Fresenius Medical Care AG (FMS) 2010 Q3 法說會逐字稿

Good day and will come to the Fresenius Medical Care earnings release of third quarter 2010 results conference call. At this time I would like to turn the conference over to Mr. Maier. Please go ahead, sir.

Good afternoon and good morning, everybody. I would like to welcome everybody to our third quarter and nine-month conference call. I'm joined today by Ben Lipps, our Chairman and CEO. Ben will address our strategic priorities and give you a general business update. Also with us is our Chief Financial Officer, Mike Brosnan, who will then discuss our third quarter/nine months results in greater detail and also address our growth outlook for the full year. The presentation material has been distributed and is also posted on our website.

I would like to remind you that our comments today will be governed by our Safe Harbor statement. Through the course of our presentation and the material today, we make certain forward-looking statements, and actual results could vary. We will use non-GAAP financial measures to help you to understand our underlying business performance, although the GAAP reconciliations are provided in our investor news and the presentation. And with that, I would like to hand it over to Ben.

Thank you, Oliver. Ladies and gentlemen, let me extend a warm welcome to you, our Board members, all of our employees and associates around the world and those who are joining us on the Internet. As Oliver said, I will cover the business update, and then Mike will cover the financials and the outlook.

Turning now to chart four, first let me say I would like to thank everyone, including the management, Board, all the staff, all of our employees around the world for their efforts in achieving another excellent quarter. This, again, was an excellent quarter. We saw strong revenue growth at 7% constant currency. Our revenue was a little over $3 billion. We saw also very good EBIT margin development that Mike will talk about and we saw net income growth of 10%, clearly in line with our guidance for the year.

In fact, we're pleased to report that, given the excellent third quarter and the results to date, we have tightened our guidance for the full year. And again, Mike will talk about that in his presentation.

Our operating performance in North America has continued to develop favorably, and we have seen very good treatment growth. Again, congratulations to Rice and the North American team; they are doing an outstanding job. In international we have continued to expand our clinic network with significant analysis clinic acquisitions in selected countries. We are also focused on continuously improving our quality, performance and our operating efficiency.

Turning now to chart five, revenue for the quarter was $2 billion in North America and $1 billion in international, which grew at a 9% constant currency growth. Again, I would like to congratulate the international team; this is excellent performance, growing at 9% constant currency in the environment that we see today around the world.

I would like to take a closer look at the regions; we saw continued solid revenue growth. Asia-Pacific grew at 21% constant currency, Europe turned in 8%, and America turned in 6% growth for the quarter. Again, very strong in each of the regions of our Company.

Turning now to chart six and looking at the non-month revenue, our revenue increased by 8% constant currency to about $8.9 billion for the nine months. If we take a closer look at the revenue for the nine months, we again see excellent growth in our regions. Asia-Pacific leads with a 12% constant currency growth, followed by North America at 8% and Latin America at 7% constant currency. So again, we have maintained the pattern through the year at growing essentially at the top end of our guidance of 6% to 9% for the first nine months of the year.

Turning now to page seven, you can see that we have continued to have excellent growth in our global services area. This strong growth was driven by 7% growth in North America and a 17% growth in international, again reflecting good organic growth and the aggressive acquisition program that we put in place in international, which I'll talk a little bit more about here in a minute. Currently, we treat about 210,000 patients in 2700 clinics. 1800 of them are in the US, North America, and 900 in international.

Looking at the growth for the three months in the products in the Dialysis Services area, Europe and Asia-Pacific leads the way with a 38% constant currency growth, followed by Europe with a 15%, Latin America with an 8%. Again, as you know, we acquired ARC, and that started to consolidate in the second and third quarter -- that started to consolidate in the third quarter of this year. So again, we see, looking at it in a global basis, our Dialysis Services business is growing at 9%, clearly right at the top end of our goals for the year.

Turning now to page eight, let's look at the nine months. It's really pretty much a mirror image of what we've seen for the three months. We continue to grow at 9% constant currency around the world. North America has turned in a 9% growth, international 12%, again led by Europe and Asia Pacific with a 13% constant currency growth. So from the standpoint of Dialysis Services, we are clearly on track and continue to expand our network in international in a very significant way, and North America continues to grow at the top end of our guidance.

Turning now to chart number nine, again, as we've mentioned many times, our commitment to quality both in the products and service is absolute, and I'll try to cover some of the data here. But clearly what you can see that, with respect to the treatment that we're providing, we are providing the desired treatment 95% to 96% of the time. In fact, our overall mortality in the US continues to improve; we had a 40-basis-point improvement. We are now in the low 14%'s range. In international, we saw a 200-basis-point improvement. We are in the mid-15s, but that's a little bit misleading because with the very strong acquisition program it takes about a year before our quality programs are in place and basically show results on this chart. So basically, both Europe and North America are operating at basically the same mortality, in the 14% to 15% range.

Again, I would like to focus on the hemoglobin, 11 to 12. Our focus in the US is paying off in terms of preparing for the bundle. We now have almost 70% of our patients in the 11 to 12 range. Again, our target is a little higher than that, but we are making very good progress. We're continuing our anemia management protocols that we started in Q2 and Q3. We expect the conclusion of those protocols in the early fourth quarter here, early mid fourth quarter, and then we clearly will put them in place in 2011 with the bundle.

Now, I'd also like to point out that we are still in the low end of where we are would like to be in both phosphate clearance, or -- phosphate meaning the phosphate targets -- and the albumin target. The 82 for North America is a lower that essentially what I think we'll be showing in the future because we have made a reagent change that we essentially have not corrected in terms of year-over-year. So we are making progress in the nutritional area in both Europe and North America, and that's very key as we look into 2011.

Now, the other point I'd like to make here is we continue to see improvement in hospital days in North America, a little tick up in hospital days in Europe. And again, I think that's because of the major acquisition programs that we have going on in Europe. And clearly, I think that we are operating in a very, very excellent position here if we are less than 10 days per year hospitalization compared to the normal numbers. So again, I think we're making progress in every area of the quality, and we clearly will keep you informed in terms of how our algorithms turn out, our pilots turn out, here in the anemia management area.

Turning now to chart 10, this slide gives you a little more of a snapshot on the performance and the key metrics in the global service area. Our organic revenue growth was 7% for the third quarter, again very good -- North America 7, international was about 6. But our same market growth now, treatment growth, has bounced back in international to almost 6%, and we are clearly operating a little bit above the market, I think, in North America at about 4.3%. I'll talk about the North American revenue per treatment and the US revenue per treatment on the next slide, but I do want to point out that in the international area we have seen seven countries over the last 12 months that we've gotten an increase in reimbursement. That is down from our normal third of the country, say, 11 to 12. We have actually seen also a slight decrease in four countries.

What this means is that we will probably, on a constant currency basis in international, be flat with respect to revenue per treatment this year. That's a little bit biased by the fact that we are expanding so rapidly, and really we will have to now, in the future, look at in terms of what we would call same-store growth versus the new expansions. But at this point in time, everything else is performing very well and we are quite satisfied with the revenue per treatment in international. And, essentially, like I say, it's going to be probably flat for the year or slightly up.

If you look at our de novos, you can see we are very active in international, building de novos. 30 have been basically started this year. North America is running at about the 60 rate and is -- and we've put together, I think, opened 42. The good news is, we only have 28 clinics waiting for certification. That's way down from where we were a year ago, and so we are able to turn these clinics into operating clinics much more quickly now than we did basically just a year ago. So all in all, all the performance metrics in the service area look quite good on a global basis and also on a regional basis.

Turning now to chart 11, talking about the reimbursement in the USA, and you can see that if you look at Q3 2009 to Q3 2010, we continue to see a 3% increase in reimbursement or basically reimbursement per treatment, and that's essentially all rate increases. There is no change in utilization; in fact, it's slightly down in the EPO area, but not that significantly. So that is clearly an outstanding job that North America has been doing in the contracting area, and it also speaks to the quality of the excellent treatments that we are providing to the patients around the -- patients in the US.

Now, looking at the average for 2009 to the average of the first three quarters of 2010, we also see a 3% increase. And remember, our target was between 2% and 3%, so we are operating at the high end of the target in terms of the average for 2009 versus the average for 2010. So again very, very excellent performance on the part of the contracting group and on the part of the entire North American operation.

Now, I think this would probably be a good time to speak about the bundle, so I thought I would say a little bit about where we are in terms of the bundle. We have made the decision to opt in 100%, and basically we are cautiously optimistic that the transition adjuster will be calculated correctly for 2011. In fact, we believe the industry has come to the same conclusion, and the industry has had conversations with Congress, CMS; and all of us, I believe, are cautiously optimistic and come away with the impression that they are supportive and want to apply the correct transition adjuster for 2011 based on the actual opt-in rate, which is now available here in November, early November.

Clearly, operating with a common physician-driven practice protocol across all clinics will provide better patient care, and we won't be wasting precious resources on temporary issues that would be required if we transitioned in. So today, we don't have all the answers, but -- on how to mitigate the financial issues of the bundle. But correcting the transition adjuster would be a major step in the right direction, and it would allow us to focus on the proper priorities for 2010 and midterm.

So clearly, much work needs to be done in 2011. We're considering this an investment for the future. We're optimistic that the bundle will provide a more stable outlook with the yearly inflation adjusters and provide a better environment to improved patient care while conserving resources. So, that's where we are. We have opted in 100%. And again, I believe -- I don't know the numbers across the industry, but I believe we will find that that is -- has been a popular decision on the part of a number of providers.

Turning now to chart 12, and let's talk about politics -- we have seen in Q3 a 4% total growth of products in North America and 5% in international. Our target -- clearly, this is a little bit lower than our target in terms of what we were shooting for, for the year. But there's a couple of factors behind it of a temporary nature that we think will basically iron themselves out and go away next year, but they are here this year.

What we are seeing in North America are really, two effects. We are seeing a mix effect as the customers are -- as our customers and other clinics are preparing for the bundle. They are looking at smaller dialyzers to save, essentially, costs and, at the same time, adjusting their treat and protocols to provide the same excellent outcome for their patients. So this gives us a mix shift, then, that actually reduces the revenue. The unit volume continues in the same level. And if you corrected for that, the actual numbers for North America product site would be, clearly, around 3%. But that is part of what's happening this year, and we expect to see that continue through fourth quarter.

Now, the other thing that's happening is I think we are seeing an increase, a significant increase in the use of iron in terms of basically preparing for the bundle. And, at the same time, we are seeing a pricing pressure. So that pretty much nets itself out with respect to the volume versus the price. So that's essentially another effect that we are seeing here in 2010.

Now, in the case of Venofer, what we plan to do in 2011 is to introduce new, smaller dosing regimens along with the ability to essentially administer this through the Venofer pump, which will be part of the new 2018 machine which I'll show a picture of here, and I think you probably know the machine. So we feel, as we go into 2011 we've got some real opportunities to offer value to our customers in terms of anemia management and in terms of, essentially, a cost-effective anemia management.

Now, if you look at international, we are seeing a strong growth in machines of 6%. PD is growing at 4%. I did forget to mention that in the US we see a 6% growth in peritoneal dialysis. The new Liberty Cycler is doing very, very well. So we are seeing essentially a growth, a strong growth in PD in North America. We are seeing the very same, similar in Asia-Pacific and in international. We are seeing a strong dialyzer volume growth in international at 10%, and Asia-Pacific is leading the way with around a 14% growth in the machine business.

So all in all, we see the mix effect in the US as people prepare for the bundle. We are very excited about offering our new IV iron Venofer therapy next year. We think that it will be very beneficial to our customers, so we think we've got everything in line to essentially, as we get into 2011, we've got some new opportunities and new products to basically offer in North America for sure and international also.

Now, we will look here at the nine months. And again, at the nine months we basically saw the mix shift start early -- or, second quarter and third quarter. So if you look at nine months, the numbers are a little higher in the target range. North American total revenue growth in products was 6%, international was 5%. If you basically correct for the mix shift, North America would have been 5% in the external market. So essentially, all of the signs are pointing to -- we're continuing to grow the product volume, maintain our market share and bring out some very exciting new product for 2011.

If you look at international for the nine months, pretty much the same point -- we see PD growing at about 6%, machines growing single-digit, mid-single digits, and then Asia-Pacific growing essentially in the 15% range.

So basically, as we look at the products business, we are really very comfortable where we will be this year as we end up the year and as we go into 2010 -- or 2011, because we've got a number of new products coming along that are pretty exciting.

Turning to page 14, in the US we've launched the 2008 T. We have started selling that product in September. It's an excellent machine, and basically developed based on the K, and we see that it's got a large number of features that I'm sure that our sales guys will be more than happy to talk with you about. And we see this as one of the key features in terms of moving into essentially -- Venofer -- optimizing the application of Venofer and iron therapy in anemia management.

We also have -- Liberty Cycler is doing very well. We have new PD solutions coming out next year called Delflex Neutral, and we have the 510(k) approval on our K-Sorb machine, so we would expect to see our sorbent products to enter the market in 2011.

In international area we have had excellent success with our 5008 S, designed specifically for hemodiafiltration, doing very well. We have almost 50% of our patients in Europe on hemodiafiltration. And again, all the merits that I've talked about in the past continue to be there.

So in summary, it was an excellent quarter. We clearly have some things that we have to get done for the rest of this year and into 2011, but we are very optimistic and we think our decision to opt in the bundle was the correct decision. And basically we are looking forward to Congress and CMS essentially making the right decision here in allowing the industry to continue to go forward, take care of patients in 2011.

So I think at this point, Oliver, let me turn it over to Mike, and Mike will run through the financials.

Thank you, Ben, and let me extend my welcome to the participants on the call today as well. I'll start my presentation on page 16 of the materials, the third-quarter profit and loss statement. Ben has reviewed the details of our top-line performance. Here again, very briefly, you can see the strong Q3 revenues of $3.1 billion, which grew at 7% constant currency, with a 6% organic growth.

That top-line performance was transformed by our employees around the world to an even stronger operating performance with EBIT growing 9% to $493 million for the quarter. The EBIT margin improved from 15.6% to 16.1%, an improvement of 50 basis points on a worldwide basis. And I'll add a little bit more detail to our operating results in a few minutes on a separate chart.

We continue to move through the P&L. You can see our net interest expense continues to run favorably year-over-year due to the low levels of LIBOR and EURIBOR. Our interest expense of $70 million was down $5 million from Q3 last year, and it was up slightly from the second quarter. Our borrowing in total was down about $100 million from the second quarter of this year.

Looking at tax expense for the quarter, you can see reported effective the tax rate is up about 1%. This reflects largely a true-up of the expected taxes on a year-to-date basis. Our forecast for our tax rate for the year is still expected to be within our guidance. Our performance for the quarter led to a 10% increase in net income, $248 million. I would note for you that, operationally, this compares to $238 million for the second quarter. You may recall that we had a one-time tax benefit in the second quarter that improved our earnings after tax to $248 million, which is, coincidentally, the same level as I'm reporting to you now in the third quarter.

Moving to chart 17, if you take a look at the year-to-date results, once again strong top-line performance, just under $9 billion for the first nine months, reflecting an 8% constant currency and a 6% organic growth, which was transformed to 10% growth in our operating income, or $1.4 billion.

If you look at our EBIT margin for the period, you can see we had a 20-basis-point improvement over the last year to 15.6% margin nine months year-to-date. This is the level that we had expected to achieve for the year, and we achieved this despite the effects of Venezuela that we discussed in the first and the second quarter.

At this point, I would expect some additional accretion in the fourth quarter of possibly 10 to 20 basis points to bring our full-year margin performance in at 15.7% to 15.8%. Our tax expense and our underlying tax rate are consistent with our discussions of the second quarter. You may recall, our year-to-date results for both periods are due to two specific valuation decisions, which I'll just take a moment to remind you of so that you can make some sense of the underlying tax rate.

In 2009 we reexamined our tax reserves for a claim in litigation in the second quarter. And without that effect, last year would have been around 35%. In 2010 we put some structures in place in the second quarter that enabled us to realize that deferred tax asset, which, when you separate that from our operating performance, indicates that our tax rate will be consistent with our guidance of 34.5% to 35.5% All of this gave us double-digit growth in net income of $707 million on a nine-month, year-to-date basis.

Turning to chart 18, you can see the third-quarter margin performance again, 16.1%, up 50 basis points on a global basis. Underlying that, if you look at the results for North America, you can see a margin improvement of 140 basis points from 16.7% to 18.1%. This was due to the increased revenue per treatment coming from commercial rates that Ben mentioned and, to a smaller extent, the Medicare composite rate increase that we received in 2010. This was coupled with lower costs for pharmaceuticals and a slight reduction in bad debt expense. These improvements were partially offset by normal personnel cost increases, a small increase in medical supplies on the services side of the business and increases in product delivery costs.

On the international side the margins were down about 90 basis points from 16.7% to 15.8%. This was positively impacted by lower product costs in the international business and increased leverage of our SG&A, but that was offset by, in particular, lower operating margins in our Q3 acquisitions, particularly in Asia and Eastern Europe. Over time we will expect that these results from the new acquisitions will improve as synergies take effect, but we just closed those acquisitions in the third quarter of this year. And lastly, you are seeing some of the ongoing effects of the hyperinflationary environment in Venezuela.

Our corporate costs reflect a small increase in R&D and a small increase in legal spending related to intellectual property, as well as a slight unfavorable foreign exchange effect in the third quarter.

Moving to chart 19, again, we typically start our discussion of cash flow from operations with a look at our days sales outstanding in terms of accounts receivable. DSO was a big driver of cash flow, and we had excellent results in our operating cash flows for the third quarter, representing 13% of revenues, which I'll show you in a minute. But our DSO did increase slightly in both North America and international. North America is up two days from the second quarter, but North America continues to perform at record low levels in terms of DSO, and all of our data indicates excellent collections results in [income class].

International moved up a day from 113 to 114 days. This was a relatively broad increase in the number of days and does not represent any extraordinary risks from a collections perspective. The change in DSO, however, was the principal driver on a year-over-year basis with regard to our operating cash flows. We had the Q3 results from last year showing decreases of about two days and Q3 of this year being up a day.

So if you turn to chart 20, you will see that Q3 2010, $384 million, 13% of revenues, which is very good performance in our industry, but down about 13% from $443 million in Q3 of last year. So both of these quarters are higher than our norms.

Capital expenditures of $121 million continues to be slightly below last year and also, I'd say, slightly below our historical norms up about 5%. We are currently running at about 4% with about 60% of that CapEx for maintenance.

Acquisition spending at $87 million represents the closure of our acquisitions of Asia Renal Care as well as the acquisition of the business in Korea, Germany and, to a lesser extent, North America.

Moving to chart 21, look at the nine-month year to date results for cash flow, again showing very good results, 12% of revenues for $1.027 billion, up 17% on a year-to-date basis, favorably impacted by reductions in inventory on hand, increased earnings and other working capital improvements outside of DSO.

FX at $339 million is about 3.8% of revenues, and that produced a cash flow -- a strong cash flow, at 8% with a 40% increase on a year-over-year basis. Acquisitions at $239 million is continuing very strongly with our acquisition program this year, and that program, as I've indicated before, has a strong international orientation.

Moving to page 22 and taking a quick look at our debt and EBITDA development, our debt at the end of the quarter is $5.7 billion. It's down about $100 million from the second quarter, and our EBITDA development is strong. Therefore, our leverage improved sequentially, 2.46 to 2.37. We also had cash on hand and short-term investments at the end of the quarter totaling just under $600 million, which is available to fund our acquisition program.

We had a very successful extension of our credit agreement in September, pushing the maturity of that agreement out two years to 2013, increasing its capacity by $250 million with most of that increased capacity in the revolver. We also reviewed our accounts receivable securitization facility in the United States and increased that facility by $50 million, representing a total capacity of $700 million. This facility, as you know, is renewed annually.

We do not typically disclose our margins on our credit agreement, but the rates in both of these transactions were better than our expectations and reflect our strong position in the credit markets. Our ratings remain unchanged with S&P and Moody's, S&P indicating BB with a positive outlook and Moody's maintaining BA1 with a stable outlook. We plan to return to the capital markets in early 2011 to address our remaining 2011 maturities; anticipate no problems in maintaining adequate capital resources.

My last chart on page 23 -- I'd like to reaffirm our guidance for the year. One quarter left, we have reduced the range of our expected performance in net income by increasing the floor of our guidance and reflecting a new range of $960 million to $980 million in net income. Capital expenditures and our acquisition guidance remain unchanged, although our CapEx will clearly be at the low end of that range.

Now, if I could, I'd just like to take a moment and elaborate a little bit more on Ben's comments regarding the opt-in the election we made on the bundle in the United States. As Ben indicated, we made an election to opt in as of January 1, and the decision was a difficult one. Our most important consideration was our patients and the requirement that any choice we make on a new reimbursement system has to be on the second order behind continuing the high quality care that we do provide our patients. While opting in was not the easiest path financially, we believe it will be better for our patients and we believe it will be better for the business over the so-called transition period.

Ben also indicated we were keeping to our schedule of providing 2011 guidance next February. However, we did think that some insight into our plan to mitigate the effects of the bundle would be appropriate at this time, given our decision to opt in.

To give you a little context to the way we are thinking about this, you will remember that we presented our midterm guidance at our capital markets day in September of this year. And as we said at the CMD, our guidance was inclusive of the bundle. Based on the work that has been progressing, we [affirm] that our [rule 13] guidance due today is unchanged.

Now, in terms of how we plan to mitigate the impact of the bundle, I'll take you back to capital markets day as well and you will recall that there Rice Powell reviewed the work that we undertook over the course of the last several months and provided detailed success factors on the bundle, home therapies and pharma. We are executing that plan, and we are making good progress. And that plan includes three broad measures with regard to the bundle.

First, as Ben indicated, we have been working with CMS and with the U.S. Congress, and we are cautiously optimistic that the translation adjustor will be recalculated for 2011. Next, we are working with our medical directors and treating physicians to make protocol changes used in treating patients, and we are negotiating pharmaceutical acquisition cost savings.

And lastly, the remaining mitigation in our plan should come from the incentives CMS has provided around improved patient care upon initiation of dialysis, training incentives, the encouragement to provide more home care for our patients and cost initiatives in our clinics.

In summary, we may not have all the answers today, but we are acting on the opportunities that we have identified. The beginning of next year will be challenging, but we will do our best to make the transition as smooth as possible operationally.

Finally, from a cash flow perspective our experience has been that when the federal government makes changes to Medicare, there is a drag on the cash flow side of the business in terms of how quickly those changes are coordinated with the states. Therefore, we do anticipate a slight increase in our DSOs next year, and we will work with CMS in the states to ensure that the payments are based on a coordinated benefit, once the new PPS system is put in place in January.

In closing, once again you can see our improved guidance for the balance of this year, and we are solid on our midterm guidance that we provided to you on capital markets day.

With those comments, I'll turn the call back to Oliver.

Thank you, Mike, thank you, Ben for the presentation. And I think we are now ready to open up the lines for questions.

(Operator instructions) Stephan Gasteyger, Jefferies.

Hello, and thank you very much for taking my question. I have one on Europe, and I was wondering, after you saw the bundle in Portugal be positive for you, have you seen any other major country in Europe like about to move to a bundle or any sign that some countries in Europe might he moving to a bundle with the potential reimbursement changes we are seeing in Europe right now? Thank you very much.

Yes, we are -- actually, again, we said it would take a couple of years to get the data and publish it. But everything looks quite attractive in terms of patient outcomes, and we think there's a couple more countries that are looking at the same concepts -- Spain, for one. Even international -- we see opportunities in Asia-Pacific. So we think that this will continue to move in the European area, but probably not until 2012.

Martin Wales, UBS.

Could you just clarify what you said on the bundle a little further? You say you're cautiously optimistic the transition adjustment will be adjusted for 2011. How are you thinking about accounting for your CMS payments in 2011, given that cautious optimism; on the basis that the transition adjustment is adjusted, or not? When do you think you will get more clarity on the situation?

As we mentioned, again, for actually one day now the data has been filed with CMS. So we would expect, if we're going to see the transition adjuster modified for '11, it would happen sometime between now and the end of the first quarter. So that's our expectations. Again, no one knows for sure, but I think we find a lot of support in the industry and essentially across Congress and CMS to basically get this modified.

And, sorry, could you just give us a little bit more color on precisely how you are trying to incur -- what you are doing with Venofer? You talked about this a bit, and I apologize if I missed some of it, but just a little bit more on what you are doing there, firstly? And secondly, how does that impact your agreement with the originator and the previous distributors in the US for the product?

Okay. What we are seeing with Venofer, because of the safety profile, is a proven safety profile over many, many years. There's very little hesitancy to essentially change the regimen and provide, essentially, more frequent doses of Venofer and, therefore, optimize the anemia management. So we're seeing an increase in the volume. But at the same time, because of the impending bundle, we're also seeing pressure in the pricing on the Venofer. It clearly doesn't impact our current -- we are over the volumes that we had discussed purchasing. But we are very optimistic in 2011 with the Venofer pump on the T machine, we will be able to optimize it even further in terms of cost efficiency. And if you ever observe providing IV iron or EPO, it clearly is a labor-consuming task. So we think there's some room here to really optimize this, and that's why the T machine has been introduced with the pump on it.

And any implications for your agreement with the originator on the previous distributors of the product?

I don't think so, at this point in time. We have a very good working relationship with both Galenica and with American Regent, and I think all of us are just very excited about this potential for Venofer, especially because of its safety profile.

Tom Jones, Berenberg Bank.

I just had two questions, to start with. I was just wondering if you could clarify on the international pricing what the underlying pricing growth was year on year in Q3, so sort of stripping out the dilutive effect of acquisitions you made in Russia and in Asia Renal Care -- a bit of a slip there.

And the second question was just on bundling. The capital markets there, you talked to under -- to a $12 headwind that you had to address as we moved into 2011. I was just wondering how you would think about that, or how you are thinking about that and how you are planning with respect to getting this transition budget neutrality factor back. Are you aiming at the low end of that with your planning, and therefore do certain things that you could pull back from if you get the transition budget neutrality factor adjusted back? Or are you kind of, in your planning process, more or less working on the assumption that you will get it back and planning accordingly?

I think, as we mentioned at the capital markets, at that point in time we had not really made the decision, obviously, to opt in. But we said at the time that we would be planning to mitigate somewhere around 5% of the cost. So clearly, if we are able to see the transition adjuster fixed, that would take a little pressure off there. But we clearly believe that it really should be fixed, and it essentially does give us some opportunity, then, to take the proper timing to make some of these other changes so that we don't influence patient care. So it would really be good for the patients and, I think, good for the industry.

We hadn't planned on that at the time, and I don't know that we've changed our planning otherwise. We are still on the track that it may not get mitigated, but we really believe it should.

And in terms of mitigating the impact of the bundle, there are several things you are in control of almost entirely, but there are other things that maybe you need some other parties to play ball with. In terms of mitigating input, how much do you think is dependent on how your contract negotiations Amgen go? [I sense] that contract is up for renewal, and it's obviously a fairly big swing factor over and above the transition budget and (inaudible) and whatever you might do with EPO consumption is probably the third biggest swing factor in how you deal with your cost base under a bundle. So I just wondered, out of the total things that you can do to address the cost, how much of it is really dependent on what you can get agreed with Amgen.

Well, we certainly don't talk about any of our negotiations. And again, we've said over the years, Amgen has been really a great partner. But why don't we turn it to Mike? We've tried to put it into three buckets for you; but, Tom, we can't really get any more precise than that today. It's just we are moving rapidly towards getting our plans in position. Rice and his team are working on it daily. But we can, basically, I think Mike, put it into three buckets for him somehow. Let's try that and see if that helps, Tom, okay?

Yes. I think, just to give you a little bit more color to the overall plan, the way we are thinking about this is not specifically to just acquisition costs. But if you think in terms of the protocol changes and what we are trying to accomplish in terms of acquisition cost, I would say that the drug utilization and cost initiatives as a group, which are a lot of different things, should be around 40% of our mitigation plan, plus/minus. The transition adjuster that we've talked about, I would say, is probably another 40% plus/minus, in that range. And then the initiatives in terms of the incentives that CMS is providing, the patient mix initiatives, if you will, and the facility cost initiatives outside of the drugs, will be in the range of probably 20%.

[Jeff Harneman], Feltl & Company.

Not to beat to death, but on the transition budget neutrality factor, the 3.1%, is an act of Congress needed to change that, or is it something that CMS can just go ahead and do on their own, as far as you know at this point?

Yes. I think I'm probably not in a position to answer that. The good news is that I think both Congress and CMS really appreciate that it's probably in the best interest of patient care to essentially calculate it based on what the actual opt-in is. So whether that takes a prod from some sort of legal bill or that can be done administratively, I don't really know. But if the will is there and everybody wants to do it, they usually find a way to get it done. So we're hoping that that's the case.

Okay, and then you talked a lot, both today and at the capital markets day, about home patient mix. What's the difference in terms of cost per treatment versus peritoneal dialysis or a home hemodialysis patient and an in-center patient? I guess there is kind of the perception out there that home therapy patients are a little less expensive, but that's only because they are more healthy. Can you talk about that a little bit and how that will help with your mix under bundling?

Well, I don't think we -- we certainly have not put a number to that. The point that we are looking at is that, clearly, if a patient elects to go home, there's clearly -- many times, they are in a more healthy state. There clearly is some definite with respect to their utilization of drugs. And it is just a -- if they elect to go home, we feel that we clearly would like to make sure they have that option.

I don't know that economically it's going to clearly make that much difference between a good operation in a clinic versus home. But we want to offer that opportunity, and clearly it saves us from building more clinics. And at the same time, if it's good for the patients, that's what we want to do.

Okay, and then my last question -- the mix shift you are seeing in North American products -- is that something that you see just anniversarying after one year, as everyone shuffles around and makes the changes that they want to make on the equipment side ahead of bundling?

Yes, pretty much. Again, we offer a size range in dialyzers, and you can basically provide a very good therapy for any one of those, with any one of those dialyzers, but you have to change your prescription and possibly dialyze either a little auger or with a little higher blood flows. So we see that as people are optimizing that.

We also, though, have a number of new products coming out next year that we think will address some of the therapy needs in anemia management and hydration management, but primarily anemia management. So we think there's some opportunities, and that's why the US team has basically burnt the midnight oil to bring out the T machine this year to have it pretty much ready to go next year, and I think they've done that.

Lisa Clive, Sanford Bernstein.

Two questions, one also touching on the product side of things -- what should we really be thinking about in terms of a sustainable ex-US product growth rate? And then the second question around protocol changes as you try to look at different ways of treating anemia -- how quickly could you roll out a new protocol across all your clinics and get signoffs from all the referring nephrologists and any other changes you would have to make?

Okay, let me take the product in international. I think you see in international, we said that we expect the product business to be mid-single digit growth and essentially between 5% and 10%. And I think we're in that range, constant currency. We are in that range. We're seeing a very strong growth in Asia Pacific. At the same time as we acquire more clinics in the European theater, those products were basically internal, so you don't see those in your external growth. So that's why I was pointing, you ought to look at the total products growth, which is running in the 5% to 6% range and clearly in international. So I think that's a fair number. We've got a number of new products coming out, so -- and they are well respected and basically well appreciated.

In the US we have this mix effect going on, I think. As we get into the bundle, it will alleviate itself next year. But nothing is really significantly awry in the products area at all.

Now, as far as how quick the rollout -- the protocol that the US team is clearly following is that any of the changes in protocol are discussed with the medical directors. They clearly make the decision. They are basically the personnel who makes the decision on the protocol. So this is something that has been worked on all year long in terms of making sure whatever we do ends up with better patient care. But it's the physicians decision essentially how to treat the patient.

So our team in the US has been working very carefully whether medical advisory boards, our physicians, and it's really very much a team effort.

So can I interpret that, since this has been very collaborative as you have developed these protocols this year, that when you do get the results, seeing as you have pretty much already done it hand-in-hand with the physician community, the that you could probably make changes pretty quickly?

Well, we certainly won't start if we don't have everybody's approval and our medical advisory board's approval. But the answer is, I think in the past we've said it would take a couple quarters. Obviously, some things will go faster than that. So I don't believe that's going to be an impediment to instituting essentially any protocols, because everyone has worked on and thought about them and we are piloting them. So we are well down the path of the protocols for next year.

Kevin Ellich, RBC Capital Markets.

Ben, I was just wondering, with the opting-in status, do you have any sense what others in the industry plan to do?

I asked today whether I could have an answer for that, because I think that would come up. I don't, except that as we worked, as the industry worked together, there seemed to be a very strong consensus that for patient well-being, we ought to all basically move towards opting in. And, like we said, we all of us are cautiously optimistic that Congress and CMS will do the right thing here and correct this. So I think you will find, when that becomes public, it will be a majority of the clinics.

Okay, that's helpful. So, basically, Medicare's assumption of 43% of the industry opting in might be low?

I think that it will definitely be low.

Okay, and then just wondering -- I don't know if you guys saw, but in January there's going to be a MEDCAC meeting looking at maybe, I guess, NCD requests for ESAs. Just wondering if you have any insight as to what that might be about and what your expectation is.

Well, I think we saw that. And, again, there was an FDA panel here recently that discussed a similar topic. And of course, our medical director, co-medical director, Mike Lazarus, gave a presentation, as did other people. And I think the feeling was that the decision was a pretty well thought-out decision. So I don't know that it will have any impact at all on, essentially, our operations. But again, we will certainly be part of it, I'm sure, and we will certainly provide whatever supporting data that they are looking for. And I don't see it as a sea change or any -- influencing essentially the anemia management approach here in the US at this point.

Understood, and then two last quick questions -- you talked a little bit about your iron and the safety profile. Is that related to the issues that another supplier had with the -- I think they received an FDA warning letter and potential label change. Wondering if you could talk a little bit about how that could be an incremental positive for you guys.

And then also, I think a few months ago I saw you signed a license agreement with a company called Interface Biologics. Just wondering if you could provide some color about what that relationship is about?

Again, I don't think there's any -- there certainly was not intended to be any reference to any of the issues with other products. When we got involved two years ago with American Regent and with Galenica, one of the things that we looked at very carefully was the safety profile and the proven safety profile of Venofer, and it seemed very, very good. Because, as you start to change therapy -- and clearly, I think you will find that the use of iron will go up -- and you change the dosing regimen, you really want to know that you have a very safe product, especially if you are going to administer it by machine. You don't want to have to have someone standing there for 30-40 minutes watching.

So it's strictly a matter of our decision to go with the safest product that we can identify at the time, nothing to do -- that doesn't mean other people won't generate or develop equally safe products. It's just it takes a long time to prove it, and we were sort of (multiple speakers) --

And then Interface Biologics?

Now, as part of (multiple speakers) Biologics, boy, I don't know how -- that's right; they put out a press release, yes. What it is, is a very interesting approach to essentially adding additives to the dialyzer to reduce the requirement of anticoagulants, and it fits nicely with the Citrasate program that we talked about last year that's being rolled out. So it's just an idea of how to continue to reduce costs and dialysis and, at the same time, find ways to provide a better treatment. So it's an approach to basically providing a bio-compatible membrane.

Okay. Which component of the treatment would that lead to potentially lower costs? Would that be the ESA?

Well, we don't have data on that. Strictly, it was oriented towards anti-coagulant costs.

Understood, okay, thanks Ben.

Ed Ridley, Merrill Lynch.

I just wanted to draw a few of these questions on product growth together and maybe to mention it more explicitly. Do you feel that your slightly soft North American product growth is at least partially due to clinics delaying orders for your new machines?

Not -- I haven't got a percent on that. But yes, we have seen a little bit of that because, again, we've announced a new machine. We are geared up to produce it next year. And I think I would put the bundle at the center of everything, and that is that everybody is looking at what are the costs for next year and how do we provide the best therapy with the least cost and get through the time here.

So the answer is, I think there's a little of it. It's related to the bundle. But I think, as we bring the new features of the machine out and people see that it actually can save them quite a bit of labor and time, that they will embrace them like they have in the past.

Okay, great, just two quick follow-on questions. Firstly, on the protocols that you are working on, obviously, on EPO use, you have mentioned that you are piloting them, obviously -- obviously in the clinics. But I think we can take it that for the remainder of fourth quarter it is just pilots? You wouldn't seek to perhaps accelerate the introduction of the new protocols ahead of January?

I don't think so. Again, this really depends on the North American team. But we need to be very methodical about it. And I've talked with them this morning, with Rice Powell, and he said that they would he getting data or having data from these protocols mid-fourth-quarter, and then decisions will be made and they will be rolled out in January. So, again, I don't think you're going to see an impact.

Now, as you do the protocols, if you expand them, obviously they will have an impact in fourth quarter. But our contracting has been very good. Rice's contracting has been excellent, and so we continue to see the revenue per treatment meet our standards for the year. Okay?

Julien Dormois, Exane.

Most of my questions have been answered, but just two quick follow-ups. The first one would be on the commercial payers. Again, you delivered quite a strong increase in the US. What is your take on how negotiations should go entering 2011 and 2012? Do you see any comments regarding healthcare reform starting to weigh in? So overall, what is your feeling on your ability to continue deriving nice increase in commercial reimbursements?

And the second one, just housekeeping one, on the tax rates and financial results guidance for full year 2011. Any help on that would be great. Thank you.

Okay, I'll take the first one, and you have the tax. You know, it's really difficult to add much color to your question as far as '12 and '13, or '11, '12 and '13. Again, we've got a good relationship with the payers. Clearly, everybody in healthcare is looking to maximize their value. And from our standpoint, we see essentially, as we go forward, we see that we will continue to see reimbursement increases in the commercial area. We think we are providing value for what they are paying.

And so at this point it's a little hard to say that they will be more or less than what we have today, but they are going to be probably within the same range. And again, like we've talked in the past, a number of those contracts are bundled. And again, that's very helpful because it's a long-term commitment.

Now, as far as the taxes, Mike, why don't you take the tax question?

Sure. Julien, can you repeat the tax question?

Just having a rough estimate on what you think tax rate and maybe financial results should be in full year '11.

Sure. In capital markets day, the midterm guidance we provided was that we indicated 35% to 36% in terms of the effect of tax rate.

Thomas Deitz, RBS.

I have two financial questions remaining, one regarding your acquisitions. I think you have about $260 million to spend in the fourth quarter to reach your $500 million. Are you in negotiations, in any big negotiations right now, or are you likely to come in a bit at the lower end of that target?

And, secondly, on the working capital side, Mike, you said that you expected DSO's to go up next year. Are there any other areas of working capital where you can mitigate that effect a bit? Or are we going to see working capital spiraling out of control in 2011?

I'll take the first one. Mike, you can have the second one. I guess (multiple speakers). As you must know, there's a number of very interesting opportunities out there in terms of acquisitions. And clearly, we've said all year long that we see this as a good opportunity for us to expand our service network around the world. So we have sufficient opportunities to meet that $500 million. But of course, it's a little early and we'd probably have more than, that we could spend in terms of opportunities. So we'll come pretty close, okay, on the acquisitions.

Mike, do you want to take the CapEx?

Sure. We are going to continue to work our working capital very aggressively. We do take a hard look at managing our inventories on a worldwide basis, which mitigates any big increases in working capital. I think what we are expecting at the moment in terms of my comments earlier was a slight increase to the bundle. We are also in the final stages next year of implementing a new system on the services side of the business. And that may slow things down by a day or so. So I think what we're talking about is fairly modest.

Holger Blum, Deutsche Bank.

I just wonder whether there have been any recent discussions as well on the ACO model for 2012. What is your stance there? How do you see that progressing? And another question on the same-store growth. I think you with 4.3%, you are at the top and since the invention of your scorecard. Is it normalization of patient growth? Is it nocturnal or better survival of patients for describing that improvement? And where do you see that number ending up midterm?

Let me take that one last, and then we'll go to the ACOs. I think it -- I haven't calculated it, but really it is a combination of, we've seen better survival. I think, at the same time, we are seeing the North American growth come back up off of the 3% that it dropped down to. So it's probably somewhere around 4% right now. And again, I think that everyone is doing a fine job in terms of essentially growing their practices. These are the physicians.

So I think we are probably -- in my mind, we are probably at really where we will stay for the next few years. Okay? I just don't see it ticking up to 5% or 6%, but I do feel very comfortable, and I think Rice does too, if it's in the 4% to 4.5% range. And again, that's really quite good for us. Okay?

Now, as far as the ACOs, the transition adjustor has taken a lot of front and center limelight here. But there still is a lot of interest I know the industry has had, and our guys, our group in Washington, along with DaVita have had discussions with CMS and various people. So we believe that there is a feeling that a renal ACO, or basically home type -- not a home dialysis, but a basically -- a physician home type program, would be advantageous. So we are still very optimistic, and we have got good vibes back that CMS also sees some -- the value there in terms of a renal ACO or a renal medical home. So it's still in the works. Okay?

Andreas Dirnagl, Stephens Inc.

Just a couple of quick questions, most of mine have been answered. But maybe to follow up on the attempts by both Tom Jones and Kevin, when it comes to the bundle and your commentary on, I believe you said you think the majority of the industry has come to the same conclusion you have in terms of opting in, I'm wondering can you give any sort of color on outside of you and your major competitor, what do you think some of the smaller operators might do? Do you think they are coming to a similar sort of decision point, or do you think that they're more likely to transition?

I just don't have visibility on that, and I'm sure that the information will be published very soon, but there certainly was a lot of interest in bundling. And I think that the community believes that CMS will basically get this right or basically use the data, which they've done a very good job in the past with it in terms of the -- being fair about it. And so everybody, I think, believe that when the data comes in, CMS will treat it fairly. But I don't know that answer. And it will probably show up in a week or so, would be my guess. Okay? But I'm being told it's quite high. I'm being told the number is far above 43%.

And sort of along those lines, I think on the capital markets day -- I'm trying to remember whether it was you, Ben, or whether it was Ron. But someone basically said that, assuming that both Fresenius and DaVita were to opt in, by your calculation that would reduce the transition from about 3.1% to about 0.6%. Is that correct?

Yes, that's correct, yes. But then it becomes diminishing returns, once you get up above 70% or 80%.

Right, absolutely. But in terms of the calculation for two thirds of the industry, that would be the reduction? Okay.

And then maybe just, Mike, quickly, maybe to paraphrase what you've been saying about the impact on the bundle on 2011, without giving 2011 guidance, obviously -- but are we clearly hearing that you are likely to get some sort of dislocation, whether it be on a profitability perspective, whether it be from DSO's increasing? But the majority of an impact is likely to be in the first quarter or spread out in the first half of the year, and you'd expect your mitigation sort of programs to really kick in as we work through the year?

Yes. We -- clearly, as Mike said -- we, and I think the team in North America is capable and really very much embraces this. We expect it to be smooth in terms of basically all aspects.

Now, that doesn't mean that it won't be challenging. But clearly, one of the key opportunities here is if the transition adjuster gets fixed or it gets calculated properly, that would be a major step forward. But we believe, yes, it will be challenging. We've known about it. We're up to it. We think that we will not compromise patient care. But we think, now, the DSOs that we are talking about in three or four days, but wow, we are down at 50-some days now. Three or four years ago we were at 60, or 60 to 70. So it's not going to -- we don't see it as a major precipice or anything like that. We have to manage our way through it. Okay? Does that --

Okay, okay. Yes, very helpful. And then finally, maybe following up on Ed's question -- so any sort of mitigation programs that you may put in place would be moving forward from here? So, for example, the perhaps like decrease in utilization that we saw in pharma in this quarter has nothing to do with anything that you've already begun to prepare for the bundle; that's just normal variance in utilization?

Yes. I don't remember that we had any utilization change in third quarter. So we really haven't -- it was really quite flat. Okay? So at this point in time, all the increase came from contracting, but we didn't have a shift down of any significance in utilization. So that hasn't started yet, okay?

Okay, great, thanks a lot.

Lisa Clive, Sanford Bernstein.

One follow-up question on private patients. At this point in time, is it safe to assume that perhaps the majority of your private patients are bundled? Or if not yet, at what point do you think you can get to that tipping point?

Okay, I think I would defer this to North America. But think what we've said in the past is that we have a significant number of the contracts bundled. But we've been very sensitive not to give the exact number, and I don't think it would be that helpful. So at this point in time we've been following their lead, if they are interested, and a significant number are bundled. Now, what will happen as we move through '11, that's still a little bit open. But I think that's where we are at this point, and we really can't say a whole lot more than that.

Okay, had to try. Thanks.

(laughter) okay, thank you, Lisa.

Are there any more questions?

At this time, that concludes the question and answer session. I would like to turn the call back to you, Mr. Maier, for any additional or closing remarks.

Thank you so much. I would like to thank everybody for joining us for today's third quarter, nine-month call. And if you should have any remaining questions, please don't hesitate to get in touch with us. Thank you so much. Talk to you next time.

Thank you.

Thank you.

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