Fresenius Medical Care AG (FMS) 2012 Q1 法說會逐字稿

Thank you, everybody, for being back on the call. I would like to welcome all of you to Fresenius Medical Care's first quarter 2012 analyst conference call. Also, a warm welcome to everybody who joins us today out there on the Web. We very much appreciate your continued interest in our company.

With me today is Ben Lipps, our Chief Executive Officer and Chairman of the Management Board, Rice Powell, Deputy Chairman of Fresenius Medical Care and Chief Executive Officer of Fresenius Medical Care North America, and Mike Brosnan, Chief Financial Officer.

My duty, as always, I would like to start our presentation also by mentioning our cautionary language mentioned in our safe harbor statement of our presentation and the material we distributed today. For further details concerning risks and uncertainties, please refer to our filings, as always, including our SEC filings.

And with that, Ben, I would like to hand over to you.

Thank you, Oliver. And I'd like a little bit of upfront apology. I'm at the tail end of a cold. So, if I cough from time to time, it's not the data. It's really me.

So, again, like to, ladies and gentlemen, extend a warm welcome to you, our Board members, and all the employees and associates and people who have joined us on the Internet.

In terms of the agenda, I will cover the global business update. Rice will cover the progress in North America. And Mike will cover the financials. And then we will all take questions and answers at the end of the session.

Turning now to chart four, we're very pleased with our successful first quarter. We've seen strong operating performance, excellent revenue growth in North America of 9% and even better growth in the international segment with 12% constant currency growth.

Again, I'd like to thank the dedicated staff worldwide, the management board, and everyone involved with our company for the excellent contribution that you make and dedication towards the highest-quality products that we sell to our customers and the highest-quality patient care that we provide in our centers.

We continue to focus on quality and improving our operating performance at the same time.

Turning now to numbers, for first quarter 2012, our revenue was $3.25 billion, again, a 9% gain in revenue year over year. In terms of constant currency, the growth was 10%. We're very satisfied with that fact, and we're also very satisfied that we could see a operating profitability growth.

EBIT margins increased by 100 basis points in the international segment and by 30 basis points in North America. Our reported net income attributable to shareholders grew by 68%. This includes an investment gain that we were able to realize as a result of our initial 49% equity position that we took last year in Renal Advantage before the opportunity to acquire Renal Advantage became available to us. Mike will talk more about that gain later in the presentation.

However, excluding that net income gain, we will see -- we saw our growth by 10% -- our profit -- our net income grew by 10% attributed to our shareholders to $244 million in the quarter, which is again a excellent start to the year. And we also saw the same earnings per share increase accordingly.

This is very reassuring. And we believe that we're on a good path for the year. And we will also confirm and have confirmed with confidence our guidance for the year. And this excludes the investment gain.

Turning now to chart five, let's take a closer look at the revenue growth in the regions. We saw very solid growth in Latin America, 26% constant currency. Europe grew by an impressive 10% constant currency. And in Asia-Pacific, we saw a little lower growth of 5% in constant currency, which is mainly due to a slower product sales in the first quarter, resulting from inventory depletion by significant customers prior to their fiscal year-end close of March 31st.

We do believe that, through the rest of the year, we'll see Asia-Pacific return to its leading position in terms of revenue growth quarter after quarter.

North America, as you know, turned in revenues, an impressive revenue of $2.1 billion, again growing at 9%. This reflects normalization after the budget implementation and integration of the acquisitions that we've made in North America. International revenues were $1.1 billion, growing at 12% constant currency, again reflecting very solid growth in both products and services.

In fact, today, Europe, Middle East, and Africa represent 22% of our business, and international segment represents 35% of our revenue.

Turning now to chart six, you can see the performance of our dialysis services business. We've experienced very strong 12% constant currency growth in the first quarter. It was driven by a 16% constant currency growth in international, reflecting our acquisition program combined with an excellent same-market growth of 5% in international.

We saw very good pickup in our same-market growth in North America 3.4%, which gave us a total same-market growth worldwide of 3.8% or approximately 4%. And again, Rice will talk some more about that. But, all the regions are performing quite well. And we're seeing our same-market growth in the range of 4% to 5%. We're quite pleased with that.

Turning now to slide seven, as I've mentioned, we're always committed to the highest quality of products and the highest quality of service. Chart seven has a lot of numbers on it, apologize for that, but I think there's some very important contributions that our staff have made towards our increasing and improving quality on a global basis.

Chart seven is our unique overview of the global patient outcomes, representing approximately 250,000 patients that we treat in our clinics worldwide. Impressively, we continue to provide the prescribed therapy on a global basis between 96% and 97% of the time. This shows our dedication to providing the physicians and our associates with the prescribed therapy that they want their patients to have.

And again, very impressive, and each year, this gets a little bit better, a few basis points. But, when you're that near the top, you can realize how difficult it is to continue to grow except for a few basis points a year, but again, very impressive.

Now, the green shaded areas represent metrics over -- that have improved over the last year. I'll focus on five of those quickly, catheters, anemia, nutrition, phosphorous removal, and hospitalization.

With respect to catheters, we've now made excellent progress around the world. We have after 90 days 82% of our patients and above operate without catheters. This is clearly -- North America's made significant changes and improvements in that area. And Asia-Pacific, though, continues to lead the field at a 94% of our patients do not have catheters.

Looking at anemia management, in the US, you know the regulatory focus has changed to 10 to 12 grams per deciliter. It differs from the previous guidelines of -- 10 to 11, the previous guidelines of 10 to 12. However, we are making -- the North American team is making excellent progress. Again, Rice will discuss that.

In the 10 to 12 category, we now have over 78% of our patients in the 12, in the 10 to 12 category, although in the 10 to 11, we're closer to 40% to 45%. I'd like to say that we have clearly done an excellent job of focusing, improving the protocols. And again, as I said, we'll talk about that a little more later.

Now, in the international area, we continue to still focus between 10 and 13. And in the EMEA area, we have 77% of our patients in that category. So, I think, over time, you're going to see sort of two metrics from FMC. One of them would be in the North America. And the other will be basically the international.

Moving now into nutrition, in terms of nutrition, we're making excellent progress as measured by the albumin level of our treated patients. Over 85% of our patients globally now have albumins in excess of 3.5 grams per deciliter, a continued strong improvement. And this is something that's very important, as everybody knows.

Bone mineral management, we're making progress as we focus primarily on phosphorous removal. We're not up to 63% of our patients in the US are below 5.5. EMEA leads the way with 76% above or below 5.5.

And again, I think that is probably attributed to a number of different reasons. But, one of them could -- is primarily or could be related to our online hemodiafiltration. We have more patients being treated with online hemodiafiltration in the EMEA area because of the availability and also because of the prescription. So, that could be part of the difference. But, again, we're making great progress in each of the areas.

Hospitalization, pretty much the same in Europe and North America. However, Asia-Pacific continues to show about half the days of hospitalization. We're still looking at this data, as Asia-Pacific is growing very rapidly and we're getting our systems in place. But, we do believe that, even when all the data's scrubbed down over the next 12 months, Asia-Pacific is going to have basically hospital days that are probably two to three days less than what we see in Europe and North America.

We believe it's a function of the -- basically, the high nutritional state that we see in the Asia-Pacific patients combined with possibly no catheters. But, again, they have a very strong nutritional state.

In summary, we're dedicated, as we've mentioned many times, to improving the patient outcome of our patients. And on a global basis, you've got pretty much an idea that we're making progress in each one of the regions.

Turning now to chart eight, looking at the clinics, we're treating about 253,000 patients in 3,100 clinics. We've passed the 2,000-clinic mark in the US. We have about 2,053 clinics counting the managed clinics.

And for the first time, we have passed the 1,000 mark in the international area. We have 1,060 clinics in the international area. About 600 of them are in Europe, 220 in Latin America, and 243 in Asia-Pacific.

We saw a very strong increase first quarter, a 13% increase in number of clinics, primarily driven by North America and the acquisition of Liberty. But, as you remember last year, we were in the same mode, where we had very strong acquisitions in the international area. And so, we pretty much have the profile that we're looking for in terms of the clinical footprint around the world.

Turning now to the next -- turning now to products -- excuse me, turning now to products on slide -- chart nine -- excuse me.

I'd like to talk a little bit on a global basis. We had a 6% constant currency growth at the top end of the market. It was led by international with an 8% constant currency growth, driven by very strong growth in peritoneal dialysis products and machines.

This growth was attributed to strong organic growth, mid-single digit, and it also reflects the positive effect that we've seen in terms of the Gambro acquisition that we did last year, the PD business of Gambro last year.

With respect to North America, the numbers show a 4% decline in the external growth. And in the total revenue growth, it was 2%. These don't give the total picture. Rice will cover that in his presentation. But, by and large, our products business is very strong on a worldwide basis. And we're quite pleased with the performance that we continue to see, and especially in the first quarter.

Turning now to the summary, slide 10, we continue, as I mentioned, to focus on improving the quality, anemia, phosphorous, and hydration management. The large acquisitions are behind us. We're progressing well with the integration. You'll hear more from Rice here in a second.

And also, we continue to improve our operating metrics while keeping the highest quality of products and services. This, of course, means that we need to continue to have tight cost controls, which we've lived with for years. And so, in summary, we are off to a good start. We confirm our guidance for 2012 with confidence.

So, I think at this point, I'd like to turn it over to you, Rice, to give an update on North America.

Thank you, Ben. Good morning, good afternoon to everyone. It's a pleasure for me to have a few moments to spend some time with you. In the next several minutes, I'll give you an overview of North America's performance in the first quarter of this year.

I'd like to start with going back in time to February of this year when we were at our 2011 full-year presentation. There, I had given you some expectations for North America in the first quarter. We had talked back in February that we were anticipating a successful close of the Liberty/Renal Advantage acquisition.

We were promising that we would see stronger revenue growth. We would see improved same-store growth. We were optimistic that we would continue to see our patient care outcomes improve and that we would continue to have excellent operating performance as indicated by hopefully improvement in our EBIT margin.

So, let's take a look at our report card for that period of time if we can.

We did close the Liberty/Renal Advantage transaction on February 28th. And we're happy with that. We expect annual revenues of approximately $700 million with this addition of Liberty to our book of business. 201 clinics will be coming into our family.

And so, if you think about this, around $700 million in revenue, 201 clinics, for an investment net of the proceeds from the divestitures of approximately $1.1 billion. We continue to expect that this will be accretive to earnings in the first year after closing. And as of today, we've completed the sale of 44 dialysis clinics to DSI Renal. This was part of the consent decree that we signed with the FTC.

We have 10 additional clinics that should be closing sometime I believe late this quarter. Of those 10 clinics, nine of them are in the state of Hawaii, and we have one in the state of New York. And simply put, there are just other regulatory hurdles we need to go through in order to divest those clinics. We see no issue in that. It just takes a little longer time. And we're working on that process.

If we could, let's go to slide 13, expecting strong revenue growth in 2012. As Ben mentioned, our North American revenue grew 9% in the quarter. Our service business grew by 11%. And we are very pleased with the 3.4% same-market growth.

Please allow me to remind you that, in the back half of 2011, third quarter, our same-market growth was 2.9%. And in the fourth quarter, it was 2.7%. So, we're seeing a nice push upward. And we hope to continue to see this trend go in that direction.

Now, turning to products Q1 performance, I'd like to look at this in two ways. I'd like to look at total North American revenue and then spend a little time looking just at the external revenue.

If you look at our disposable products, they showed a strong performance of 6% growth. Now, this growth somewhat moderates when equipment is included. And you see the 3.5% growth on total renal products, excluding pharma.

And then if you look at total products with pharma included, we're down about 1.6%. We've discussed this on several occasions of the pricing pressure that we've seen and the willingness that we at the moment in time to take pricing down in order to support the industry.

Now, if we go and we look just on an external basis, what we've done is we have excluded Liberty and Renal Advantage since they have now become internal customers after the acquisition.

If you have followed us for some number of years, you might well remember past experiences. When we have acquisitions, we take third-party customers, and they are converted to internal customers, therefore, shrinking, if you will, the available market that's out there for us.

So, if you take that footnote, then you see that, yes, in our HD and PD disposables, we're up about 6.3%, the total renal products, excluding pharma, up about 1.6%, and then the total nut drops about 2.5%. And again, that is comparing to the 4% drop that Ben mentioned several minutes ago during his presentation.

If I could direct your attention to slide 14, this is my last slide. I'd like to just focus on some of the operating metrics. And again, let me orient this rather busy slide for you. When you look at the light blue and the darker blue bars, those are showing our revenue per treatment. The dark blue single line in the middle of the bars is our cost per treatment.

And what you see is we had a $5 improvement per treatment in our revenue per treatment. And at the same time, we were able to produce a $2 per treatment reduction in our cost. So, we like the idea of revenue up, cost down. And we hope to continue that trend. And obviously, on the right side of that chart, what you see is simply the manifestation of that in our operating margin and the 30 basis points for Q1 of '12 at 16.5% versus prior year at 16.2%.

I think, at this point, it's appropriate. I will turn it over to Mike. And he'll take it away.

Thank you, Rice. And welcome to everyone as well. I'll walk you through a little bit more detail in terms of our financial results and then comment briefly on guidance for fiscal 2012.

If you turn to slide 16, looking at the first quarter profit and loss, you can see the top line growth, as Ben has already commented on. And that generated a much better performance in our operating earnings, which grew 13% to $503 million worldwide.

Our EBIT margin also increased from 14.9% to 15.5% or 60 basis points for the first quarter.

As you know, we operate in challenging economic conditions around the world. With that, however, we continued to show good margin improvement with North America improving 30 basis points, as Rice has already commented on, and international improving 100 basis points.

International was largely driven by our foreign exchange gains but also supported by lower production costs, lower costs related to acquisitions on the international front, and this was partly offset by an increase in our provision for bad debts in international.

Our income from equity method investees is down a little bit, reflecting slightly lower volumes of IBR in the US and increased spending in our trials to obtain approval for our new phosphate binder PA21.

Continuing to move through the P&L, our net interest expense increased from $72 million to $99 million. I think, as you know, our capital markets activities and our acquisition activities drove this change, partly offset by about a $5 million -- by an increase in interest income of $10 million.

Moving to tax expense for the quarter, you can see the reported effective tax rate is down substantially. The investment gain that Ben referred to was nontaxable. And that's why the rate drops quite a bit year over year.

If you move the effect of this gain from our tax rate, the tax rate increases from 33.3% to 33.9% in the quarter.

And that rate is influenced by a number of routine items. But, if you consider the gain associated with the divestiture of our legacy clinics in the Liberty transaction, the tax rate would actually be flat operationally year over year.

Regarding the change to our noncontrolling interest, you can see a reduction from $28 million to $23 million. This reflects some reclassification of costs between operations and noncontrolling interest in the quarter. And it's not meaningful in terms of any trending for fiscal 2012.

So, consistent with our guidance, we anticipate noncontrolling interest will increase over the course of 2012, consistent with our performance around the world in our joint ventures as well as the effect on noncontrolling interest as a result of the acquisition of Liberty in the US.

Overall, our reported earnings are up substantially to $370 million. As Ben commented, $127 million of that improvement is the nontaxable gain that I just mentioned.

That gain was the result of being required to calculate the fair value of our 49% interest in Renal Advantage. And the Renal Advantage operations over the course of approximately the one year that we held that minority interest were very successful. And the methodology that's used to calculate that fair value is discounted cash flows. And that resulted in the gain of $127 million.

Excluding the investment gain, our earnings were up 10% on a year-over-year basis.

Turning to slide 17 and starting the discussion of our cash flows, as always, we first start with DSOs. And you can see our DSOs increased worldwide by one day, ending the quarter at 81 days. North America is flat at 55 days. And international is up three days to 124 days.

In North America, we're down five days year over year, which shows the great job that our folks have done in that market, both stabilizing the switch to the bundle as well as managing our system conversion, which I've commented on before and which is ongoing in fiscal 2012. So, we're very pleased with the 55-day DSO and the performance on receivables in North America.

In international, we continue to see the days creep up a bit, largely driven by Spain, Italy, and China, as we've commented before. And we'll continue to monitor collections in those countries and other important markets around the world.

Moving to chart 18, which is our full cash flow, you can see that operating cash flows are very high in the quarter, about 15% of revenues, up substantially from last year's 6%. We benefited in the quarter from the improvements in our relative performance of accounts receivable and our relative performance of inventory. And that combined was worth about 4% of revenues.

We also received a refund from the German tax authorities regarding the successful appeal of our long-standing litigation on that 1997 to 2001 tax returns that equated to about 2% of revenues. So, if you adjust for these items, you can see a consistent performance in the core business of around 10% operating cash flows to revenue.

Capital expenditures at $122 million were about 4% of revenues, which is very consistent with our results year over year. And the split of CapEx is consistent with about 60% maintenance, 40% expansion capital, and services representing about 60% of the overall spend.

As a result, free cash flow was about 11%. There's nothing happening in the quarter that would change our expectations for our long-term performance in terms of operating cash flows or capital expenditures.

Acquisition spending at $1.5 billion reflects the closure of Liberty at the end of February, which Rice has already discussed.

Turning to chart 19, a quick recap -- excuse me, a quick recap of our cash. You can see we have a very good balance sheet position relative to our plans for year. We had a very successful senior notes offering in January, floating $1.8 billion. This was our largest notes offering ever with $1.5 billion in US, seven- and 10-year tenders, and a smaller EUR250 million offering with a seven-year tender.

We continue to have no difficulties accessing the credit markets. We finished the quarter with $580 million in cash on hand and available borrowing capacity of approximately $1.5 billion from our credit agreement and our accounts receivable facility in the US.

As you may know, our credit agreement begins to amortize meaningfully at approximately $400 million a quarter beginning in June of this year through March of 2013. We believe our liquidity is adequate to address this amortization. And we anticipate renewing the credit agreement later this year with a similar agreement, both in terms of structure and term, obviously depending on market conditions at that time.

For those of you who look at our balance sheet details, you'll see that the credit agreement has been moved from long term to current liabilities in the first quarter.

Turning to page 20 and looking at the development of our leverage. Our debt at the end of the quarter is $8.8 billion. This is up about 20% from year end. Our EBITDA development was also strong. So, our leverage increased, as we expected to 2.96 times, just under three times.

Moving to my last chart, chart 21, we are recapping our outlook and confirming our guidance for the year that we provided you in February.

With that, I'll turn the meeting back to Oliver.

Great. Thank you, Ben. Thank you, Rice. Thank you, Mike, for the presentation and for the update. Jerry, I think we are now ready to open up the lines for Q&A.

Thank you. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions). The first question is from Mr. Tom Jones, Berenberg Bank. Please go ahead, sir.

Good afternoon, everybody. I had a couple of questions. The first, if I may, is just on the new entrant into the ESA market in the US. Obviously, you've now got some options under your flexible contract with Amgen to use other products. Just be interested to hear what your thoughts on Affymax's products are and how you might use it across the organization going forward.

The second question, now that we're a year into the bundle, interested here what trends you're seeing in HD versus PD and whether PD is picking up a little bit in terms of its relative share versus HD in the US, having historically been one of the lower users of PD around the world.

And then I have a follow-up question on your commercial contracts, which I'll ask in a minute.

Thank you, Tom. Rice, it sounds like both of these are North America. Why don't you take them?

Yes, Tom, hi. It's Rice. In terms of Affymax, they did get approved. From my perspective, what I can say to you is, as you all know, there are several ESAs that are in the queue to get approval beyond the one that Affymax just got back in late March. And we are talking to all of those people.

We are very active in our clinical research and doing clinical trials. And so, we certainly look forward to using those products under clinical trial protocols where appropriate.

In the case of Affymax, with them being approved, we are in dialogue with them. We're looking to understand how we might best get comfortable with that product. We'll be a slow and steady user, if you will.

We're going to want to make sure it works well. We understand it. We've been with one product for almost 20 years. So, we think caution is important. But, at the same time, we're excited there's a new opportunity there. And we certainly, in the way we structured our latest contract with Amgen, have flexibility to do that.

In the case of one-year end of the bundle, yes, PD is growing. I would tell you that our organic growth rate for PD in the first quarter was approximately 12%. So, we are seeing growth. You might ask, is it at the expense of in-center? I don't think that's particularly the case. But, we haven't sorted all that detail out.

But, we are continuing to support our home businesses. And we like what we see. We're supporting it via technology, both for products as well as technology in the home to be able to better serve our patients that take their dialysis at home.

Okay. That makes sense. And then the final question I had was just on your US revenue per treatment. It was up year on year $6 or $7. But, if I strip out the effects of the vascular access, which I believe is now included in that number, plus the fact that, in Q1 last year, you had the transition adjuster still in there. And then obviously, this year, you've got the underlying increase in the bundle rate.

It would suggest that your average commercial rate is probably down a touch. My guess is that's probably due to lower EPO consumption, so kind of all good on a profitability level.

But, I'd be interested to hear whether -- what's going on, on the commercial side. I guess the EPO thing should start to wash out fairly soon. But, I'd be intrigued to get some color on kind of where you are with bundling some of your commercial contracts. It's kind of ebbed and flowed over the last 12 months your willingness to bundle up some of the commercial contracts.

I just kind of wondered where we are now and at what point should we expect both the EPO thing on commercial side and bundling to start washing out of your sequential revenue per treatment numbers.

Tom, this is Ben. Hey, thanks for the question. Very good question. Mike, it sounds like that one falls pretty much in your area. Can you take that?

Sure.

Okay.

Sure. Thanks, Tom. There are a number of moving parts to that question. First, I would say, I would agree that, when you look at the changes in Medicare and the fact that we're continuing to expand our services, those are both positive impacts on the quarter.

And we continue, as we've commented last year, to look at our pharma protocols. And that does have an impact on the unbundled or nonbundled commercial rates. So, consistent last year, we separated that out and indicated that that would show a decline in the overall revenue rate.

When you look beyond that, we think that our commercial mix is stable. And we had said in our guidance that we would look for continued modest increases in our commercial rates over the course of 2012. And I think the first quarter of the year is consistent with that expectation.

Beyond that, we did indicate at the end of the year that we had a new arrangement with BA. And that is having a modest impact on our rates for fiscal 2012. So, you're seeing some of that impact in the first quarter. So, when you put that all together, you end up with the overall rate increase that Rice commented on a few minutes ago.

And maybe I might follow up on just one thing, seeing as we're talking about price. International price was down I think 1.8-something percent on a constant currency basis year on year. In February, you kind of guided to flat pricing internationally year on year but that you expected the quarters to be somewhat volatile. Are you still sticking to that sort of outlook for 2012 for international pricing to be basically flat?

Yeah, Tom. This is Ben. We certainly are. And I think the impact that we saw first quarter, as we described last year was primarily from Portugal. And the guys are in the process of mitigating that in a number of ways. But, I think, as Mike and all of us said last year, our goal would be flat to slightly up this year.

There is a lot of give and take here in terms of pricing. And, Mike, I don't know. Do you want to go a little bit into that more, or do you think Tom -- ?

-- I was going to say pretty much what you said.

Okay.

Okay. Perfect. So, general conclusion, we should read too much into that international pricing number in Q1.

Yes, we're still on that don't read too much into it. We're still on that track. But, again, we'll let you know more as we go through the year.

Good. Thanks for answering the questions. I'll jump out of the queue now.

Thanks, Tom.

The next question is from Michael Jungling, Morgan Stanley. Please go ahead, sir.

Great. Thank you very much for taking my call. I have three questions. First, on labor cost, can you talk a little bit about what you're seeing with respect to labor inflation at your clinics in North America, Europe, and also Asia?

Question number two is on your renal drug business. How does pricing compare in the first quarter of 2012 with the pricing in 2011?

And then the last question I have is in relation to the US cost per treatment. It seems to be it's going down quite nicely in absolute dollar terms but at a slower rate over the last three quarters than one of your major competitors. Can you sort of comment on what -- on why that would be? Are you being more conservative on EPO? Is it a different contractual arrangement with Amgen, or are you investing more? Some sort of guidance would be very useful. Thank you.

Mike, it sounds like you ought to take this one. Okay?

Okay. Sure.

You know -- .

-- Michael, yes, just in terms of the cost per treatment in the US, as Rice commented, it did come down a bit in the first quarter, which we think is a good signal.

It came down year over year in Q1 despite the fact that typically you do see seasonality of labor rates changing just a bit because of the -- some of the taxes that kick back in, in the first quarter of the year.

And we are seeing a modest increase in labor cost in the US. But, cost per treatment is down despite that. So, I think the overall effect on labor in the US is being well managed.

In terms of the drugs, we can't comment specifically about our contract versus anybody else's because we don't have all that detail. As Rice said, we're happy with our contract. And it gives us the flexibility we're looking for. And I guess that's all I'll say about that at the moment.

Relative to labor cost in other markets around the world, we had indicated that we would manage our international costs consistent with the way we had in the past. You do see in some of the countries around the world an increase in labor cost as those countries become more sophisticated and more highly developed. But, we think we can manage that relative to the reimbursement increases that we're getting in those countries.

And I think one more point on that is, remember, we have the Nursing Academy. And we're flying nurses from the academy. And so, if in time that we do see the pressures on the reimbursement, which we don't see now, Mike, we think we'll have an answer for that in the future. So, I think we've got it covered both ways.

And then on the drug pricing for your own renal drug business, please?

Take that, Michael. Yes, we've seen some pressure, not as much as we saw probably midterm. Middle of last year through the back half of the year, we're down a little bit, not very much. I think hopefully that it's stabilized at this point. But, we took a bigger hit, if you will, in the middle part of the year in 2011 than what we're seeing at this point.

Is that still for pricing to be up for the full year in your renal drugs busienss?

I don't want to predict that at the moment. I'll tell you how we're answering this, Michael. We're looking at this with better technology, being able to administer drugs on the machine, and some advantages that we believe we're going to bring to the marketplace.

Let me stay silent on how I might price that. That's fairly sensitive. But, we're certainly in a mode that we'd like to see pricing increase. And we believe if we can bring technology to the market that we'll do that. And there's an opportunity for that. But, again, probably, I'll hold there. And maybe I'll have more info for you later in the year.

Great. Thank you.

The next question is from Ed Ridley, Bank of America. Please go ahead, sir.

Hi, thank you. Yes, a couple of follow-up questions. While we're talking about the renal drug business, could you remind us exactly with where we are now what proportion of your US products it is?

And certainly, if you could give us any more information on the timeline of some of the -- Rice, the products you've just talked about, that would also be helpful as well. And that'd be my first question.

And, Rice, you also talked about, obviously, a slight uptick in the underlying growth in your US business, organic growth. Again, clearly, your competitor is growing quite fast on an organic basis.

And for me, that sort of seems like an opportunity rather than an issue. Could you perhaps address how you hope to accelerate your underlying growth in the US and on what sort of timescale?

Thanks, Ed. Rice, sounds like those are directed right at you. So, would you -- ?

-- Yes.

All right.

Not a problem.

All right.

Ed, I'm probably not going to make you happy on your first question. I think I'm going to refrain from giving you details on the breakout of our pharma book of business versus our overall products book of business. It's not something we've done. So, I think I'm going to refrain on that.

But, maybe I'll make you happy on growth. No question that Davita's definitely on same-market growth doing a great job. How we're getting there, I think you're going to see some continued improvement from us.

And this is kind of a manufacturing guy giving you an answer. We've really broken down how we bring patients into our centers, how (inaudible) make it for people to come into our clinics. And we've gone into these processes because, let's face it, it is a process. It's a phone call. It's work that has to go back and forth. And we've tried to break this down, simplify it, make it easier for people to get into our clinics and be treated. And I think we're seeing some benefit of that.

We've been at this for five months last year continuing on. And so, we're trying to break this process down to make it easy and effective for us to get new patients in and to continue to see us improve our same-store growth.

Would it be far to say that you would -- following the integration, obviously, of Liberty, your management may have more opportunity to focus on organic growth rather than integration.

Clearly, an integration of the size and scope of Liberty can create distractions. And you're probably remembering that I did talk about that last year and toward the latter part of the year that we've been totally focused on trying to get the integration going and what we're trying to do.

I don't want that to be a convenient excuse, Ed. We need to do a better job, and we will. But, there's no question that it fights for people's times when you're in the midst of an integration like that, sure.

Understood. And just a quick question, Ben, have we had any update on -- from the US authorities on integrated care? It all seems to have gone quiet on that front. Do you think we could still hear something from them in the next quarter?

Ed, I tell you sort of where I am on it and I think pretty much the industry. We're sort of in what I would call a quiet time, like the end of the quarter, we report our earnings. So, to quote an unnamed member of the community, of course, we have no basis for predicting timing. But, we do want to continue to reiterate the striking value proposition which we think we could bring to patients, families, and to society to reduce cost.

So, quite frankly, the industry I think is bullish on it. But, we really don't have at this point a clear idea of the starting point, starting time. And sorry that I can't be more precise. But, that's sort of where we are at this point in what I would call (inaudible) time.

Okay. Thanks.

Thanks, Ed.

The next question is from Veronika Dubajova, Goldman Sachs. Please go ahead, ma'am.

Good afternoon, and thank you for taking my questions. I have three questions, if I can. The first one is -- and this is probably best addressed to Rice -- when you reported full-year numbers, you've given us some expectations for where you think revenue per treatment and cost per treatment will be in the US on a full-year basis.

If I remember correctly, it was revenue per treatment up 3% to 4% and cost per treatment plus 2% to 3%. Just wanted to check that you're still comfortable with that, given where we ended up in Q1.

The second one was on EPO utilization, if you can give us a sense in terms of where you are as of the end of Q1 versus fourth quarter and then year on year and whether you think there's anymore for you to go or whether the protocols that you rolled out are now successfully integrated across the board.

And the last one, given some of the pricing pressures for Venofer and some of the volume, I guess you highlighted volume decline this past quarter. Just wondering if you're still happy with the terms that you have with Galenica.

Thank you, Veronika. Good questions. Let me just take them from the top. Back in February, when we talked about 3% to 4% revenue growth, revenue per treatment growth and cost per treatment up maybe 2% to 3%, we've not changed our opinion on that.

We're one quarter into the year, and we think those are still good estimates for you to bake into your analytics.

In the case of EPO, we do have some new information. If you recall back in February, I had indicated that I thought we might see a high-single-digit to low-double-digit continuing decrease through the first quarter of this year. And in fact, we did see about a 10% decrease.

Now, what I will tell you is -- because your next question will be, is that going to happen every quarter? I think you're going to find that we've probably leveled out for a little bit. It may go down a little bit more. But, we have our protocols all rolled out. We feel very good about the work we're doing with our physician partners on this. But, we really did get to that 9% to 10% drop that we thought we would see in the course of the first quarter of this year.

And relative to Venofer, you do a deal, and you have partners, and you stand with your partners. I like the deal with Galenica. I think that they're great partners. Have we hit a rough patch? We have. But, we'll work our way through that.

Again, I think technology helps you overcome some of those issues. And in the case of volume, yes, it's down. But, the Venofer piece or really the iron piece tends to move around as people are looking at what they're doing with their EPO.

So, I think it has gone down. I think it may stabilize a little. Could it come back some? I think that's probably right. But, I would tell you that tends to move around as people have been focused on EPO first.

So, give us another quarter and ask me this question again. I'll have some more color for you. But, I'm okay with where we are.

That's great. And if I could just one quick follow up on that, in terms of just thinking about income from the JV, is the level that we've seen in Q1 the reasonable expectation for the rest of the year?

Mike, you want to comment because that had more in it than just the -- yes.

Yes, I wouldn't -- I typically don't guide to an individual line out among the financials. So, I'd probably say that we've confirmed our overall guidance. And we gave a number of data points in that regard. So, yes, I'd leave it at that.

Understood. Thank you.

The next question is from Gary Lieberman, Wells Fargo. Please go ahead, sir.

Thanks for taking the question. Maybe to follow up on the last comment, Rice, that EPO utilization was down 9% to 10% sequentially in the quarter, I guess, can you talk about that in context of the cost per treatments, which look like they went up sequentially? So, can you maybe talk about some of the offsetting factors there?

Gary, what I will probably say somewhat briefly is -- and Mike alluded to this earlier -- usage did go down. Some of the cost did go up a little bit. Remember in our desire to have a nonexclusive short-term deal with Amgen, we knew that we were going to be looking at less discount than we had historically seen. And that is the case.

We are working hard to, as we've always done, overcome those sorts of bumps in the road. But, there's certainly an impact there. I won't go into much more detail than that. But, your instincts are good.

Okay. I guess, maybe, how -- in terms of timing, how long do you think it takes you to overcome some of those bumps? Is it the next quarter or two, or does it take longer than that?

I think what I would tell you is we're going to be working diligently as we go through the year. It's certainly more than a quarter or two. Is it going to be eight or nine quarters? Probably not. But, it's medium term I think. And we're working hard on that. Obviously, the flexibility that we've gained in getting a comfort level with other ESAs will also play into that over time as you could imagine.

Okay. And then maybe on the Liberty acquisition, you didn't have it in there too much in the quarter. But, could you comment on what impact, if any, it had on overall margins and how we should think about that in the second quarter and the impact as we go through the rest of the year?

Mike, that's yours.

Okay. Yes, for the first quarter, Gary, the -- when I step back and I look at the impact of Liberty on Q1, I'm thinking of it in terms of the single month and also some of the one-time costs that we had in the quarter that related to the acquisition.

So, I think, net-net, it had really no effect at all on the EBIT margin for the first quarter. So, what we picked up in terms of any incrementality from one month of acquisition was consumed by the one-time cost.

And on the bottom line, I would say there was a slight negative impact when you consider the financing cost that we incurred in the first quarter related to Liberty, particularly because we raised the money in January.

When you look towards the rest of the year, obviously, we had plenty of time to think about the impact that Liberty would have on our guidance for the full fiscal year. So, that's in there in terms of what we've provided on revenues and margins.

Just to go back to what I had said last quarter for the full-year guidance, typically, we guide to a 10 to 20 basis point improvement in margins. Our full-year guidance indicates that we anticipate a 40 basis point improvement. So, that's 20 to 30 basis points related to the incremental effect of Liberty, which was well beyond our baseline acquisitions.

So, I think it's reasonable to expect that we'll have some further margin accretion as the year progresses to achieve the overall full-year results.

Okay. Great. Thanks a lot.

The next question is from Frank Morgan, RBC Capital. Please go ahead, sir.

Hi, this is Brian Lawson for Frank. Thanks for taking my call. I wanted to see, like the commercial pricing trends you guys are seeing in the marketplace right now and then, looking forward, I was trying to think about what the pricing environment could look like in the US with the mandate and more patients potentially moving to exchanges. Can you tell us maybe your thoughts on that. Thanks.

Thanks. This is Ben. Why don't we split that into a couple issues? One of them is what will happen in terms of the commercials. And then the second one is the exchanges. I'll answer the exchange real quick.

Again, let's see what happens in June in terms of the Supreme Court as far as the exchanges. But, basically, I think you saw the announcement by CMS or by basically the government that the exchanges now will have the same MSP characteristics as normal commercials. So, I think it's too early to determine the impact of the exchanges. But, I think, Mike, you or Rice can talk a little bit about what you see in the normal commercials. You want to take it, Mike, or do you -- ?

-- Yes, no, I can comment -- .

-- Okay -- .

-- Follow up if he wants to. I would say we're not -- we really haven't said anything different about '12 than we have in prior years. You take these contract by contract. It's a negotiation with an important payer or customer. And over the years, as we've indicated, we typically on average get modest improvements in our commercial rates.

As we look at 2012, we continue to believe that's the case. Also, harkening back to a question that was asked a little bit earlier today, which we didn't answer specifically, our view on the bundling has not changed either. We've got -- we think we're about where we want to be. That might move around a little bit as time moves forward. But, we think we've got the right mix of bundled versus unbundled commercial contracts.

Okay. Thank you.

The next question is from Ingeborg Oie, Jefferies. Please go ahead.

Hi, good afternoon, gentlemen. Thanks for taking my question. The first question was on the minorities, maybe a technical one. I'm not sure if I completely understood the reclassification of costs that you mentioned because the line came in a bit below what we expected it to be in the quarter. And what -- were there any implications for the full-year expectations?

The second question is on your strategy with regards to JVs with positions that there is more of this included in with the Liberty acquisition. So, how does this impact your strategy? And also, should we expect to see more of this in future acquisitions, given that this is maybe a larger component of the remaining market?

Okay. You'll take the minority, and Rice will take the -- .

-- Yes, just on your question on minorities and -- it was a pretty high-level discussion because, frankly, it's a complicated question. But, I guess the best thing to say is, when you're looking at joint ventures and all the bookkeeping associated with minorities, you have to also consider variable interest entities, which are entities that you don't necessarily have an ownership interest in, but you support financially around the world.

And we had a situation where we reclassed some of the cash flows between operating earnings and minorities to the tune of $5 million. So, it's a very small number. But, when you're looking at minorities, it tends to be a very small number in the quarter.

That's why I said it's nothing to indicate a trend that -- when you look at our guidance, we were -- you can impute what we thinking would happen with regard to minorities when you look at net income versus net income attributable to FME. There's nothing happening in the first quarter that puts us off track to that trend. But, it had to do from a bookkeeping point of view with how we account for a variable interest entity.

So, we're going to stay with our guidance.

Yes, I wouldn't read anything (inaudible).

Rice, you want to -- ?

-- Yes, Ingeborg, it's Rice. In the case of JVs, your recollection is correct. Liberty is bringing roughly 100 clinics into our book of business that are all JVs. They were always 100% JV with physician partners. Renal Advantage was a little less so.

What I will tell you is we do like that strategy. We believe that it's very viable. We are at today, on a clinic basis, we have 369 clinics that are in JV arrangements out of roughly 2,034 clinics. That puts about 18%. Now, if that 2,034 number throws you, remember when Ben had in his slide 2,053, that's some managed clinics in there as well, about 21 of those.

But, so, we're at about 18% of our clinics on a -- in a JV relationship. We'll take those as they come. We're not afraid to do them. We don't expect that we'll be ever 100% JVs because that gives you a whole lot of clinics that are 100% wholly owned with us. But, we're comfortable managing the dichotomy between those two.

Great. That's helpful. Thank you.

Thank you, Ingeborg.

The next question is from Chris Gretler, Credit Suisse. Please go ahead.

Yes, thank you. I have two questions, first related to your international margin, actually. So, I was a bit surprised by the magnitude of the step up. Could you elaborate on these different factors you mentioned in your presentation with the remarks that have led to this 100 basis point increase, specifically?

And in particular, I'm interested also in the bad debt. I think it is the second quarter where we've taken no more bad debt expense. And given your DSO increase in international, eight days, year over year, I was wondering what the risk is on that side. So, that will be my first question.

And the second question is actually more of a technicality. Given that you made these accounting changes for bad debt in the US business, why wouldn't the revenue per treatment not change going back?

Those are yours, Mike.

Okay. Yes, relative to the international margins, I think the bad debt piece -- or, I guess the best thing to say if I did it proportionally is FX and bad debt had probably a similar effect in opposite directions, wash each other out. And I had commented (inaudible) lower product cost and the lower level of acquisition spend in fiscal '12 over fiscal '11.

And if I kind of size those for you, I would say that our products improvement is about three times the size of the impact to the acquisition. So, you're looking at a relatively modest effect year over year due to lower acquisition spend, a good improvement in production cost, and then FX pretty much washed out the effect of bad debt in international.

In the US revenue per treatment, if I followed your question, you're wondering why we're showing those numbers gross not net, correct? Yes, we did that because we thought it would make it easier for the investor community to follow the trending rather than looking at lots of restated numbers.

We had thought, frankly, coming in today that, from an industry perspective, we would have comparability. And as it turns out, we don't.

(inaudible) second quarter and we'll sort out whether we want to continue to report it on a gross basis, which we thought would be in your interests, or net. So, we'll see. We'll take a look at it and think about what we do in Q2.

But, obviously, because the bad debt's reported separately, you can easily calculate what the overall effect of the bad debt was.

And if there was a third question, I missed it. That was it?

Actually, the bad debt expense and the DSO increase internationally.

Yes, the -- .

-- And the risk coming out of that.

As we said before, when you look at the business around the world, you are dealing with governmental payers. There is some private reimbursement. And our bad debt experience in international is consistently that.

So, we continue to receive assurances from the governments in the various countries that we're working in that they're going to pay us, albeit a bit slower. We don't see in the markets we're operating in anything that's approaching what happened in Greece. We're watching that very closely. And certainly, (inaudible) in the countries we're operating in increases significantly.

But, for now, we are working with our customers and our payers to manage those carefully. And we have not as a consequence had any extraordinary -- we feel nothing extraordinary that we'd need to provide additional bad debt for beyond what you see normally in operations.

Do I find a geographical split of your accounts receivable somewhere in your disclosures?

No, I would say beyond generally what we provide in this meeting (inaudible) Europe, Latin America, and Asia, no. I think we've been very clear (inaudible) that we have an appreciable business in Italy, Spain, Portugal, France (inaudible) giving precise geographic splits on revenues.

Quite frankly, we operate in almost 40 countries from a services perspective and well over 100 countries from a products perspective. So, we've got pretty broad coverage in the international markets in all developed markets around the world.

Fully understood. Thank you.

Thanks, Chris.

Mr. Maier, there are no further questions at this time.

Great. Thank you so much, Jerry. So, thank you, everybody, for participating today. I wish you a great rest of the day and hope to talk to you soon. Thank you.

Thank you for joining us.

Thanks.

We want to thank Fresenius Medical Care and all the participants for taking part in this conference call. Goodbye.