarter of 2011. That was a $4 billion credit agreement that we executed in connection with the acquisition of RCG in 2006. The revolver and term loan A portion of that credit agreement come due Q1 2011, term loan B portion amortizes down in 2012 and matures in 2013.

We anticipate in the back half of this year a combination of extending our credit agreement and, if necessary, possibly a transaction in the capital market, a bond offering, to address the maturities that we have in the first quarter of 2011. We're very confident, having spoken to our banks as well as having executed a very successful euro bond offering in January of this year for EUR250 million at a 5.5% coupon, that we will have no difficulty addressing our financing needs at a time that's opportunistic for the Company in the back half of 2010.

You will notice on the balance sheet and in some of the statistical data that you perceive that because the credit agreement matures in less than 12 months, $1.4 billion has moved from long term debt into current liabilities on the balance sheet as of the end of March.

Lastly, on page 20, we are reaffirming our guidance for the year, greater than $12 billion in revenues, $950 million to $980 million of net income, a leverage ratio of less than 2.5 times, and capital expenditures and acquisitions of roughly $1 billion.

I also provided you supplemental information at yearend, indicating that our guidance included our margins would be flat with 2009 at 15.6%. I'm reaffirming that guidance, despite the onetime effect that you see associated with Venezuela in the first quarter that brought those margins down slightly. And interest rate was also indicated a range of 5.5% to 6% in the yearend meeting and I'm reaffirming that guidance as well.

Thank you very much and with that, I'll turn back to Oliver Maier with regard to the Q&A.

Great. Thank you, Mike, thank you, Ben, for the update and the presentation and the details.

Maryanne, I think we can open up the phone lines for the questions, please.

Thank you. (Operator Instructions).

We'll take the first question from Lisa Clive from Sanford Bernstein. Please go ahead.

-- a few questions. First, looking at your revenue per treatment development in the US, I understand the actual number, the decline is less than it looks at first glance. But could you just discuss some of the reasons for that, whether it's mainly drug utilization or whether there's been any shifts in payment rates from private payers?

Second, on bundled pricing and preparing for that, could you discuss the timing of spending on that? Will costs be frontloaded? Should we expect that over the next six months? Will it -- or will it also run into 2011? And then lastly, could you discuss your negotiations with private payers? I understand you do want to try and get as many of them on a bundled basis, and maybe just a bit on timing and your progress there.

Okay. Lisa, this is Ben. I'll take part of that. Basically, the question you had about commercial mix, we've essentially continued to see that increase over the last 12 months, and we've continued with that for the quarter-over-quarter, although we don't look at it that closely quarter-over-quarter. But we're still doing very well in that area. As far as to a $1.00 and change difference, it's so many little things. I'll let Mike do that in a minute.

But the second thing I want to talk about was the private payers. We don't comment on the -- on the percentage of private payers that are bundled. Of course, as I think both ourselves and some of the other providers have indicated that that was a desire on the part of the payers and we've certainly accommodated that. So, we probably won't -- we won't comment on how much, but it's clearly significant and it will probably grow as the bundle comes in.

Now, as far as the laying out the costs and the timing, I think everybody in the industry is saying two to four quarters. But we don't really know what we're dealing with yet, so we can't give you a firm number on that. We're all sitting here with bunches of plans in mind, but it makes no sense to start executing them until we see the final reg come out and we expect that towards the end of June. So at this point, I think we'll all implement it over some time period, but exactly what it will cost, we won't know that till we see the final regs and we'll certainly comment on that on our second quarter call.

At this point, Mike, do you want to comment on what adds up to a $1.00 or how you look at that? I don't think we --

Yes. No, I'm happy to make a comment, Ben. Lisa, what I would say is that the guidance we provided at yearend was 2% to 4% increase off the average revenue per treatment for 2009. That -- the midpoint of that range would put us for 2010 more or less flat with the fourth quarter of 2009. So, I think we're on track. I think we're continuing to see the positive signs that we look for, both year-over-year and sequentially, with regard to pair mix in particular and commercial rate improvement.

The only comment I'd make in terms of the $1.00 and change is that's a such a small number when you're dealing with a yearend versus a Q1 and all the true-ups that take place at the conclusion of a fiscal year that we think our performance is on track with our guidance.

That's great. Thanks. I realized it was a slightly nitpicky question, but had to be asked. Appreciate that.

We expected it.

Thank you, Lisa.

Next question comes from Kevin Ellich from RBC Capital Markets.

Good morning, guys. Thanks for taking my questions. Ben, just wanted to go back to slide 8, the slide that shows your strategic initiatives and nocturnal clinic dialysis and online HDF. The outcomes look fantastic. Just wondering what the likelihood that any of these alternative treatment options could gain more traction and eventually become the standard or covered?

Let's take the clinic nocturnal. Basically, we see opportunities that go to about 15% in terms of if you just look at the capacity, and that probably will cover a significant portion of the population. The online HDF, basically the time there is in the four-hour range, and so it essentially can actually replace high flux dialysis. It could be a one-on-one replacement and of course, there could be long term some combination of those two in the US, okay?

So, I think that we're -- these are not something we're doing just for research. We feel we have application over the next five years to actually change the therapy.

Okay. That's helpful. And then, we've seen a little M&A activity in the US. I think DCAI was acquired by a small private dialysis chain. Just wondering if that consolidation buys them any leverage with you. Do you -- how do you view that? And, I guess, what's your outlook on the acquisition market in the US now?

Well, I think, as mentioned last fall, we're really pleased with the essentially market situation in the US. There's a number of independent providers that we're very interested in helping them when the bundle comes along. And so, we're not at this point in any major acquisition program in the US and I don't think we will be.

But at the same time, I think if there's some consolidation among the SDOs as they're called, or they call themselves, I don't think that really impacts the market. I believe that basically most of them are customers, as we understand the bundle. We, and I think DaVita will work with them to be in the ACO program or the -- basically whatever we can do with the Innovation Department. So, I think in some ways it really is a decision they're making for their own financial reasons, but it doesn't change the market.

Got you. And then, just wondering if you have any updated thoughts on bundling. Your competitor, DaVita, on their call, Kent sounded a little bit more positive on what he expects in the final bundling rule. Just wondering what you're hearing and also the timing?

I think I can tell you what the consensus, at least I'm hearing, on the timing. But I certainly can't tell you what's in it. I think everybody has actually speculated this thing pretty widely. It's our view that people are focusing -- CMS is focusing on the end of June, or at least this quarter. And so, I know that all of the industry and everyone has conveyed -- worked with CMS in terms of the questions and the worries that we have and they've been very receptive in terms of meeting with us.

So, I think DaVita's optimism is warranted. But I don't think either one of us really know what the bundle's going to be until they finally put out the regs. So, at this point, we're optimistic, but -- because of the discussion. But at this point, I don't know any more than I did six months ago.

Got you. Last question. EPO utilization, wondering if you guys could give us that and then, in your comments you made, made a comment about increased utilization of pharma. Was there anything unusual there? Can we get more color as to what the increased utilization was?

Yes. If you look year-over-year, I mentioned that it's really been pretty flat for the last -- for the last six -- for the last three -- two quarters. But essentially, what we've seen over the year is that we've seen an increase in EPO, we've seen an increase in iron, and a little bit of vitamin B. So, it's pretty much the same three drugs that we've dealt with.

We've pretty well leveled off, I think, on the EPO and essentially, we've also seen an increase in essentially the Medicare payment. And if you look at it, it's essentially those, with EPO being the least of the amount, okay. So, it's really iron and vitamin D.

Got you. Thanks, Ben.

Next question comes from Ilan Chaitowitz from Redburn Partners.

Good afternoon, gentlemen. This is Ilan from Redburn in London. First worth mentioning --

(inaudible - microphone inaccessible)

Hello? Can you hear me? Hello? Hello there?

Yes, we --

Hi.

-- hear you.

Great. Thank you. First worth mentioning, happy birthday to Oliver.

Thank you.

And then --

No exposition this year.

And then, just three questions. Firstly, with regard to the interesting slide on page 11, what does that actually mean in terms of the 12% cost reduction? Does that mean that -- would that mean from EBIT per patient perspective in terms of those that are enrolled in the accountable care model? Just a bit of clarity on that one.

Secondly, with regard to the corporate costs, if you could talk about a bit with regard to Q1. Those grew substantially higher than revenues did and I was wondering what we should think about for the full year. And with regard to the US acquisitions, it's -- you've mentioned that 2010 and 2011 could see your acquisition plans pick up a bit. Are you seeing a big wall of cash with regard to interest in the sector now or is it just piecemeal in terms of the acquisitions that have been announced so far this year?

Well, let me take the last one. I don't know that I could speak for the acquirers that have acquired in the US. I think there's certainly a desire to get to a certain size in preparation for the bundle. So, I figure that consolidation was primarily that.

Any acquisitions -- I think we did about $30 million in the quarter, Mike, in the US. And those are usually small acquisitions that really fit into our networks or our physician networks. And that's essentially what we have planned for the year. So, I don't see that we'll participate in much more than that. We do have a number of international opportunities which we obviously are looking at. And so, we still think we'll spend the $400 million this year.

Corporate costs I'll leave to Mike. And as far as the EBIT, we saved about 12% of this cost in our demo. But again, it was a demo and it cost us probably closer to 7% to 8% of revenue to do that, to essentially save the 12%. So, by and large, you're looking somewhere in the 5% EBIT margin. But this was really we're looking at this is a pilot for CMS. And yes, it would be attractive possibly if it rolled out across a broader base. But the pilot will probably be essentially neutral, but it won't be a major generator of income. But we think it's in the right direction for the industry to go.

Thank you.

Next question comes from Martin Wales from UBS.

Two questions. Firstly, could you just elaborate on why hospitalization days are up internationally? You talked about expansion. Maybe you could say a bit more. Secondly, having successfully rolled out Venofer in 90% of your internal operations, could you talk a bit about the plans externally?

And also, I note from your 20-F filing, you talk about basically payments to the originator on the basis of annual estimated units of sales for the licensed products. Do you get to keep any price rises? And if you could give some sense of how that agreement works in light of that 20-F commentary.

Okay. Let me go back -- this is Ben. As I mentioned, as you look into the future, if you're going to do any optimization of anemia management, we feel you need to have a proven, safe iron drug. And so, if that's the case, then it would be acceptable for us to have at least the physicians within our clinics accepted at the 90% level. And we're proud that we got there.

Now, as far as the contract, it's basically -- has some revenue over 10-year commitments to it and essentially, we're on track for those. And so, that's the -- think of it as a distributor or a distributor plus we have the right to manufacture, if we need to, for various cost issues if they develop in the future. So, from that standpoint, I hope that answers your question on the iron.

As far as the acquisitions, you never telegraph ahead of time. But I was only trying to telegraph that we're not -- in the US, we're certainly not -- we're looking at small acquisitions in the US Internationally, basically it just depends on the opportunity and the pricing. And last year the pricing wasn't attractive and if it becomes attractive this year, we'll be active.

We didn't answer the question on corporate costs. I'm going to turn that back to Mike. I'm sorry we missed that.

For Ilan, yes?

Yes, for Ilan.

Ilan, Ben was too quick for me. So, I wanted to answer your question with regard to the corporate cost increase. In the statistical chart you're looking at, the corporate costs there of $34 million includes the R&D spending that we're directing on a global basis. And that represented, even though R&D costs in total did not change year-over-year, they're relatively flat at the $23 million.

Where that's being spent did shift slightly. So, $6 million of that roughly $10 million change relates to an increase in corporate R&D spend, with the regions reducing there slightly so that R&D spending was flat year-over-year. The balance is relatively small changes. Probably the biggest effect would just be the effect of foreign exchange for costs incurred in Europe converted to dollars.

With respect to the hospitalization data, I'm sorry. Would you repeat that question?

Sorry. You made a brief comment that the hospitalization days had gone up internationally and you cited expansion for the reason and talked about eight days being the --

Yes, I was --

Can you just expand on that a little bit, please?

Yes. What I said, the hospitalization days internationally is in the target range of the eight to nine. What my comment was on the mortality increase -- or decrease, we saw a 270 basis point decrease in mortality in the international, which is really quite significant and large.

And the reason that that happens is as we have been expanding and picking up clinics, that basically -- I'd say they have different procedures than we do in terms of out -- of quality. We get a very significant improvement in the quality and the mortality. And that's the point I was making, was 270 basis point improvement in mortality is really driven by us improving the clinics that we purchase.

Okay. I'm sorry, if you just come back briefly to my first question, my question on Venofer. My question, assuming that if you put the price of Venofer at all, you get to keep all of that extra because the 20-F quotes that the payments to the originator are based upon annual estimated units of sale, i.e. volume.

That's correct.

Thank you very much.

Thank you, Martin.

Next question comes from Julie Simmonds from Piper Jaffray.

Hi. It's Julie Simmonds from Piper Jaffray here. I was just wondering a little bit more on clinic nocturnal as to what the plans are to roll that pilot out into more of your clinics and how complicated that is as a process.

Well, we're up over 200 clinics and we'll be expanding it this year again. I'm not sure exactly what the plans are, but it's been growing at about 20% to 30% a year. We have a lot of interest on the part of patients. It certainly is a rounding issue in terms of physicians rounding it on that particular shift. And so, we're working on some ideas there to make it easier for the physicians also. But when they see the outcomes that their patients have, they've been very supportive.

So, I think the most you would ever envision it, though, would be about a 15% because that's about all the clinic utilization that we have available in that night shift. But we'll continue and then once we see the bundle and what's included in that in terms of the quality activities -- or the quality metrics, then we'll make more decisions how quickly we move it forward.

Lovely. Thank you.

Next question comes from Tom Jones from Berenberg Bank.

Oh, good afternoon, gentlemen. I've got a couple of questions, if I may. First, just to clarify something. On your little slide related to capital care and bundling, you have included the composite rate and cost in Part B in your bundle, but you've missed out the Part D, drug cost. Is that just a graphical misrepresentation or do you know something about Part D drugs in the bundle that we don't?

Trying to be neutral, okay? Again, at this point in time, the thinking is that it will go in at a later point when the -- when everybody understands the economics. But that was just basically the way the slide looked two years ago and I kept it the same way. So, that's no message one way or the other.

Okay, just follow, and the more important questions. I was wondering -- you've given us plenty of price and volume detail in relation to the service businesses. But I wonder if you might be able to do the same on the product side, both internationally and in the US? The second question, your competitor from California, I think it might move now to Denver, made quite a bit of discussion about their exposure to the VA and some potential rate changes there. And I just wondered if you'd like to make a few qualitative if not quantitative comments in that regard.

And then lastly, just a very general question. Your operating -- sorry, your debt leverage is getting down now to a level which is starting to look a little bit inefficient. I was just wondering, I mean it's a fairly high quality problem to have, but I was just wondering how much lower you'll comfortably let that go before you start to think about doing other things to keep the debt to EBITDA in that sort of optimal 2.5 to 3 times range and what they might be.

Okay. That one I will give to Mike. Let me try to knock off the other two. But as -- like you say, it's not a bad problem to have. The prices, I'm not sure that I can answer that intelligently for you because, remember, we have a whole family of products and when we bring out a new product, we try to get an improvement in price because, clearly, it's got improved features.

So, I -- but generally in this industry, it's not one -- because of the cost constraints, it's not one that we would every year increase prices. So, it's really driven by new product introductions. So, I think net-net, we'd probably see on average very little price increase in any of our products in the dialysis products area. So, you can't really count on much there. We do make it up in manufacturing volume or manufacturing efficiencies where it comes from.

Now, as far as the VA, I got to give you my perspective on it and it's probably not totally satisfying. But over the years, we've looked at the VA as another commercial customer, okay? And really, in many ways they are. So, you negotiate with a commercial customer and you get a balance between quality and price.

And so, I see most of the discussion around going to Medicare rates. That's pretty difficult considering that Medicare is going to a bundle and so on and so forth. So, the way we look at it is that we have -- as we look at our guidance, I think Mike and I had talked with the guys and we're the 2% to 4% increase year-over-year in terms of our revenue per treatment, we just say that, okay, whatever happens, we commit to that.

And we'll -- essentially it's just another commercial entity that will blend in with the other -- the other commercial entities, some up, some down. But that's all -- that's the way we're handling it at this point in time. I don't know any other way to -- Tom, to think about it, okay?

Okay. I think I can read between the lines there, so. And on the leverage question?

Leverage -- (inaudible).

Thank you, Ben. On the leverage, I appreciate it's a nice problem to have. The cash flows are good. The debt is coming down. In anticipation of that, I indicated in the yearend call that we do hot have as a corporate objective to become investment grade and we doubled our guidance from our historical spend in terms of acquisitions.

So, I think that we have a lot of refinancing plans for the back half of the year and as I indicated, we're very confident that that will go off flawlessly. But in the interim, it makes some sense for us to probably keep our cash balances a little bit higher than we historically have. And for the right opportunity, we have a very strong balance sheet and we're in a good position.

Do you think -- I mean over the last sort of 12 to 24 months in particular, you've been quite picky about what you buy. Do you think that going forward you might just sort of maybe lower your threshold a little bit or just maybe buy some slightly less profitable growth, even if it is still generating a positive return on capital, positive spread on your cost of capital? Do you think you'd be willing to see that spread narrow slightly over what you've sort of -- you've aimed for historically or is that not something you'd think about?

I would -- I'll jump ahead of Ben. He may want to follow me.

Yes, go ahead. Why don't you keep going.

One of the things I've commented on in the past is that relative to the $400 million we plan on spending, that we thought that would be roughly 50/50 US and international. So, I wouldn't say that we'll be less picky, but I would say we feel we have lots of opportunities on a global basis to buy interesting properties at the right multiple. So, if we can't get what we want, we may shift a little bit in terms of the mix of acquisition spend relative to the US market versus some of the other markets we've indicated we're interested in, Eastern Europe and Asia.

Okay, that's very helpful. Thanks.

Thank you, Tom.

Next question comes from Andreas Dirnagl from Stephens.

Yes, good morning, everyone. Tom took most of my questions, so I'm just left to parse a couple of the answers you've already given. Ben, in response to the question on the commercial mix, you said that you're still seeing improvement there. When you say that, are you speaking about the revenue impact or volume or both?

I'm really looking at the patients or treatments, okay, mix of treatments. It's the way we monitor that.

Okay, great. So, it's a volume answer. And then, just to be clear in response to Tom's question, I gather you're saying in effect what everyone seems to be hearing, which is that your current expectation would be that the Part D, the oral drugs, are probably going to be postponed from at least the initial bundle, correct?

Yes. Andreas, I just -- this is Mike Brosnan. I just wanted to supplement Ben's comment a little bit. I can imagine where the question is coming from. The --

Yes, we're all trying to reconcile your comment with DaVita's.

Yes. No, exactly. When we refer to mix, we're indicating that a larger percentage of our patients are coming from commercial, but we talk to it in the context of rate volume because those patients are paying a higher rate. So, it's both volume and rate.

Okay, great. And then, just on the oral drugs?

I think the -- again, I listen to the same discussion that you probably listen to and it seems like if the payment was appropriate, then clearly it would go in and we probably could do some good things with it. However, establishing what is the appropriate payment may take a pilot. And so, that's why I'm saying that I'm hearing more discussion it'll go in at a later date than I'm hearing that it'll go in now.

But really, that's nothing more than discussion. I really don't know and we're prepared whatever's the right approach that CMS takes, we'll essentially work with them and accommodate whatever approach they take. I have heard nothing to say they won't ever go in the bundle, it's just a matter of timing.

Yes. Absolutely understood and the color is appreciated. Thank you very much.

Thank you, Andreas.

We'll now take a follow-up question from Kevin Ellich from RBC Capital Markets.

Hi, Kevin.

Please go ahead. Your line is now open.

Seems he stepped away from the telephone. That will conclude today's question-and-answer session. I'd like to hand the call back over to your hosts for any additional or closing remarks.

Okay, thank you very much for your interest in joining us today and we look forward to seeing you on one of the road shows.

Great. Thank you very much, everybody.

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