Fresenius Medical Care AG (FMS) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fresenius Medical Care Q 2012 Conference Call. Throughout today's recorded presentations all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If any participant has difficulty hearing the conference, please press the star key followed by a zero on your telephone for operator assistance.

I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Great. Thank you so much, Jerry. Thank you, everybody, for being back. I would like to welcome all of you to Fresenius Medical Care's earnings call for the third quarter and for the first nine months of 2012. Also, a very warm welcome to everybody who joined us today out there on the web; we very much appreciate your continued interest actually in the Company.

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

I would like to start our presentation also by mentioning our cautionary language that is in our Safe Harbor Statement of our presentations and the material we distributed today. For further details concerning risks and uncertainties, please refer to our filings including our SEC filings.

One more housekeeping item for today's call because of the impact of Hurricane Sandy on the East Coast and the US, many analysts and investors are still without power or may not have reliable server access to join today's call on line. However, for fair disclosure considerations and that we are aware of the fact that we always have a big crowd joining us for our disclosure call, I would like to ask those who have dialed in to limit their questions to just two, absolutely max three questions per round, in an effort to get everyone an opportunity to participate in the Q and A portion. Obviously absolutely feel free to reenter the queue if you wish. We will of course provide a playback with -- but we would appreciate everyone being considerate of our time constraints.

That's it from my end, Ben, and the floor is yours. Thank you.

Thank you, Oliver. Ladies and gentlemen, again let me 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'll cover the global business update. Rice will cover the progress in North America, Mike will the financials. Then we'll go into questions and answers.

Clearly third quarter was a very challenging quarter. Yet we did make progress defining our going forward prospects with a number of focus projects that I believe will strengthen our business as we look ahead. In light of the negative implications from the difficult economic environment and currency fluctuations, we did accomplish a good operating result with excellent cash flow for the third quarter.

Although the third quarter is my last quarter that I will report to you as a CEO and Chairman of the Management Board, I would like to point out that the CEO transition to Rice Powell continues on track with the appointment of Ron Kuerbitz as the new CEO for North America effective January 2013. Working with Rice and the Management Board as we have done for the past 13 years, I believe that our prospects for continued growth remain very solid and excellent.

I would now like to turn to chart four and talk about the numbers for third quarter. As you can see, our revenue was approximately $3.4 billion, a 7% increase over prior year. This reflects an 11% constant currency increase. North America grew at 13%, impressive, and the growth in International was 7% at constant currency.

Asia Pacific and Europe had seen weaker revenue growth than normal in the services business, which I'll talk a little bit about as I get to talking about the services. However, despite the challenges, our operating profit increased by 6% in dollars to approximately $570 million. In North America we saw strong development of our operating results in the high 18% range, which Rice will discuss as we go through later.

Now, our net income attributable to shareholders, however, did decrease 3% in dollars and in Euros it increased 9%. So again, I'd like to thank all of the dedicated staff around the world, the Management Board, for their continued dedication to providing the highest quality products and services in our center as you'll see from the quality charts later in my presentation.

Turning now to chart five, we'll take a quick look at the nine months. Obviously I won't spend a lot of time on it. Rice, Mike will cover more later. Our revenue for nine months is approximately $10 billion, an 8% increase over last year, an 11% increase in constant currency.

Our operating profit is also increased by about 11% to approximately $1.65 billion. Our reported net income attributable to shareholders including the investment gain was 22% to approximately $930 million.

I would like to comment a little bit about this because this gain, which was a result of our minority investment programs in the US in 2010, allows us the opportunity to execute some special projects this year, which Rice will talk about later and set the stage for future growth and future continued solid performance, so I would like to -- Rice will talk about them and Mike will talk about them but this is an opportunity that we clearly are focusing on in fourth quarter.

Now, excluding this investment gain, as we have during the year as we've set our guidance, clearly our net income grew by 4% in US dollars for the nine months and 14% in yen and Euros because of the fluctuations between the euro/dollar.

Turning now to chart six and we'll take a little closer look at the revenue in terms of the regions. North America approximately $2.25 billion in revenue, 13% growth again, reflecting a strong underlying organic growth as the integrations of our acquisition in North America continue to -- that Rice will talk about -- continue to provide revenue and profit.

Now, we saw very strong revenue growth in Latin America plus 23% in constant currency. However, in Europe, Middle East and Africa, EMEA, we saw a 4% growth in constant currency. This is primarily driven, I'll show you later, by the activities in the service area and, again, because we're vertically integrated we got the benefit in the products area.

Turning now to Asia, we see a further acceleration in the growth in Asia from second quarter to about 7% constant currency. However, the norm for Asia is, Asia-Pacific, is usually in the range of double digit and the reason that we're a little bit behind the norm is that we made a decision to change our distributor relationships in China and this allows us to essentially approach that in 2013 a very strong opportunity in China, which we continue to see growing at the 25% plus range in terms of patients.

So our revenue growth in China then for our third quarter was only about 19% and again when I say only about 19% is extremely impressive, but in China we've been kicking the lights out at approximately 25% to 30% growth over the past couple years.

I'd also like to point out that we're actually in our net NephroCare cooperative dialysis clinics in China, which we essentially help manage with the regional ministries. We are now treating 6,500 patients in almost 70 clinics. So of course, that shows up as products business, but we have a very good profile in China, both the products and the service, and again like I say, it was the right time to change the distributorships and essentially optimize our China distribution system.

Turning now to slide -- chart number seven, we'll talk about dialysis care in clinics. This is a fairly standard slide; I think, almost everybody probably memorized it by now, but essentially we're treating about 250,000 patients as we complete Q3. We're back into the normal mode of de novos. We had very few acquisitions in third quarter and our de novo rate is essentially 100 per year, in that range, and we're back at that you'll notice. We're doing about 25 a quarter.

Now we have seen a 12%, if you look year-over-year we've seen a 12% increase in clinics. This is from the acquisitions and the normal growth. We did, for the first three quarters of the year, deliver almost 29 million treatments, which also is up about 12%.

North America has about 2,000 clinics. International has about 1,000 clinics distributed between Europe and Asia-Pacific and Latin America. So essentially our network is pretty solid. We're in all the right regions. We're pretty much back on a de novo growth rather than major acquisitions; hence, pretty much we're moving back towards business as usual.

Turning now to chart eight and talking about the performance in our dialysis services business, you can see that globally we have a very strong 12% constant currency growth in Q3. This was really driven strongly by North America. I'd like to point out that the organic growth, the same market growth in International, which usually is in the 4% range, is a little lower than that this quarter and it's because of a very interesting phenomenon that we see in a couple of countries, Spain and the UK. Because of limited admittance to hospitals, the actual -- these countries now have hospital space, which in the past they did not and so they're actually treating some of the patients that would normally go to our clinics in the hospitals. The good news is we're selling a lot of machines because they have to set up to essentially run dialysis.

So the same market growth then is low in International at about 2%. I do believe it will come back to the normal 4% range over in the foreseeable future. The other good news is that we also see that the organic revenue growth in International is 5% and that is a reflection of our success in continuing to see increase in revenue per treatment. We have received reimbursement increases in 13 out of 30 countries over this past year. We've also offered and are being paid for additional services, such as hydration management and hemodiafiltration.

So the International Group their average constant currency revenue growth this year actually increased by 2%, which is clearly above what we had expected in terms of the actual revenue per treatment increase. So International we're seeing a little bit less, same market growth but we're also seeing good organic growth and we're able to capitalize on our structure in those countries that have issues in terms of open hospital space.

Turning now to chart number nine, our quality chart, a lot of numbers on here, I apologize for that but quality is very important that we monitor it. We work with our medical colleagues around the world and we're very proud of the fact that we actually have an opportunity to share with the world some very key quality metrics that are in Asia-Pacific, Europe and the US.

I think I would like to point out we continue to deliver globally between 96% and 97% of the time the prescriptions that our physicians prescribe for their patients. That is a significant accomplishment when you look at operating in 3,000 clinics around the world under many, many different conditions.

I'd also like to point out that we are also globally making progress on replacing catheters with fistulas. You have through 90 days because again it depends on the intake system whether they come with a catheter or not. We're actually up to 82% of our patients in both North America without -- that do not have catheters and clearly Asia-Pacific leads with about 93%. So making good progress and that, of course, shows up in many ways in terms of improved outcomes and also hospitalization.

The other thing I'd like to point out is that we've had a focus and I think a recent paper has been published in terms of improving the overall nutrition of our state of the patients and we're now proud of the fact that over 85% of our patients globally have albumins greater than 3.5.

And finally, that leads to even with some of the anemia management activities that Rice will talk about in terms of the anemia protocols, that we actually have been able to continue to slightly improve the hospitalization days around the world. And that's a major accomplishment and Rice will talk a little more about what we've done there to ensure excellent outcomes for our patients.

So again I think in the quality area we're focused on it. We're proud of what we're doing and we clearly have a unique data set here that we always sharing with you.

Turning now to slide 10, I'd like to talk about the products business. If you look at the total product sales, we had growth of 6% in constant currency. Externally we had growth of 7% in constant currency globally.

Now, that was clearly driven by the International region with a 9% growth in constant currency again driven by machines and driven by dialyzers, the pharma products, and the pharma products in the number of countries. So if you look at, and Rice will talk with you a little more about North America, that number you see here doesn't really tell you the whole story on North America and Rice will point that out to you.

So the products business globally is growing above the market. We're maintaining our market share and we're capitalizing on our structure internationally where we need to in terms of how the various hospitals are being allocated to treat patients.

Turning now to my summary slide, I'd like to say that yes we've had some slower divestitures of clinics than we expected, again because we are good partners around the world. We want to make sure that we pass all the regulatory hurdles and we also want to make sure that wherever the clinics go they go to a good operator so that, clearly, we can with pride talk about the divestitures.

Now, there's also some other things that Rice will talk about in terms of just the normal regulatory scrutiny but that has affected our same market growth in Europe and I think Rice will talk about it's had an impact on our revenue growth in North America.

Mike will talk about our outstanding cash collections and, quite frankly, this is no easy task in this environment to continue to collect from essentially 125 countries, but our team has been doing an excellent job and I believe we're respected for the services that we provide.

Now we also, I think, are working with our payers in the US and around the world. Our intention is to continue to grow our reimbursement rate, either through additional services or essentially increases in reimbursement that reflect our cost increases from inflation.

Now, also I've got to mention and we'll spend a lot of time on it today, as everyone knows from reading the newspaper any place there's a major new standards being imposed by the regulatory agencies in terms of products quality, pharma quality around the world. We believe that we're ahead of this, as we have tried to be for years, and we've invested significantly in 2012 to increase our quality systems and absolutely make sure that we're on the best-in-class or clearly on the top end of what the regulators would expect from us.

Now, that's not all completed. We need to finish the validation in fourth quarter and then, of course, you eventually get your tests when you get inspected but we have invested significantly in that area. I've mentioned that our CEO transition is on track. You'll enjoy working with Rice and the group and I believe it's a seamless transition. But I also have to tell you that, yes, our guidance is we are projecting the lower end of guidance. We're excluding the investment gain and the special projects that we're talking about because we believe those essentially complement each other and so I believe that we have a lot of work to do in Q4 but there's no question that this team has been here before and we've accomplished it many, many times and I'm just really proud to say I think we're doing the right things.

And I'd like at like at this point to turn it over to Rice and give you some more details on North America. Rice.

Thank you, Ben. Good morning, good afternoon, everyone. Slide 13 begins my prepared remarks. I think it's important that if you'll allow me to at least start with an update that's not depicted on slide 13 on hurricane Sandy.

Obviously, it was a tremendous storm, a lot of impact for us. We had 207 clinics that were affected by this monster storm all the way from North Carolina to Massachusetts. We had roughly 10,000 patients whose scheduled treatments were impacted and what I mean by that is we either were able to move those treatments up and do them on a Sunday. We had great co-operation with our staff to come in and treat patients ahead of the storm. Yes we had some patients that couldn't do that and we're trying to make those treatments up as quickly as we can.

We today have around 150 clinics that are closed and will begin opening. The good news for us is our clinics have power. We have generators in each of our clinics and allow them to perform treatments during these difficult times.

What's happened to us in many cases is roads are closed, municipalities have asked people to stay off the road and we have certainly abided by that request and we do have some water damage in areas. But we are coming back up. We have employees whose homes have been impacted. We're going to work with them to make sure that we can help them get back on their feet as quickly as possible. But all in all, this terrible event we've been able to handle with preparation and tremendous teamwork from our staff, the local municipalities and all of those that take patient care as seriously as we do.

Now with my prepared remarks, the integration of Liberty and Renal Advantage along with American Access Care continues. As you'll recall American Access Care was the acquisition of the vascular business that we made just about a year ago. It's running well. We're happy with that business and that management team.

Liberty, Renal Advantage, we are a little behind where I want it to be. The simple fact is when we closed the deal in February the Federal Trade Commission issued a hold separate word to us, which simply means they asked us to not get involved in some of the normal integration activities while we allow the divestiture process to go on and we made sure that the entity that was accepting our domestic clinics was up and running and doing well.

What this really did for us is put us a couple months behind getting at the heart of the type of integration activities that we typically would do looking at revenue rates, looking at payer contracts, things of that nature.

And yes, I know you'll ask me the question so I'll give you the answer now. We have seen some softness in the Renal Advantage revenue rates and we're working on that. The business that we brought in from Liberty is strong, performing just as we had expected it will. The revenue rates from Renal Advantage were being worked on but there is some softness there and we ended up getting at that in those activities a couple of months later than we had planned.

Even with that, as Ben has mentioned, you know that we had strong revenue growth in services. I'll speak to that a little bit later and we continue to see the improvement in our same store growth as depicted on slide 13 we continue to walk up approaching that 4 plus percent that I'd like to see us maintain in terms of same store growth.

Now, anemia management, couple of points that I'd like to make that are not on the slide, our average in-center dose per treatment is beginning to level off. We're seeing consistency. We think we're down at a level where we may have a little more room but generally we believe we're in a leveling off period and we've take the curve down to the point that we had told you we would over time.

Secondly, [Omatus], the trial, I know that is of interest to a number of you as well as to me, we have accrued the 10,000 patients that we set our to accrue in this pilot study. The results, we believe we'll see in March and April of next year. We're continuing to dose patients. The study does not end until December of this year and I would say to you that it's been a very well run study. We're roughly about a week or two behind where we wanted to be and that's simply we took a little more time in some planning and training, but we are at the 10,000 patient mark. We see this study running through the end of the year, as we told you, and then we will be talking with you about results as we get into the first quarter of next year.

Couple of quality indicators on anemia management that are very important; we are below the national average in the sub 10 and hemoglobin rounds per deciliter rate and in transfusion rate. Now, what does that mean? If you look over a three-month basis under sub10 control, what it tells you is that we are operating with about 13% of our patients at sub 10. The national average among dialysis providers in the US is around 19%.

If you will recall back in February we talked to you about the fact that, as we saw our dose go down, it was very important to us that we didn't see a high spike in our sub 10 patient group, which would tell us that perhaps we're putting them in jeopardy of requiring transfusions, which we don't want to do.

Conversely, if you look at the 2012 US RDS annual data that shows the percent increase in transfusion rate from September of '11 to September of '10 the overall industry is at a 24% increase in the number of transfusions that are being given.

We are operating at 4.3%. Again, another indicator that although we may have been slow to the party to look at EPO dose drop, we've done this in a thoughtful way our Chief Medical Officer, Frank Maddux, and his team in making sure that our patients have gone through this activity in a very controlled, safe manner.

Another question that I know that you'll want to as is where we are with integrated care. We continue to answer questions when asked from CMS. I can't predict when this will happen but we believe that it will happen. We continue to be engaged. When we're asked we try to be cooperative and help answer any questions that we can.

If we go to slide 14, we talked about this slide many times. Again we're looking at the revenue per treatment on the left-hand scale, cost per treatment on the right-hand scale. What this tells you is that we've had a 1.3% increase, $349 per treatment versus $345 quarter-over-quarter last year and yes you see it uptick in our cost per treatment.

What we see here is simply we are running a little higher personnel cost, as we've gone through the Liberty, Renal Advantage integration activities. I would tell you we may be running with a little more people than we initially had planned but the decision that we made there was let's be better safe than sorry. We'll take the extra staff. We'll take the extra folks to make sure things are going well. Please do not read into this that that means we're going to have a layoff or we're going to be letting people go. It simply means we made a conscious decision to keep enough people through this time and it has turned out to be fortuitous, given that we've had two hurricanes in the last six to eight weeks. It has turned out to be the right decision for us.

Last slide, which is slide 15, again I just want to highlight the strong revenue growth in North America quarter-over-quarter of 13%. You can see in our services businesses we're up 15%. Ben mentioned in his remarks to you that if you look at the negative 1.1% in the products business, you could certainly infer from that that we're not doing a good job. I would counter that's not the case.

If you recall, Liberty Renal Advantage was our second or third largest external customer. We have now brought them into the family. So if you correct for that, you can see we're right at about 2% growth in the quarter. The measure that's very important to me and that I gage the success of our products business in the US is by looking at our hemodisposable products, dialyzers, bloodlines, concentrate, all of the disposables that you need to perform a hemodialysis treatment in our clinics. And keep in mind that's roughly about 90% of the treatment base in the US, not just for Fresenius but in the US, has done via hemodialysis and we're growing at 7.3%. So, as indicator I feel good about that.

You will as me, well if Rice if that's the case what's not going so well? We do see some softness in our machine sales, particularly in the independent market. We continue to put our best effort. We feel comfortable. Our data tells us that we're not losing share. We're not losing sales to competitors. We are simply competing with the economy and I don't know that we'll overcome that every time, but that's the case.

I would like, as my last prepared remark before I turn it over to Mike, to get it on the record. I want to thank Ben for his leadership and his guidance through the 15 years. That work -- I apologize for the emotion but it's quite a change for me to think about this. Mike, please.

Thank you, Rice, and good morning and good afternoon, everyone. I'll go through the financials starting on the Q3 P&L.

As you can see, the top-line growth of $3.4 billion as Ben has already commented on. Our operating earnings grew 6% to $568 million worldwide. Our EBIT margin is down slightly from 16.8% to 16.6%, or roughly 20 basis points, and we saw that margin decline in both North America and in our International business.

North America our margins declined by 10 basis points as a result of higher personnel costs this year and higher rebates recorded in Q3, 2011 results than the same quarter this year for pharma products. This was partly offset by higher revenue rates and the progression of the Liberty Acquisition that Rice reported on.

In International, the decline in margin was about 50 basis points driven mostly by a change in methodology regarding cost allocations in our production units related to the International business and some smaller unfavorable reimbursement effects partly offset by improvements in our bad debt expense in the International business.

Continuing to move through the P&L, our net interest expense increased from $68 million to $108 million. Roughly $10 million of this relates to the earnings on the investment note we had on Renal Advantage Business we had in 2011 prior to our acquisition of Liberty with the balance of the change related to our capital market's activities and our acquisition activities on a year-over-year basis.

As you can see from the reported numbers, our debt is up about $1.7 billion from the end of 2011.

Moving to tax expense for the quarter, you can see the reported effective tax rate is down about 170 basis points. This difference is essentially due to the higher costs in 2011 due some tax audits and the release of some reserves in 2012 for risks that will not materialize. The underlying rate is still in the 34% range operational.

Our non-controlling interest increased from $24 million to $37 million due to our acquisitions and as the result of growth in our joint venture operations. This is consistent with our guidance and, as Ben indicated, our reported earnings are at $270 million are up roughly 3%.

Turning to the nine-month results again, Bens already commented on the revenues, 8% growth current, 11% constant currency. Operating income is up 11% to $1.7 billion with margins showing about 40 basis points of accretion.

North America's margins on a nine-months basis grew 60 basis points due to the improvements in our revenue rate, the benefits associated with the Liberty acquisition, lower pharmaceutical costs divestiture gains, which were somewhat offset by personal cost increases.

Our international margins have improved 20 basis points coming largely from favorable FX, business growth in the Asia-Pacific region, partly offset by some lower margin tenders won in 2011.

Net interest expense is consistent with what I indicated for Q3 and our income taxes on a nine-month basis are showing roughly at 34% operational tax rate. Net income is $930 million, as indicated in the charts.

Turning to the start of the cash flow discussion in our day sales outstanding, you can see that our DSO improved worldwide by one day sequentially and in the quarter at 76 days. North American is down one day to 53 days and the international business is flat.

I'm very pleased with the overall picture for receivables on a worldwide basis.

Turning to my next chart for the third quarter cash flow statements, you can see operating cash flows are strong at 16% of revenues, up even over last year's strong Q3 performance of 15%. We benefited in the quarter from improvements in our relative performance of receivables and inventory. Capital expenditures at a $164 million are roughly flat with last year and consistent with our guidance. As a result, cash flow was about 10% of revenues.

Acquisition spending reflects a modest level of spending at $37 million. This is mostly related to the US with a small true up of the Liberty acquisition and some cost associated with the acquisition of additional vascular access centers.

Turning to my next chart, operating cash flows for the nine months at $1.467 billion, again reflects the strong improvement in receivables and inventory. Capital investments are consistent on a year-over-year basis and the acquisition spending of $1.6 billion reflects the activity that we've been discussing all year.

We finished the quarter with just under $620 million of cash and availability under our borrowing lines of roughly $1 billion.

Yesterday we closed on the new five-year credit agreement, which consists of $2.6 billion term loan A and three revolvers totaling $1.2 billion. The loan was well received and will carry initially a LIBOR plus 200 basis point margin, which will drop to a margin of 175 basis points after six months.

Company's debt maturity schedule now stretches out to 2022 with little required refinancing activity between now and 2016.

Turning to my next chart on leverage, our debt at the end of the quarter is $8.4 billion and as expected are (inaudible) decreased slightly to 2.8 million [times].

And now turning to my last chart, which is our outlook, Ben has already commented on this in part. You can see we're continuing our guidance regarding our operating earnings. We are finding the year to be a very challenging one.

In our August call we added a formal definition to the [tittle] mark indicating that would reference a range of plus or minus 0% to 2%. Currently for the full year we're at the low end of our guidance range for both revenues and earnings and, as Ben indicated, we anticipate some special collection efforts related to services performed in prior years and other initiatives in the forth quarter that will help us to achieve this guidance.

We have excluded the investment gain from our guidance all year and in addition, as Ben described, we plan to take some charges in the fourth quarter that are not included in this operating guidance. These charges mainly relate to the intended renegotiation of the distribution, manufacturing and supply agreement for iron products and a donation to the American Society of Nephrology to found the Benjamin J. Lipps Research Fellowship Program.

To provide you with a couple of additional guide posts with regard to our guidance for the year, as Rice commented, same market growth in services continues to be in the 4% range worldwide, which is what we indicated at the beginning of the year.

As I had said in the second quarter call, our organic revenue growth has softened a bit due to our expectations at the beginning of the year, largely do to some of the pricing and bundling discussions we've had over the course of the year. And in the third quarter our commercial mix was down slightly sequentially.

Therefore, I'm expecting that revenue for treatment in the US will be in the 1% to 2% range for the year. And regarding the collections efforts that we referenced in the guidance, we are referring to the US. As many of you know, it's not unusual in the US healthcare system to have revenue elements related to prior-year services carried in the current period due to the contractual nature of the business. We're highlighting this in our guidance because we are at the low end of the range and this effort is supporting our guidance at that level.

With that, I will turn the meeting back to Ben. Thank you very much.

Thank you, Mike; I appreciate it. Just a closing comment and then we'll go into Q and A. Again, as I've mentioned since this is my last analyst meeting as CEO, I'd like to express my appreciation to all of you, the investors and the analysts who have followed the Company for a number of years who have been supportive. We really do appreciate your support and we try to work with you in any possible way and I think your support has been key to our success.

And, as I said, I really firmly believe and I think everybody does what the Management Team throughout Company that we have a very bright future, very proud of the new Management Team and essentially that good Management Team is essentially all from inside FMC and that's a real credit, I think, to the Group that I worked with for the last many years.

So after all that I think why we don't open up for questions and answers and get back to the questions that are on their minds. So, Oliver?

Great. Thank you very much, everybody for the update and the presentation so, Jerry, I think we can open up the lines for Q&A and please remember my opening housekeeping remarks in terms of the amount of questions. Thank you so much.

Thank you. Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions). The first question is from Tom Jones, Berenberg Bank.

Good morning everyone, thanks for taking for my two questions. The first was just on commercial revenue for treatment rates. I mean you've seen some softness in Q2 and Q3. Some of it's been of your own volitions; some of it's been from external pressures. From our perspective, when should we start to think about that annualizing out and you getting back to a more normal sort of low single-digit year-on-year increase in commercial revenue rate, commercial rate, sorry?

And then the second question, which really just on these other measures, I'm still slightly confused about them. I wonder if you might be able to gives us a little bit more detail on what exactly they involve and what the potential magnitude of them is in terms of what you're pulling forward over past periods into Q4 to help you get to your guidance range?

Okay, Mike?

Yes in terms of the commercial revenue treatment rates, I think the two things we talked about the most and I'll, just in terms of order of importance I guess would be that, as both Rice and I have commented during the year, we have had some of the larger commercial contracts come up for renewal this year and we completed those. I think, in the second quarter we said we're done. So I think you may see some year-over-year effects coming into the first part of 2013 just given the timing of those, but I'd say by midyear that should be behind us 2013.

And then the other effect, which we commented on both last year and this year, is that with the unbundled commercial contracts, you do have a pharma effect associated with that that shows up in your revenue rate because Rice is reporting on the fact that we're more or less in a stable position at this point on EPO. I would expect that will stop having a volatile effect on the top-line.

In terms of the collection efforts, I don't have too much more to say frankly. The -- we felt because we are at the low end of the range that we should highlight it. It's more than we've traditionally seen in terms of normal day-to-day operations so we just wanted to make that point.

Okay, that's helpful, thanks very much.

Lisa Clive, Sanford Bernstein.

Hi, two questions; one, you mentioned the commercial mix was also unfavorable this quarter. Could you just give us a little more details? I was under the impression this is really the first time in quite a while that that's been an issue for you so maybe comment on how you think we should consider that going forward? And then the second question on the international revenue per treatment, you did mention you have gotten increases in a number of countries but are there areas in particular where you've had pressure and again, what shall we expect for that over the next year or so?

Thank you, Lisa. Again, Mike, I think why don't you take those okay?

Okay. Rice, do you want to do the commercial?

I'll chime in; go ahead, Mike.

Yes on the commercial mix you are correct. Typically what we've said now for many, many quarters is that it was stable. You know, there's always a little bit of plus/minus in that but in the third quarter there was some softness so just in terms of transparency we're reporting out on that. I frankly wouldn't read anything into that in terms of any kind of long-term trending. We typically comment on it as to whether it's stable or not and so we just maintained our consistency there and we did see some softness in Q3 but I wouldn't do any predicting with regard to as we go forward.

On the international rates Ben absolutely is correct of course and we have seen, particularly in the third quarter, some favorability. When you look at that on a year-to-date basis, it's a little bit closer to what we had guided to for the year because you did have, as I had commented at the beginning of the year, we had increased volatility in international rates, both ups and downs, so Q3 was very strong.

The full year is a positive, a little over 1%, and what I had said at the beginning of the year when you look at revenue rates internationally that we'd be roughly at a breakeven to a slight positive and when I think of revenue rate including not just the base business but also the acquisitions we've done, I think my guidance still holds because some of the countries we're growing in and having very good results in are lower revenue rate countries than some of the legacy countries so you've got a little bit of country mix in there that if you were to look at the revenue rate all in without regard to legacy business and acquisitions, we'd be right within the range that I had indicated at the beginning of the year.

Okay thanks and just lastly I wanted to say, Ben, you will be missed. Rice, clearly we think the Company is good hands and, Ben, I hope you have a good time in Washington harassing those politicians and Medicare to get integrated care done.

We will, we will.

Thank you, Lisa.

Ed Ridley-Day, Bank of America.

Firstly, on your IV iron business could you give us a little bit more detail on the performance of that business. Clearly there are some significant challenges in that market and how -- well, basically how are you going to go about renegotiating your agreement there and then that will be my first question and secondly, I think just quickly on the med care tax are you now in a position where you could give us more guidance on the potential impact of that on our business next year? Thanks.

Ed, this is Ben. I think as far as the IV iron business and our position that we're in the process of executing this quarter, I'm going to turn that to Rice and I think, Rice, the tax is your area. Why don't you take those, okay?

Ed, let's see if I can give you some guidance here. A couple things, yes in general the market is extremely competitive, extremely tight so let's go back and just a couple of historic points. A couple years ago as we were going into the bundle we guided you and we said to you that we thought that the IV iron dose would in fact go up in the near future and we did see that. and then consequently as EPO has dropped people have now settled into their iron dose and we are seeing in our own clinics and in the industry in the US that the IV iron dose has now come down on a trailing effect, if you will, where EPO ended up. So just in general we've seen the dose come down some.

The renegotiation, there's not a lot I can tell you other than to say the following, Ed. It's a partnership. We contemplated in doing deal that if there were external circumstances that would fundamentally change the market that we would both be willing to sit down at the table and try to re-craft the deal in a way that provides economic benefit to all the parties involved and we're at that point in time. It's just the right time. There is some competition with new products out. Pricing is tightening up, if you will, so we're taking advantage of the gain and those monies that are available to us to renegotiate and put a more realistic, if you will, deal in place.

I don't think there is much more that I can say. We are continuing to meet with our partner, American Regent, Leupold and those discussions are ongoing so there's probably not much more I can say other than we did contemplate that the market could change fundamentally with the bundle coming and all of these things and we're at the point where renegotiation makes sense.

Rice, if I could just quickly just a quick follow-up on that. Is there -- do you feel there's something you can do really to sort of other words stabilize your business? I mean obviously renegotiation of contracts is one thing but stabilize the volumes, is there any initiatives that you could give us some detail on?

Yes what we would like to do obviously we had a commitment to our partner as to the amount of Venofer we'd be purchasing and what we're doing we're trying to redefine what makes sense, what's rational on those commitments. I will tell you that our market share has not dropped. We are continuing to manage the market. We're continuing to invest. Our Venofer [puff], which will automatically dose Venofer in the clinics, it's module that goes in our machine. We'll continue to roll that out but the volumes, the fact is the volumes are down and we need to deal with that, Ed, and that's what we're attempting to do.

And then secondly, on the med-tech tax I would guide you that the impact of that is somewhere in the $20 million to say $25 million range for us as we look at next year.

Very helpful, thank you.

Gary Lieberman, Wells Fargo.

First, congratulations, Ben, although it's really difficult to think of you retiring and certainly very difficult to think of you relaxing enough in order to actually retire.

That's what my wife says. Thanks, Gary, go ahead.

First question, Mike, I think you addressed it. I just wanted to make sure I am clear on it. You said that the -- I guess the AR and also to some extent the revenue and the guidance is benefiting from prior period recording of revenue?

Yes services performed in prior periods, just when you think about the US healthcare system and how revenues are recognized on services performed, sometimes you get -- you routinely get some carryover from one period to the next. I just highlighted it because it's a little bit bigger.

Is there any way you can sort of quantify it for us or at least directionally kind of quantify it for us?

Well, I said it's helping us with our guidance so that gives you some directional input and I think beyond that I've said all I am planning on saying today.

Okay and then I guess my next question, it sounds -- it looks like the volatility with the currency maybe is a little bit bigger than it's been in the past. Have you given any thought to sort of increasing the hedging effort of some of the volatility there?

Yes I think why don't you take that one?

When we were more just products we could have some internal hedges but we're now 50 plus percent services so, Mike, take it.

Yes. No I think I'd said in the past but just to kind of refresh it, we do have an active hedging program but -- and we typically do most of our hedging as we're preparing our operating plan for the following year. We take a look at what we think the overall currency levels are and we would typically hedge a portion of the revenue stream, particularly as it relates to the products business, as Ben indicated. And then each region monitors that over the course of the year paying particular attention to the more volatile countries and hedging when we think it's appropriate from a cost perspective because, as you know, some of the more esoteric currencies get pretty expensive when you look at the forward rates.

So I wouldn't say we're changing anything. We're very mindful of it. We've got really good folks monitoring it around the world and in our central treasury group in Bad Homburg and, as a consequence, I am not changing the guidance that I provided at the beginning of the year relative to the impact of currency on the business.

Okay and then if I could just maybe sneak last question in, you mentioned the changing distributor relationships in China. Could you give us maybe just a little bit more detail on that?

Yes I think you know in China as Japan there's always what they call intermediary distributors. You have your own sales force there but there's a whole system for delivery of the products and we see we've had in China alone there would be maybe 14, 15 distributors and again, depending on their financial position, we have to assess that and we do that from time to time when the contracts come up. We particularly believe that with all this, the activity going on between Japan and China, that there may be some very unique opportunities for us over the next couple years so we just decided it was time to make sure that we have all the strong horses that we need in terms of this secondary distributorship and when you do that there's obviously some loss of revenue at the time. So that's really all it is, we're just truing up that group, truing up that distributorship and getting prepared for what we think is going to be north of 25% growth for the next few years.

And that should take a quarter or two quarters to kind of smooth itself out?

I think we're seeing the main hit of it probably in third quarter.

Okay great.

Christoph Gretler, Credit Suisse.

Yes good afternoon, good morning and on two questions, now the first relates to your cost per treatment. I think now your guidance now during last conference call you mentioned that you expect that to be down 1%, 2% and now it looks now a little bit ambitious assumption. How do you stand to that statement nowadays?

And then the second question relates to the cost allocation that was hitting your international margins. Can you explain that to me? I thought that would be basically in the consolidation process, not that this would basically now cancel out so I was just wondering any more insights and then lastly, also wanted to wish all the best to Ben for his future. Thanks.

Thank you. I think, Mike, that's going to your questions.

Okay. Thanks, Chris. Yes on the cost per treatment in Q2 I did say that I knocked the cost increase down from 2% to 3% to 1% to 2% and in light of what we're seeing in the fourth quarter I think I would adjust that further in terms of our full year expectations on the cost per treatment probably being in the flat to plus 1% range, so you're taking note of the favorability that we have there in the US on the cost side.

And in terms of the change in allocation methodology, I commented on it only because when you're looking at just the international you're absolutely correct it makes no difference to the consolidated results but when you're looking at only the international margins, any change we make with regard to how we allocate those costs around the world has an impact so it's a way -- by way of explaining the change in margin but it actually has absolutely no impact on the consolidated business worldwide.

Okay clear, thank you.

Oliver Reinberg, Cheuvreux.

Yes Oliver Reinberg from Cheuvreux, I have two questions plus one housekeeping and firstly, I'd like to come back to the mix of commercial patients how much are these actually bundled and unbundled? I fully understand that you do not give us any kind of color what the percentage is but given the fact that this is now probably a meaningful moving item, can you just give us any kind of idea of how many percentage points that the mix of bundled contracts has actually increased? That would be helpful.

And secondly, I think at the beginning of the year you guided as to what the kind of increase in minority charges to go about $160 million. I think if we take Q3 as a run rate we will probably only get half of this increase coming through so probably we fall $25 million to $30 million short of that. Could you just give us an idea of how much of this kind of shortfall would probably be initial conservatism and how much of this is the effect that the Liberty integration is somewhat behind schedule and which we should actually consider as a kind of increase in monitoring these charges next year?

And on the housekeeping briefly, Michael, can you just give us any kind of color from the refinancing what would be the absolute impact on the interest cost on a 12-month basis in absolute dollar terms? Thanks a lot.

Rice, do you want to take the--

Yes, Oliver, it's Rice. On the mix of commercial and the bundling, I know I am not going to make you happy. I am probably not going to give you what you're looking for unfortunately. Again, what I will take you back to is the comment that Mike made earlier. We had some big contracts. We've done those. Those are behind us now. We are comfortable with where we sit but I am not particularly comfortable giving you any more color than that. I apologize but I think I am going to hold at that point.

Mike, do you want to cover the other questions?

Sure yes, Oliver, on the minority interest you have a better memory than I do. I didn't remember the 160 earlier in the year but yes with three -- with nine months done I think you're right. I think the minorities will come in a little bit better than that for the full year and I think Q3 and or the nine month date is probably pretty reasonable guide for the full year.

On the interest side we'll provide more guidance when we do our -- or more transparency when we do our full-year guidance in 2013. I think overall we're very happy with our cost of money and I think we've taken advantage of the market for the last couple of years to do most of our refinancing activity at very favorable rates but I'll say more on that probably when I do my full-year guidance with the year-end results.

Okay thanks, Michael, can I just coming back to the minorities, I mean the shortfall, is that mostly conservatism or is it the kind of delay of the Liberty integration, so will that actually be something that we have to be in mind for next year?

Oh yes it was just conservatism in the guidance. The fact that it's lower than the 160 is I think good news.

Okay thank you.

Veronika Dubajova, Goldman Sachs.

Good afternoon and, gentlemen, thank you for taking my questions. I also want to start off by thanking Ben for guiding us over the past number of years and we wish you all the best for your retirement and we will miss you and, Rice, congratulations and we look forward to working with you. I have two questions if I can.

My first one is on the international same store growth rate and you've now seen meaningful deceleration here from 5.5%, 6% if I look back at where you were tracking '09, '10 to this quarter 2% and I understand that there are some one-time efforts or effects here that are driving that but I am just slightly puzzled and trying to think through this not just for 2012 or 2013 but really thinking about this trend on a three to five-year view. What do you think is a realistic expectation for same-store growth rate, given the type of demographic trends that you are seeing? And also what type of profitability impact might this have on your business if we do see this lower growth rate persist in the medium term?

And then my second question and I appreciate, Mike, you might not be able to comment on this fully but given that 2013 will be somewhat of a tougher year in the US, we have the sequester coming in. We have the medical device tax and your business did benefit from some one-time gains this year on disposals. Any guidance initially you can give us in terms of how we should be thinking about development and cost lines across 2013? Thank you.

This is Ben. I'll try to put a little more clarity on the same market growth in international. Yes the 2%, as I mentioned, was clearly below the norm and there's no change in patient growth in these areas so it's not something that we see is going to be permanent and also what we're looking at is around a 4% same market growth into the future and right now so a couple countries are they have room in their hospital so the patients are going to their hospitals because it's all paid by the government, so this is a temporary trend. Long-term plan on the 4% I think same market growth.

Rice, like -- sure?

Ben, I was just going to quickly follow up because if I look historically, I mean this business used to grow 7%, 8%, 9% same market or, you know, 5% in '09 and '10 so is there a reason? Has the geographic mix changed or were those earlier years not good indications for underlying patient demand?

No I think we have two metrics we're looking at. One of them is the same market growth and it was obviously in the 5% to 6% range in terms of if we're buying clinics or have clinics in the developing countries and then there was the organic growth, which would have the revenue increase or additional services and when we jumped up to a higher organic growth, which is revenue growth, that was when Portugal went to a bundle and so we ended up with a 50% increase in reimbursement and so but the actual same market growth has been in the 5% to 6%. We believe now because we are in all the countries, not just the developing countries, that 4% is a better same market growth, okay. And so I don't think we've ever had a same market growth that high that I can remember but we did have an organic growth because of some bundling in some of the countries, primarily Portugal.

That's clear, thank you.

Okay thank you.

Veronika, it's Rice. On guidance let me try to give you a little bit of color but I will preface it by saying obviously guidance for 2013 will be one of my first duties. We will plan to do that at the end of February as we give you full-year results. We will be as transparent as we can be on that. Let me answer your question on sequestration and then on the device tax. If you look at it in terms of North America, we estimate that to be somewhere in the neighborhood of around $100 million to $105 million impact on us. The sequestration in and of itself is around $80 million to $85 million and, as I said to Ed, I told Ed really today we did see the devices around $20 million to $25 million. Now that's big numbers.

Obviously we don't know yet exactly how this will play out. It is the law of the land so, as we budget we're planning on that so that's the numbers that we're trying to work with. But if you put it in the context of a global company, the impact of sequestration is about 0.5% on our overall revenue, so we have to kind of look at it in two ways but that's probably the best I can give you in terms of color at this point as to how we see the impact and though to let you know that at this point it is the law of the land and so we are expecting that this will happen.

That's great, thank you.

Ingeborg Oie, Jeffries.

Thank you very much for taking my question. I would also like to first wish Ben all the best for a very active retirement and also, Rice, we will look forward to working with you going forward. My first question is on the international margin and the developments, which are going on internationally where it seems the governments are willing to listen to kind of increasing bundling and increasing numbers of services taken on by you, which could drive revenue growth but at a lower margin so should we expect the margins in the international segment actually to trend downwards and over time?

And then my second question is on the $70 million renegotiation, well the up to $70 million renegotiation charge; is this high number relating to any penalties for volumes that you have not used or is there another reason why the charge seems relatively high? Thank you.

Mike, why don't you take the international and Rice (inaudible) yours.

Yes and you'll forgive me and I think I probably have the best excuse known to man. I am not going to prognosticate with regard to the midterm on the international margins because we're in the middle of our CEO transition so I'll take Rice up on his comment that we'll come back to you next year on that and leave it at that because we are obviously we had a Capital Markets Day several years ago so when you look at the natural cycle of things probably at some point in '13 we'll also refresh our mid-term guidance and you'll get some more transparency on that and I'll pass it to Rice relative to the renegotiation.

Yes, Ingeborg, what I will tell you is that there are no penalties assessed. The deal that we struck was not put together in that way so there's not a penalty per se. I don't know that I can give you much more color on the size of the number. I will listen to your judgment that that's a big number. I'll hold my comments on that but we're not in a penalty phase. We are in what I would call a proactive and positive relationship renegotiation phase. If this thing were really not going well I would tell you that and that's not the case but we're not in a penalty phase. We're trying to plan for the future and just re-craft a deal based off what's going on in the marketplace.

Perfect, thanks for your help.

Martin Wales, UBS.

Thanks and I guess I'd like to add my thanks to Ben for all his insights over the years and wish him good luck in his retirement too. Two quick ones, thinking about 2013, which I know you don't want to comment on but obviously we have to forecast it, should we be worried that 2012 is not especially high basis for a lot of these payments from prior years or is it a wash with the other impacts you've talked about?

Secondly, coming back to this renegotiation charge, just a clarification--

Martin, can you repeat the question? We didn't get that actually, sorry.

Sorry, should we be concerned that we're looking at an artificially high base in 2012 as a result of these special collections from prior years or does it wash with some of the other things you talked about that impacted the year?

Yes. No I understand the question. You know, I think if I weave these things together I would say that with the comments that Rice has made on sequestration and the device tax '13 is going to be we'll have to look at it differently in terms of starting point and I'd actually chunk your question up to that level and say that '13 is going to have to be different because of all the things we're talking about. And we're being very open about it. If sequestration happens, that's a pretty -- Rice, that we're talking about some fairly large numbers.

Yes.

Okay but I expect you can't exclude it because like you say, it's the law of the land but I am just trying to get a sense of the 2012 base ex sequestration and the devices tax. Is it going to be -- is it artificially high because of these collections or not?

No I think I've said before that I probably answered what I am going to do so I won't comment at this point. I appreciate every question I answer is going to lead to another question.

Okay and just a very quick clarification on the $70 million or up to $70 million renegotiation charge, just to be clear, that would all be cash?

We actually I think it's a safe assumption because it's a conservative one but since we haven't finished the discussion it's not entirely clear how that will manifest itself relative to cash or charge.

Yes, Martin, I think Mike is right. I really just want to stress to give you a little more color, we are in discussion as we are speaking. We have folks that are sitting down with our partner and meeting and I'll be part of those meetings in another day or so so it's just too in the moment for us to give you much more guidance than what Mike just did.

Okay thanks very much.

Holger Blum, Deutsche Bank.

Yes hello, Holger Blum from Deutsche. All I want to start off never congratulated a Company to well or anything like that but, Ben, in that specific case I think thank you very much. Congratulations to your career that you achieved really impressive. All has been a pleasure working with you so most of the questions are answered. Maybe just a short one; what are the hedging gains year-to-date in the first nine months that you have booked?

Holger, while we're thinking about that, I want to thank you for the compliment and again, as I mentioned, we very much enjoy working with all the analysts. I don't know that we -- we're caucusing on your question, probably don't have an answer on that.

No it's -- I'm trying to think of the best way to answer your question, Holger, and I think we don't think of it as a pure hedging gain because in our international business we actually use the currencies that we're hedging. So, if you will, in the sense of if the folks in Asia are paying Euros associated with some of the materials they're procuring, we just settle the bill with the hedged currency so we're not capturing and calculating all these things in the context of a gain.

From time to time we do talk about the translation and the transaction effects of currency and when I give guidance I'm typically commenting on the fact that those naturally offset each other so you have a much lower impact on earnings than you do on revenues for instance when you look at the currency effects. So I don't have a year-to-date or a reported number to give you but typically what you'd see it in is you'd see it in the transaction effects that we comment on from time to time as opposed to the translation.

Appreciate that's not spot on for you but we just don't think of it that way in the business because we're actually using the hedged currency to settle the obligation.

And that's primarily on the products' side.

Yes, yes.

It's primarily broad and as we increase manufacturing in each of the regions, that becomes less and less of a long-term issue, Holger, but that's essentially that's what we do. Anything -- Holger, does that give you enough clarity? Does that help you on that?

Close enough for you, Holger?

Yes that's fine. Basically it's also about making the bridge from '12 from a fair base and headwinds, tailwinds, where we could end up then in '13 but I understand that it's in summary a bit too early for you to comment on that earnings bridge going into next year, so thanks again.

Excuse me, Mr. Maier, there are no further questions at this time. Please continue with any other points you wish to raise.

Okay great. Thank you so much, everybody. All the comments about Fresenius Medical Care and the management are much appreciated. We really appreciate your support and working with you guys over the last 14 years. I guess internally we will have the pleasure to work with Ben since he is going to be the Honorary Chairman of the Supervisory Board so nevertheless thank you so much and we are looking forward to talking to you next time actually when we announce the full-year results. Thank you so much.

Thank you for your kind comments.

Ladies and gentlemen, this concludes the Fresenius Medical Care earnings conference call. Thank you for participating. You may now disconnect.