Fresenius Medical Care AG (FMS) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fresenius Medical Care Second Quarter and First Half Year 2012 Earnings Conference Call. Throughout today's recorded presentation all participants will be in listen-only mode. The presentation will be followed by a question and answer session.

If any participant had difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. Please avoid the use of mobile phones for this conference in order to assure maximum sound quality.

I would now like to turn the conference over to Mr. Oliver Maier. Please go ahead, sir.

Thank you, Jerry. I would welcome all of you to Fresenius Medical Care's earnings call for the second quarter and the first half year of 2012. Also, a warm welcome to everybody who joins us today actually out there on the Internet. We very much appreciate your continued actually in the Company.

With us today are Ben Lipps, our Chief Executive Officer and Chairman of the Management of Fresenius Medical Care; Rice Powell, our Deputy Chairman of Fresenius Medical Care and Chief Executive Officer of Fresenius Medical Care North America and obviously Mike Brosnan, Chief Financial Officer of Fresenius Medical Care.

My duty, as always, I would like to start our presentation again by mentioning our cautionary language mentioned in our Safe Harbor Statement of our presentation in the materials that were distributed today. For further details concerning risks and uncertainties, please refer to our filings including our SEC filings.

That said already from my end, Ben, so the floor is yours.

Okay thank you, Oliver. Ladies and gentlemen, let me also extend a warm welcome to you, our Board Members, all of our employees, 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 our progress in North America and Mike will cover the financials and then Mike and Rice and I will answer questions at the end of the presentation.

Turning now to chart four, we are very pleased with our successful second quarter. We've seen strong operating performance with excellent revenue growth. All regions and segments have contributed to this achievement. Again, I'd like to thank the dedicated staff worldwide, the Management Board and the employees for their continued dedication to provide the highest quality products and patient care. We will continue that as our focus and also on improving operating efficiencies.

Now, turning to the numbers; for the second quarter 2012 our revenue was approximately $3.43 billion, a 9% increase over prior year. This reflects an increase of 13% in constant currency. We are also satisfied by the fact that we've been able to increase the operating profit in Q2 by 16% to $589 million. Our reported net income attributable to our shareholders grew by 11%.

However, in Q2 this includes an investment gain of $12 million, which we've been able to realize as a result of our initial 49% equity interest in Renal Advantage. Excluding this investment gain, the net income attributed to shareholders grew by 6% to approximately $276 million. This is very reassuring and shows that we are on a good path to achieve our full year guidance for 2012 and we expect another record year. Even more impressive is the fact that achieved results converted to Euros represents an increase of 24% on the revenue line and a 6% increase on the bottom line expands to 18%.

Turning now to chart five, we'll take a quick look at the first half of 2012. Our revenue was approximately $6.7 billion, a 9% increase over the prior year. This reflects an increase of 12% in constant currency. The operating profit increased by 14% to approximately $1.1 billion and this was the first time that we've achieved in the first half of the year a $1 billion operating income. Net income attributed to shareholders grew by 37% to 660, about $660 million, and of course this includes an investment gain of approximately $140 million. Excluding that our net income for H1 was up by approximately 8%.

Looking now, turning to chart six, we'll take a closer look at the regions in terms of revenue growth. North America had revenues of about $2.25 billion growing at 14%, reflecting an improved underlying organic growth as well as successful integration of our acquisitions in North America. We saw good revenue growth in Latin America of plus 20% constant currency and Europe, Middle East and Africa 9% growth in constant currency. In Asia/Pacific we've seen an increase or a sequential acceleration of their growth to 8% in constant currency.

Turning now to chart seven, today we provide dialysis care to more than 256,000 patients worldwide, which represents an increase of about 14% compared to the previous year. In the first half of 2012 we've delivered approximately 19 million dialysis treatments worldwide, an increase again of about 14%. Globally we operate about 3,100 clinics. Approximately 2,000 of them are in North America and about 1,000, 1,100 are in the international area with Europe having about 600 clinics, Latin America about 225 and Asia/Pacific very close to 250 clinics.

Again, I would like to say that after these acquisitions we are moving back to a more normal operating mode and we'll do about 100 de novos this year, which is pretty close to our 2010 de novos and these will be split pretty much 50/50 between North America and international.

Turning now to chart eight, you can see the performance of our dialysis services. We've experienced very strong global growth of 16% in constant currency, 15% for the half year and that was driven by strong growth in both regions, international as well as North America. This strong growth reflects our acquisition program in both regions combined with good, very good, organic growth in the international of approximately 5%.

Organic growth in North America sequentially improved to 2% for Q2 and we continue to see very good same market growth in North America as well as international.

We are also pleased to report that during this, the very difficult times that we're experiencing in the currency around the world, in Europe and Latin America year-over-year our average revenue per treatment has increased in 13 out of 29 countries where we provide dialysis. The average revenue per treatment, however, has decreased about 1.5% in constant currency but this is because of changing country mix with our acquisitions and clearly we talked last year about the decreases in Portugal, which have been basically contributed to the decrease this year.

So for 2012 we expect the average sales per treatment or revenue per treatment in the international areas to be pretty -- to be nearly flat in constant currency.

Turning now to slide nine, or chart nine, as I mentioned we've always had a clear commitment to product quality and service quality. Chart nine has a lot of numbers on it but I think there are some very important contributions to quality that I'd like to point out.

And, again, this chart represents our outcomes as seen as we treat 250,000 patients on a worldwide basis. we are very proud that we continue to deliver 96% to 97% of the time the prescriptions prescribed by our physicians, by the physicians treating the patients, and it also continues the improve by a few basis points each year, showing that we continue to maintain this strong quality commitment to deliver the therapy prescribed by our physicians.

The green shaded areas represent metrics that have improved over the past year and I'll focus on about five of them, catheters, anemia, nutrition, bone mineral or phosphorous removal and hospitalization.

With respect to catheters after 90 days we're making excellent progress. 82% of our patients in North America are without catheters after 90 days and again, this is led by Asia/Pacific with 94%, and very good progress in all regions.

Anemia, looking at our anemia management in the US, as you know, the new regulatory focus is between 10 and 11 grams per deciliter and it differs from the previous guidelines of 10 to 12 grams per deciliter. However, I would like to point out that we are clearly making excellent progress in tightening that curve. Our staff in North America and now about 77% of our patients are within the 10 to 12 grams per deciliter region. And again, Rice will talk a little more about some of the other activities we have here in North America.

I'd like to also point out in international we still keep the focus between 10 and 13 and we have about 77% of our patients between 10 and 13 grams per deciliter. In addition, I would like to point out that all of our retrospective studies dating back as far as 2003 continue to demonstrate an improved anemia state, reduces hospitalizations in costs and provides for lower mortality. I do believe the natural variation in hemoglobin levels have prevented the prospective studies from confirming this retrospective data.

Turning to nutrition, in terms of nutrition we can see that we're making progress in terms of measured albumin levels of our treated patients. Over 85% of our patients on a global basis now have an albumin greater than 3.5 grams per deciliter. Looking at bone mineral management, we're making good progress. You can see that the progress in the US is improving. We have almost 65% of patients being treated below 5.5 grams per deciliter. In the international area we have 77% in Europe, 72% in Asia/Pacific.

As far as hospitalizations, we continue to make progress, although I believe we are balancing the effects of improved nutritional state with the patient anemia state here in North America. Turning now to page -- to slide, chart 15, I'm sorry chart 10, I'd like to talk about the products growth.

If you look at the total products growth, we had 6% growth in constant currency, clearly equal or above the market. Our external growth was also 6% in constant currency. International had 6% in both areas and North America continues to show improvement with a 3% increase in Q2 compared to a 4% decline in Q1. We've clearly got some good improvements in the products area in the US, which Rice will talk about in his presentation.

Turning now to my summary chart, that's chart 11. Clearly we maintain our focus on providing the highest quality products and patient care. As Rice will show you, we're progressing well with our international, or with our North American integrations. We are also progressed very well with our international acquisitions, the integration of our international acquisitions, excellent strong cash flow, you'll see that, and we continue to focus on R&D with new products coming to market. And we are also conducting a number of clinical trials around the world to try to improve the anemia management, bone mineral management and hydration management of patients that we treat in our clinics. And, as I mentioned, we confirm our guidance for 2012.

So, at this point, I'd like to turn it over to Rice, who will give you some input on our progress in North America. Rice?

Thank you, Ben. Good afternoon, good morning, everyone. We in North America had a very good Q2 and I'd like to thank those of the North American team that are on the phone and on the web for their very, very good effort in the second quarter. With my next four slides I will give you some detail on our North American performance in the second quarter.

If I could direct your attention to slide 13, the North America update, we remain on our plan for the Liberty Renal Advantage integration. Our teams are busy, lots to do with good progress is being made in our integration activities.

Ben has commented on our revenue growth so let me say on our same store growth we continue to improve, as we promised you we would and, as you can tell from 2.7% in the fourth quarter of last year, 3.4% in the first quarter and then bumping up to 3.6%, we're not satisfied at this point. We're going to continue to push and then see this growth increase but we are making progress and that is rewarding for those that are working so hard in that endeavor.

Continuous improvement in patient outcomes and operating performance is key to our operating philosophy in North America and we're going to continue to press forward and we'll talk more about that in the next quarter as well and we hope to have good results to show you in those areas.

Our conversations with the government on integrated care continue. We are excited. We continue to feel good about the process as it moves forward.

If I could direct you to slide 14, what I am showing you is our revenue per treatment and cost per treatment analysis for the US dialysis services business. As you can see, we achieved a Q2 revenue per treatment of $351 versus $348 in the second quarter of last year, a 1% improvement. On the cost side of the equation we lowered our cost per treatment for Q2 by $3 per treatment resulting in $280 cost per treatment for the second quarter versus $283 a year ago, so again, a 1% decline in our cost per treatment.

Not on the slide but a data point that I think you'll find of interest is that we have recently signed two new contracts with our commercial payers. These are multiyear contracts in term and they are bundled contract as well but I think you should know that information and I'm sure we'll have a little more discussion during the Q and A on that activity.

Now, turning to slide 15, I'd like to direct your attention to the product section. As Ben has said, in the external as reported line we show good growth at 3.1%. Accounting for the acquisition of Liberty Renal Advantage, and additional excluding the divested clinics as well, the revenue then on those calculations excluding those two activities shows external product growth of 6.2% for the second quarter. As you know, we had some rough quarters in previous years. I feel good about where we are. I think we're getting there with good innovation, new products coming out, good quality in the continued desire for our people to make sure we're providing products for unmet needs in the marketplace.

Looking at slide 16, there's a lot of information on this particular chart. In consideration of the remaining time that we have I'd like to draw your attention to point number four. The net increase for 2013 is 2.5%. There is no transition adjustor for next year as well but the obvious question on everyone's mind is with a good guide of 2.5% as a net increase will we see a 2% downside as a result of sequestration? We obviously don't know the answer to that. We will plan for the worst case and work very hard for something positive to develop in this area.

In conclusions, I think given the time we have, Mike, I'd like to turn it over to you and let you take people through the financial statements.

Thank you, Rice. And good morning and good afternoon to everyone. I'd like to welcome you to the call as well. I'll review the financial statements and then update you on our guidance for 2012. So if you turn to your slide 18, as you can see, our top line growth at $3.4 billion Ben has already commented on, very good growth at 9% with 13% on a constant currency basis.

Operating earnings grew at 16% to $589 million and worldwide our EBIT margin increased from 16.2% to 17.2%. We continue to show margin improvements, both in North America and in international despite the difficult operating environment around the world. In North America our margins improved 150 basis points with approximately 90 basis points of this improvement the result of gains we experienced from divesting the clinics associated with the Liberty transaction net of some additional one-time costs related to that.

The balance of the improvement in North America was 60 basis points, which was generated based on improved revenue rates largely driven by Medicare, our expanded services and some benefits associated with our Liberty acquisition. This was partly offset as Rice commented on by commercial pricing, the non-bundled drug utilization that we've commented on, both in 2011 and earlier this year and by increases in personnel costs, bad debt and depreciation.

In international the overall improvement in margin was about 20 basis points. This was largely driven by foreign currency gains and a benefit associated with increased business in our Asian operations. This was partly offset by slight increases in our bad debt expense in international.

Moving down our income from equity method investees is down about $5 million reflecting increased spending on our development of the new phosphate binder, PA21.

Looking at interest expense, that increased from $75 million in 2011 to $104 million this year. As you would expect, this is related to our capital markets activities, particular our acquisitions and the changes that we've reflected in the business over the past 12 months.

Sequentially we're up slightly in interest expense related to the financing of the Liberty transaction.

Moving to tax expense for the quarter, you can see the reported effective tax rate is up 40 basis points. This difference is essentially due to the higher tax we paid on the gains related to divested clinics. This, as you know, is largely driven by the non-deductibility of goodwill for tax purposes. That increased tax effect was partly offset by the tax free nature of the $13 million investment gain that Ben referred to earlier in the call.

If you eliminate both of these effects, the tax rate is essentially flat year-over-year. Our non-controlling interest has increased from $25 million to $36 million and this is due to our acquisitions and the result in our underlying joint venture operations.

Our results for the second quarter I think are consistent with our guidance with regard to non-controlling interest for the year. Overall our earnings are up to $289 million. As Ben has commented, $13 million of that increase is due to the non-taxable investment gain.

Turning to chart 19 and just commenting on the half-year results, again a good top line growth at 9% current 12% constant currency, operating income is up 14% to $1.1 billion with margin showing 80 basis points of growth. 30 basis points are from the divestiture gain net of costs associated with the Liberty acquisition with an underlying 50 basis point improvement in operating margins coming again from improved revenue rates in North America, offset by personnel costs and good results in the international side of the business.

Net interest expense is consistent with the increases in Q2 and the drivers that I commented on and on income taxes at the half year mark, again the operating rate is flat at about 33.8% with the financials showing the benefit of the tax free investment gain, partly offset by the increased taxes on the divestitures.

Net income of $660 million for the half year excluding the investment gain is up 8%. It is worth noting that for the half year results the net effect on earnings of the divestiture gains and the one-time legal and other costs associated with the Liberty transaction is relatively small at a plus 1% for the half year.

Turning to slide 20 and starting our discussion of cash flows with the chart on our day sales outstanding, you can see that our DSOs improved worldwide by four days sequentially and ended the quarter at about 77 days in total, down from 81. North America is down one day sequentially to 54 days and international is down four days to 120 days at the end of the second quarter.

In North America we're down five days year-over-year, which shows the great job our folks have done in the market, stabilizing the switch to the bundle and managing our system's conversion, which is ongoing. We're very, very pleased with the North American DSOs at 54 days.

In international we're particularly happy to see the reduction in days. This represents a great job in execution by our employees all over the world, having in mind the extremely difficult economic environments around the globe. We also benefited in the second quarter by a substantial payment of past due amounts in Spain.

Despite this, we will continue to monitor the collections in the important markets the Company has around the world as the year progresses.

Turning to chart 21, looking at our cash flow statement for the second quarter, you can see that operating cash flows are very strong at 13% of revenues, up from last year's 10%. We had consistent performance year-over-year in earnings related cash flows and we benefited in the quarter from the improvements in our relative performance of accounts receivable.

Capital expenditures at $151 million were about 4.4% of revenues, roughly 70 basis points higher than last year, and the split of our CapEx is relatively consistent, 60% maintenance, 40% expansion, with services representing about 55% of the overall level of capital spend. As a result, free cash flow is 9% of revenues.

Acquisition spending is a net benefit in the quarter of $6 million. This reflects a modest level of spend offset by the proceeds from our divestitures in the quarter. The comparable figure from last year largely reflects the acquisition of IDC from Euromedic in the second quarter.

Turning to chart 22 and looking at the half year results, again strong improvement in receivables is driving the 14% of revenues in our operating cash flows. Capital investments are consistent year-over-year and acquisition spending of $1.5 million reflects the closure of the Liberty acquisition in February net of divestitures.

In 2011 the half year figure reflects the IDC acquisition that I mentioned a moment ago as well as our initial investment in our partnership with Liberty through Renal Advantage early last year and some other smaller investments in the US and other countries around the world. We finished the quarter with $677 million of cash on hand and available borrowing capacity of roughly $1 billion between our credit agreement and our accounts receivable facility in the US.

Our credit agreement has begun to amortize meaningfully in this quarter with the first $380 million payment on the term loan be due at the end of June and that will continue quarterly through March of 2013. Our liquidity is adequate to address this requirement and we anticipate renewing our credit agreement later this year, with a similar agreement in structure and term depending on market conditions at that time.

My last comment with regard to cash flows is normally we don't comment about our legal calendar but I will make an exception for a trial that is scheduled to begin in just a few days on August 6th in Federal District Court in Boston, Massachusetts. At issue in this trial are a civil settlement payment deductions taken by the Company on prior year's tax returns. These deductions were disallowed by the IRS and the Company then paid the Federal tax.

The trial will consider the Company's complaint for a complete refund of the federal taxes paid. I don't want to prejudice the case and therefore I can't comment further on the specific but we have made regular disclosures with regard to the issue in our regulatory filings with the SEC on 20-F and 6-K over the last several years. My comment is really simply driven by the fact that a few days after this call you may see that the trial is starting.

Turning to chart 23 and looking at the development of our leverage, at the end of the quarter our total debt was about $8.8 billion and our EBITDA development was also strong so as expected we are seeing a slight decrease in leverage now that we've closed our large acquisition fiscal 2012 and we've come down from 2.96 at the end of Q1 to 2.92 at the end of the second quarter.

Turning to my last chart, 24, and taking a look at our outlook for fiscal 2012, we -- as you can see, we are confirming our guidance that we provided to your in February and affirm at the end of Q1 in our make fall. The same market growth in services is in the 4% range worldwide, which is exactly what we indicated at the beginning of the year.

To give you a little bit more color, organic revenue growth has softened a bit due to the pricing and bundling that we indicated would take place in our guidance and obviously in the US, as Rice had commented, on our new long-term agreements that we've put in place since the beginning of the year.

On the international side the -- we indicated to you in our full-year guidance that any anticipated reimbursement cuts were anticipated in our guidance. We do have a few countries where expected reimbursement increases have been delayed, so that's what's softening the organic revenue just a bit.

On the other side we are seeing an improvement in our revenue expectations related to our acquisitions.

Currency exchange rates have an impact on us consistent with the framework that we provided to you in our full-year guidance both in February as it related to the top and bottom line. Due to these developments, we have provided some additional clarity to our guidance with regard to revenues and net income. In the note to the chart you'll see that we've indicated that the [title] mark, be approximately related to those two references, means that we're within a range of plus or minus zero to 2% of the indicated number.

With that said, I would indicate that in terms of the top line we indicated a range of 13% to 15% growth on a constant currency basis with regard to revenues and currently we're at the lower end of that indicated range.

With that, I will turn the meeting back to you, Oliver.

Great. Thank you, everybody for the update and this presentation and I think, Jerry, now it's time to open up the lines for Q and A.

(Operator Instructions). The first question is from Jonathan Beake, Citi.

I've got two questions, one for Rice and one for Mike. Rice, you commented on the sequential improvement in same store growth in North America, stated that you are not done yet. I was wondering how much further do you believe you can go, what's the sustainable rate for the future that we should be and do you have a target that we should be considering in our models?

And my second question is for Mike. You commented on the favorable DSO developments, which somewhat goes against the trends that we are hearing of elsewhere in healthcare. Do you believe this is sustainable or are you expecting it to carry us over the second half of the year?

Rice, go ahead and take--

Jonathan, thank you. It's Rice. What I would say is we're not done. As you well know, I think in my mind I believe we should be looking at same store growth four plus percent. I think that's a target that I'm pushing my team to. How much longer will it take to get there or when will we be there? I'll -- not going to venture to guess at that point but I hope that every quarter you'll see continued growth on our part but we really do believe we should be in the four plus same store growth quarter.

Mike?

Yes, Jonathan, with regard to DSOs I think that obviously the second quarter was helped by the payment we received from Spain but when you look more granularly we are seeing improvements in a number of countries around the world so for the back half of the year frankly I'd be very happy if I saw a relatively flat or stable DSO because it's involving so many different countries but I think we're having some good news from another -- from a number of countries as the governments get their hands around what they want to do with past due payments.

And I think, John, as I mentioned, we're in a unique space and that is that we're working very closely with the governments who are mainly the payers outside the US and everyone wants to control our healthcare costs and we're only 40% of the revenue around the world so we're working very closely and, as Mike said, would be -- we'd like to keep it in the same range but it's we're just different than everyone else and we've got a different approach to this okay.

Thank you.

Frank Morgan, RBC Capital Markets.

Two questions; one, maybe you reference a continued discussions on integrated care and I was just curious could you elaborate a little bit more, maybe talk a little bit about timing and size and any other details you could have there. And then over on the commercial side, you mentioned a number of new contracts that include a bundled feature. I am just curious on the commercial side are you having any discussions on that side with regard to the integrated fair models and innovative payment systems? That's it. Thanks.

Frank, thanks. Rice, I think both of those are in your area.

Sure. Frank, on integration care we still are bullish. We, as you probably know, there was a call yesterday that CMMI had set up. I think a couple of key sections coming out of yesterday's call was there was great consistency among large, small providers, patient associations as well that integrated care was something that should come to be, that folks really believed it was a way to take this disease to a better management spot, if you will, so we continue to believe we're making progress. I really can't venture to guess as to when or the size of that. I just don't know and my guess would not be better than anybody else's guess.

And the area of commercials, yes in fact we have got a small pilot going with one of our commercial payers in the integrated care area. It's very small, early, early stage but clearly the discussions and the talk about what we're doing with the government has sort of spilled over, if you will, into commercial opportunity so very small, early stage but the good news is we're having dialogue with commercial payers about the opportunity.

Just one final question, as you think about that clearly being a long-term opportunity if you've enjoyed the benefits of moving to the bundle in the US, what do you see as sort of an intermediate terms [debt] to growth, another catalyst for growth? Thanks.

Frank, I think there are a couple of things that we continue to have opportunity in the growth area. One is we continue to see good growth in our home therapy business. Our growth in the PD area for our service businesses in second quarter was 10.5% so that was a nice growth for us at this point. And I will continue to say that when you look at our same store growth this is a process area for me. This is all about the ease within which patients can call and get into our clinics and I think our improvement that we're seeing there means that we're adapting and changing our processes appropriately to make that easier for people. So I still think there's room for opportunity here. We're going to continue to push on it, bullish on integrated care but not going to stand still and wait on that. we have to continue to push this through as best we can in the core areas.

Frank, thanks for your questions.

Gary Lieberman, Wells Fargo.

If you said it forgive me but can you tell, discuss what ESA utilization did in the quarter?

Thanks, Gary. Rice, why don't you handle it?

Yes I can.

We didn't but we'll give you the information.

Yes, Gary, hi. It's Rice. What I would tell you is we've really seen the EPO dose reduction kind of come into the predicted range that we had given you some time ago. I think the last time we spoke in February or perhaps at May, we had talked about we thought there might still be a high single-digit drop in the EPO dose through Q1 and early Q2 and in fact we've seen that. We saw just right at a 10% drop so I think we're sort of in the zone that we had predicted we would be in. There could still be a little movement around but we feel like we've kind of gotten into the spot where we thought we would.

Okay and then maybe any comments on the initial take on your trial with (inaudible)?

Sure. No great question. We're currently looking to put 10,000 patients on by September. We're about 50% of the way there, meaning that 50% of that number has seen their first dose and we believe we're on a track to get the remainder dosed by September and again, as you know, this is really all about looking at safety and the operational effectiveness of [Osmontis] and so we're excited to get this study underway and really see what we're going to learn here over the next number of months.

Okay and how long do you think it would take before you have a meaningful amount of data where you can further assess it?

Yes it's going to be into next year. I am going to give you kind of a broad range of somewhere in Q1 to Q2 simply because there's going to be a lot of analysis and work that we're going to need to do so I can't be too specific but figure first half of next year we're going to have I think a better idea obviously about what this looks like.

We'll have the first pass at looking at it.

Yes.

Okay great thanks a lot.

Tom Jones, Berenberg Bank.

I've got a couple of questions on three different areas really. The first is just on the international business. We're seeing a lot of healthcare companies fundamentally reassessing the areas that they're doing business and how they're doing business, particularly in Europe. I just wondered how that's baking into your thinking at the moment, whether there are certain markets, which are contractually de-emphasized going forward and redirect investment elsewhere, just some color with that relationship context about pricing being a perfect variable across the various international markets.

The second question was just on the US. I guess most of the sequential drop in US revenue treatment was related to these new bundled contracts. Two questions I have on that area really, one just how shall we be thinking about the revenue treatment development in the second half of the year? And second just intrigued as to what's driven you to sign up a couple of large insurers on bundled contracts at this particular point rather than at any point in the last one to two years.

Those are kind of the main questions really.

Thank you, Tom. This is Ben. I'll take the international. Rice, you can take the bundle. I think, Tom, as you know, we're in a different space than many of the other healthcare providers around the world and what were finding is that the patients are still there. They're growing in terms of 5% to 6% a year and we're providing service in about 35 to 40 countries that have had programs for many, many years and we are not the complete cost of treating these patients. So were working with all of these payers to find more effective ways to treat the patients and also to accommodate their cost sensitivities or their healthcare cost sensitivities so we basically have been expanding, as you notice last year, in all these countries and I think that that will continue so we're just in a different space than most of the -- many of the other healthcare groups.

Rice, why don't you take the North America one?

Sure. Tom, it's Rice. On a revenue per treatment I think Mike had said it earlier today. In the second half of the year we think we're going to be somewhere in a range of 2% to 3% on the revenue per treatment increase and we're hoping to see our cost per treatment held down to around the 1% to 2% would be our target.

And relative to why sign up now, it's been our strategy. I think we communicated this back at the end of last year that we would look at opportunities to sign commercial contracts when we felt the time was right. I think we got to a point where we were comfortable so again, these are multiyear bundled. We're comfortable with we're just feeling our strategy and our plan as we go through the year and let me go back and just clarify too. On the first answer I gave you that 2% to 3% rate on the revenue is really a full-year rate. It is what we're going. Don't let me mislead you on that.

Okay perfect and just on the bundled contracts I don't know the accounts question on it but do they have sort of annual price step ups in them and is that tied to the rates of the commercial insurers getting on their premium increases or is that a bit too much detail?

Well, it's a lot of detail. Maybe I'll say it this way. In any negotiation with partner there is give and take and we feel comfortable with where these, the give and take discussions, came out. Maybe I'll just leave it at that.

Okay I had one quick follow up on Liberty. Now you've got your feet firmly through the door. Is there anything in there that you found that's been more pleasing than expected or vice versa, any skeletons you found in there that are not been quite to your liking and maybe pick up that on where you're standing in regarding synergy potential out of that deal might be of use to us?

Yes, Tom, I would say this. From the skeleton standpoint we haven't seen any boogey man in the closet that would scare us. I think the upside for us has been just the quality of the people that have come into Fresenius as a result of that transaction and the physicians partners that we're getting a chance to work with. We're just very pleased at this point.

Right.

Tom, from my stand -- it's Ben. It's been handled very well and I think, Rice, it's been very gratifying that it has gone as well as it has. We enjoy the people and they're basically very similar to our group.

Perfect.

Martin Wales, UBS.

You've opened a reasonable number of de novo clinics in the US this quarter. How shall we think about that going forward and how are you looking at the (inaudible) between de novos versus acquiring clinics in the US going forward? I guess the second question on catheterization I am assuming that the Asia/Pacific number is about as high as you can possibly go just for patients suitable for a non-catheters or suitable for (inaudible) a catheter approach. Do you think you'll ever get the US at that sort of level?

Martin, hi. It's Oliver actually. We didn't get your first question, if you could repeat that one, sorry.

De novo clinics in the US, 16 in Q2, what are you thinking about the going -- how should we be thinking about this going forward?

Oh okay thanks.

Go ahead.

Sure, Martin, hi. At 16 in Q2 I would guide you to consider somewhere around 45 to 50 for the full year, 52 or 53, something like that. That would be the range. I don't think that's too out of the realm of our past experience.

And more generally, how are you viewing the de novo versus buying decision for US clinics from here?

Well, a lot of things go into that. I probably won't get into all of that detail. We certainly kind of run through our own analysis but two things happen. One we consider are these wholly owned clinics that we're looking to do de novos, might they be JVs, where is the geography and what is the current footprint? So obviously there are a lot of things that go into it. But let me give you this. We're not changing our outlook on that as a result of anything that's gone on. We continue to evaluate these opportunities in the same way. We really haven't seen a shift in our desire from that standpoint, so we're -- I think we're being consistent as we evaluate the opportunity.

And, Martin, if you step back and look at it on global basis, we're basically treating about 4% new patients in terms of, 4% to 5%, so that you'll need to bill. We had about 3,000 clinics, you're going to need to build somewhere between 100 and 140 but I think as we more and more into some of the home therapies we get a little more efficient so 100 represents basically what we'll need for continued growth for the basis that we have today.

And catheters?

Rice, why don't -- I think you're talking about the rate of catheters in the US versus say Asia/Pacific?

Yes I am assuming you can't go any higher in Asia/Pacific than you have done. That's some sort of natural limit for what can we achieve.

There clearly is a natural limit, I think 95% is very good and again, I think, Rice, if you want to comment but we've made great progress but there is an upper limit that you can get to.

Yes I would say the easiest answer, Martin, if it were left to me, we'd just annex Asia into North America and that would be great but we can't really do that. It is hard work and our medical office and our physicians partners are doing a great job. I think there is some more improvement that you'll see but obviously it gets tougher once you get up into the low to mid 80%. It's really hard to see a big jump up from that but we're going to continue to work hard on this.

And I think the other thing that they aren't quite comparable is that really the age between the Asia/Pacific age and the North American age you've got significantly older patients in North America and so you don't have the time many times to prepare for fistulas but good progress and I think Asia is probably at the high end, very high end.

Great thank you.

Chris Getler, Credit Suisse.

I have a few follow-up questions. And the first relates to a divestiture of clinics actually. How far in this process are we and what kind of thinking do you have now in terms of gains for the second half now that you are looking at an IP stage and if potentially incorporated in your guidance? That would be my first question.

And then coming back to the commercial bundles, could you indicate to some degree what kind of percent that business is now and what essentially is the difference now in the bundle you signed with this commercial insurances relative to a government so I was wondering that and you mentioned that in orders there was softening or you expect some (inaudible) softening in reimbursement with the rates there and now I didn't really get what the benefit now to SMC were except maybe for the long-term nature of the contract, if you could indicate a bit what was your thinking here?

And then the last question is actually on Renal Advantage in terms of integration process, how far through you are in relative to the overall progress in integration (inaudible). That's all.

Chris, thanks. This is Ben. Why don't you, Mike, talk about the guidance and what it--

Yes I can take that one.

And, Rice, the other two.

Sure.

Go ahead.

Which one do you want me to comment on?

On the divestitures.

Actually I'll take the first two. With regard to the divestitures, we're pretty much done. There's just one state left with very few clinics that has a longer administrative process to get these kinds of things done so you won't see much activity at all in the back half of the year. we're I'd say 98% complete.

In terms of the commercial contracts and the bundling, we've said for a number of years that we're not going to disclose specific percentages. We've indicated that the majority, meaning more than 50% of our contracts, commercial contracts in the US, are bundled at this point so I think that's as far as we'd want to go. Rice has already commented that in the current case these deals made good sense for us to lock in some long-term rates with those payers.

And then lastly, I think it may be a little bit of language but when Rice was updating the Liberty transaction that actually is the successor company to the Renal Advantage so that integration is proceeding very well. Folks are very busy in the US and we anticipate we'll get the consistent results that we indicated in our guidance from that. The integration will be done by the end of the year we anticipate.

Great, Mike, you got all three of them. Chris, was that okay for you or any--?

Yes that's fine thanks.

Jerry, we can go to the next question if there are any.

Excuse me, Mr. Maier, there are no further questions. Please follow through with any other points you wish to raise.

Great thank you so much. We would like to thank everybody actually who was joining us today for the Q2 call and we are looking forward to talking to you next time. Thank you so much.

Thank you very much for joining us.