Fresenius Medical Care AG (FMS) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fresenius Medical Care's Earnings Call for the second quarter and first half of 2013. Throughout today's recorded presentation 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 the 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.

Thank you very much, Brook. I would like to welcome all of you to the Fresenius Medical Care's earnings call for the second quarter of 2013. Also, a very warm welcome to the ones joining us on the web today; we very much appreciate your interest.

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

We also provided you with some adjusted numbers in Q2 only in the context of a year-over-year growth rate comparison to show a like-for-like operational basis comparison.

With us today are Rice Powell, our CEO and Chairman of the Management Board, and Mike Brosnan, our CFO. So that is it from my end, Rice. The flow is yours.

Thank you all. Good morning. Good afternoon to everyone. Thank you for your participation today. Let me take a moment to thank our employees and Management Board members from around the world for the hard work that they put into this second quarter of 2013.

If you would turn to slide four, I'll begin my prepared remarks. Second quarter I have a mixed view of our results. I think we see some strong progress in our revenue efforts. We see top line growth trends that are improving even though in the face of the first time sequestration impact in North America but also we have more to do in our efforts to become more efficient and to take cost out of the system.

If you look at our net revenue for the second quarter of 2013 at $3.613 billion you see the growth at 5%. We're quite proud of that. Looking at EBIT and net income you see respectively 8%, 9% down with net income coming in at $263 million. We obviously have more work to do there.

As Oliver said earlier, we tried to give you an adjusted look at net income in order to put it into some perspective for you. Excluding sequestration and adjusting for the special items of last year that had to do with Liberty, we would be up by 2% on this type of comparative.

Progress being made in second quarter comes from organic growth in North America. It improved to over 5% sequentially. The payer mix in North America has again improved slightly but improved nonetheless on a sequential basis.

Europe, Middle East and Africa have positive growth performance trends in products and services looking on a sequential view.

Turning to slide five, looking at our revenue from a regional perspective you can see again at $3.6 billion in the quarter, 6% constant currency North America is still at roughly 66% of that revenue, Europe, Middle East and Africa at 21% and you can see Asia/Pacific and Latin America respectively at 7% and 6%.

We're happy with the organic growth in North America at 5%. You see 5% organic growth as well in the international businesses. It's 6% in constant currency and you can see that Latin America continues at a torrid pace of 18% growth in constant currency.

Slide six, considering the scope and size of our franchise at the close of business January 30th of this year we had 3,212 clinics, a 3% increase in our facilities, a 5% increase in the number of treatments delivered globally, just shy of 20 million treatments, 19.7 million to be exact.

Looking at our patient base, 264,000 patients, again a 3% increase. So from a franchise standpoint, 3% growth in clinics, 5% growth in treatments, 3% growth in the patients and looking up at the top of the page you can see that we had 35 De novos at this point in time versus 36 acquired clinics and you see the breakdown among the regions.

Turning to slide seven and looking at organic revenue growth. On this particular slide we will give you the second quarter view as well as the first half or H1 as we refer it for this year.

Second quarter, $2.743 billion in revenues, 6% growth in constant currency, good growth in constant currency both in North America at 6% as well as international at 7% and you can see organic growth and same-market growth for both regions at 4% for same market, 5% for organic growth.

Looking at the first half of this year, $5.422 billion in revenue, constant currency growth of 7% and a very strong 8% constant currency growth in North America and 6% in international and again, looking at same market growth it comes in at 4% across the regions.

Looking at side eight with our quality outcomes, we see consistency in our clinical quality over the second quarter versus the first quarter of last year. Let's take a moment and highlight just several key areas.

Hemoglobin between 10 and 12 grams per deciliter, which is really the US reporting convention, you can see in first quarter at 73 consistently stable at 73 in the second quarter.

Dropping down a line in looking at the 10 to 13 grams per deciliter, which is the international focus, you can that in Q1 at 78 in EMEA and 78 in the second quarter as well in EMEA, so stability there, and a little improvement in Asia/Pacific, second quarter of '13 at 65 and 64 in the first quarter.

My last comment on our clinical quality page is our hospitalization days. You see a slight improvement at 9.6 days in the second quarter for the US versus 9.7 in Q1 and then we go the other way ever so slightly in EMEA at 9.3 hospitalization days per patient for the second quarter versus 9.2 in the first quarter of the year and you see Asia had a small pickup or tick up as well.

Slide nine, the good news for us, exciting news, we're pleased with what we're seeing in our products business globally. All around the world we see progress. Looking at the second quarter of this year, again external revenue only, $870 million in the quarter. You're looking at 6% growth or 5% constant currency growth for the total business rolled together and then you see the US and North America at 6% on a constant currency basis in the second quarter and international at 5%.

Looking at the half year convention, first half of the year at $1.654 billion you see nice constant currency growth at 4%, 4% for the international area and then looking at North America at 2%.

Not on the slide but worth mentioning, as I always do, looking at our growth in hemo disposables, bloodlines, dialyzers, concentrate, rinsing solutions, etcetera in the second quarter for the international businesses growth at 7%, in North America an existing 12.7% growth in hemo-dialysis disposables in the second quarter.

Looking at that from a half-year basis, international comes in at 7.2% growth and North America comes in at 8% growth, again on hemo-disposables for the first six months of the year, good performance, solid performance that we expect to continue.

Moving to my last slide, topics of interest for us to discuss today, I really have two things I'd like to comment on, our legislative focus as well as our global efficiency program.

First under legislative focus, sequestration, don't have much to say other than we believe it is here to stay. Mike is going to give you some more feedback on that. You know it's reflected in our guidance that we don't believe that the sequestration or the cuts will be reversed so we've tried to deal with them in a proactive manner.

Secondly, let me now touch on a topic that is of interest to all of us. I'm sure by now you've all seen the CMS proposal and have a lot of questions, just we at FMC do. I'm not going to be able to answer all of your questions today at this particular time. We're in the middle of a process and I do not want to speculate about possible outcomes and your guess is probably as good as my guess at this particular point in time.

Like many of you, we were surprised by the harshness of the rule. We think it goes far too deep. We think by cutting reimbursement well below the cost of care it presents a significant threat to a very vulnerable patient population. We are working hard to change the proposal and we're meeting with Congress and the Administration to help them understand the consequences of this proposed rule should it stay as offered.

We have been in Washington several days in each of the last several weeks and we've met with dozens of lawmakers and staff to express our concerns and educate them about the issue. Our senior leadership, including myself [Ron Kerbich], members of our government relations team that are based in Washington, DC will continue to meet with legislators, staff, anyone that we can throughout the fall in order to affect a change.

We are compiling our formal response to the rule, including all the data and the analytics necessary to show CMS where we think they can make improvements. This formal response is due August 30th. A very large part of our formal response is the horrific impact that this proposal is going to have on access to care in the United States, not only for FMC but for every provider. This is a very dangerous situation.

We think there's a better way of doing this. We should look at total cost of care within the bundle. If, as it has been throughout these past four decades, the Federal Government's belief that it makes sense to use the private marketplace to care for beneficiaries on dialysis than the Federal Government should at least cover the cost of care and consider all of the inputs to the bundle and not carve out just select items in the bundle that drastically justify reducing the rates.

If we're in a bundle, let's stay in the bundle and look at it as such. In addition, we think that a transition period does not make sense. Phasing in a bad number over time doesn't create a good result. It just makes a bad result last longer. The key is getting the number right, getting a number that creates a sustainable system by protecting patients, providing rational access to care and providing value to the American tax payers.

This is our singular focus for the next few months. My very personal message to our employees is, stay focused while we try to work through this very difficult situation, keep doing what you do best, which is take care of patients.

This is not a situation that I take lightly and quite frankly I never ever expected to be in a position like this with cuts of this proposed magnitude. We will do everything humanly possible to change it but we would be failing in our duty to you as our investors to not begin planning and considering the worst case scenario.

Looking at our global efficiency program, what have we done and where are we? We have completed our scope of possibilities. Or another way to do this is we completed the what, what is it that we're going to improve, what are we going to do? And now we are diligently working through the how, the when, the where, etcetera. We will be thorough and thoughtful in changing activities are coming down the road.

I anticipate that there will be questions asked today regarding our efficiency program, questions of a quantitative nature. Please consider while we may not be able to answer all of your questions today, I'd like to leave you with three key points.

The activities that we are implementing affect our employees in a number of ways. It affects their daily work, how they do their work, where they do their work, things of that nature. Our employees need to understand these potential impacts first and foremost before I publicly discuss them in an earnings call. I realize that may seem illogical to you but with 90,000 employees that look for us for guidance and trust we need to have these conversations and we will. We're beginning the process now before we can have them in a public forum.

Our efficiency program is being considered along a risk curve. Don't become efficient enough and we leave dollars on the table but pushed too hard and there is the potential to damage the Company structurally. Over reach and you don't create value, you destroy value.

Looking at the timing of our plan and having kicked this off at the beginning of the year and trying to implement this program on the eve of such a draconian proposed reimbursement cut affecting your largest region, it has the possibility to radically increase the slope of the risk curve. We are trying daily to triangulate these points to work them into our plan of action but it would irresponsible for us to have you believe that we can walk down a major path of efficiency in all areas of the Company globally and not have some coordination, some consideration of what was a shock to us, as it was to you July 1, when the proposed reimbursement cut came in such a draconian manner.

Please just consider that these are things that we are working through. We may not be in a position today, as we try to answer your questions, to answer everything but we will get there.

With that, Mike, I think I'd like to turn it over to you, please.

Thank you, Rice and good morning and good afternoon to everyone. I'm going to review the numbers starting on page 12, which is the second quarter of profit and loss statement. And despite our revenue growth, our operating earnings were down 8% or roughly $45 million from $589 million to $544 million. And if you look at this very broadly, you could break that down into two overall effects.

First, 6% of the decline or $32 million is due to the effects in both periods for transactions recorded related to the acquisition of Liberty of approximately $13 million, or 40 basis points. And we've also considered the impact of sequestration in the presentation, which is approximately $19 million or 40 basis points in this year's grouping.

The second is and the remaining decline of $13 million, or 2%, is operational. This change was driven by an increase in global corporate spending of $10 million, a decline in North America's operating earnings after considering the effects I just mentioned of $5 million and an improvement in international, which is up $2 million year-over-year.

So let me walk through a little bit more of the detail. If I look at margins in North America, they were off 260 basis points and if we consider the special effects that I just mentioned that would account for about 140 basis points. So operationally we're down 120 basis points year-over-year. Obviously, this is driven by lower revenue rate with about a 1% increase in revenue per treatment year-over-year and higher operating costs.

Again, looking at this from a rate-per-treatment perspective the revenue-per-treatment is $351 in the US, down from $350 -- excuse me, up from $355 up from $351, or roughly a $4.00 per treatment increase year-over-year or roughly 1%, as I mentioned. This increase was driven by continued growth in our expanded service offerings as well as the Medicare market basket increase.

Currently offsetting these increases we had the impact of sequestration, which is approximately $3 per treatment and an unfavorable payer mix year-over-year. You may recall that we were reported in Q3 last year a drop in our commercial treatments from the second quarter. So, as Rice has indicated in his remarks, looking at this on a sequential quarter basis, we've seen commercial mix improve since the fourth quarter of 2012.

In addition, we had a number of pricing effects related to the new contracts we signed last year and we talked about last year and the attachment of our patients to those contracts. We expect to continue to see these pricing effects through the end of the year as these new agreements annualize and we complete our patient assignments.

On a sequential quarter basis, we expect to see continued improvement in the rate per treatment driven by our expanded services and the improvement in the overall payer mix.

Continuing to the cost side in the US, let me first talk about the sequential development of the cost per treatment because I think that's actually the best comparison for fiscal 2013.

From the first quarter to the second quarter we saw a $3 reduction in the cost per treatment from $294 to $291 due to the increased number of dialysis second quarter, the passing of the first quarter impact of a legal settlement for an Apheresis case, which we described last quarter and then going beyond that the seasonal benefit in which certain payroll and payroll related taxes are satisfied in the first quarter was largely offset by an increase in pharmaceutical costs. This is in part driven by the price increase we received on Epogen from Amgen this year.

We expect the US cost per treatment will be, when you look at this on a full-year basis for 2013 you're looking at $294 in the first quarter, $291 in the second, I would say the half-year results on average is a reasonable estimate of what we'd expect for the full year. We're going to work towards improving that, as we always do, and make efforts to try to mitigate the cost increase on Epogen.

But when you look at the average cost per treatment in 2012 rather than focusing on just the quarter, we had more volatility in our cost per treatment in fiscal 2012 with the average for the year was $283 a treatment. So, roughly we're looking at something on the order of $9 or $10 of treatment increase fiscal '13 over fiscal '12 on the cost per treatment side in the US.

Let's see; last we're seeing an increase in corporate spending in North America. In the first quarter we mentioned that we had some legal costs related to the increase in the preparation for the law suits filed related to our Naturalyte and Granuflo products. Some of the cost increase in the US is being borne out by the continued legal costs associated with preparing for that matter and I'll comment on that more in the overall results in our guidance.

Turning to margins on the international business, the international margins were down 70 basis points. Most of this decline was the result of foreign exchange with having recorded foreign exchange gains in Q2 of 2012 and loss of translation in fiscal 2013.

This accounts the net effect of revenue growth and other improvements in the business is an accretion of margin on the international side of 10 basis points.

On a sequential quarter basis, the margins were down about 80 basis points and this is essentially affects related and relates on a full-year on a half-year basis to the inclusion of Venezuela.

Global corporate costs, which are in the investor news disclosed separately, you can see that those have increased in the quarter by $10 million. Most of this increase is a result of increased legal costs and related consulting expense to the defense of our intellectual property and cost related to reviewing and improving our global compliance program.

These costs when combined with the preparations in North America on the Granuflo matter present a significant headwind for the remainder of 2013.

Moving to reported earnings, as Rice indicated, they're down 9% adjusted for the special items you do see an increase in operating results of 2% year-over-year.

Going to chart 13 and taking a look at the half-year results. Our revenue growth was explained by Rice and shows a 6% constant currency growth rate, which we're proud of. Our operating earnings were down 5%, or $54 million, and this was again principally due to two effects. First, 2% of decline, or $25 million, is due to the effects in both periods for the transactions I referred to earlier, the Liberty transactions and the impact of sequestration.

The remaining decline of $29 million, or 3%, is operational. This change was driven by an increase in corporate spending of $29 million and improvement in North America's operating earnings of $9 million after considering the special effects and a decline in international of $9 million.

Margins in North America were off 150 basis points influenced once again by these special effects and the remaining decline in margins was from an operating perspective is 100 basis points, so roughly 50 basis points is attributable to sequestration and the Liberty acquisition.

Again looking at this from a rate per treatment perspective you can see in the half year that our revenue per treatment went up $5 from $3.52 to $3.57 or roughly 1.4% to 1.5%. This again was contributable to our expanded service offerings and the Medicare market basket increase partly offset by sequestrations and unfavorable payer mix and the pharma utilization of the unbundled contracts and revenues.

On the cost side, as I've already commented, it's about a $10 increase for the half year from $283 to $293 and I think that's a reasonable representation of our expectation for the fiscal year.

In international margins were down about 100 basis points. Most of this decline for the half year was related to foreign exchange or roughly 70 basis points. The remaining 30 basis points is essentially cost increases that were not covered by corresponding reimbursement increases in some of the markets related to the service business.

Global corporate costs, as you can see in our investor news, increased $29 million, again the result of the programs that I've described.

Turning to chart 14 and starting the discussion of cash flows with DSO, we're holding on to our first quarter levels in both North America and International. There's nothing extraordinary to comment on with regard to DSOs. We think we're in very good position in terms of collectability for the services we're providing to our customers on a worldwide basis.

Turning to chart 15 and looking at cash flows, very strong underlying performance at 15% of revenues, slightly better than last year and slightly better than what we typically report. This was due to managing inventories and other working capital items, partly offset this year by the stable DSO situation whereas in 2012 we had a significant improvement in DSOs outstanding that took place in the second quarter.

In short, there's nothing of concern from an operating cash flow perspective that we need to discuss today.

Capital expenditures at $173 million is in line with typically slightly less than 5% and the split between maintenance and expansion is consistent at roughly 60/40 and the split between products and services is also consistent with historical results at roughly 40/60.

We spent $30 million on acquisitions in all of our segments.

And lastly, I'll just comment that we launched our share buyback program in second quarter; program is proceeding nicely over the course of the quarter. We anticipate we'll complete the share buyback in the third quarter and I would say roughly speaking today we're about 80% to 85% through the program, as we sit here on this call.

Turning to chart 16 and looking at our leverage, $8 billion in debt outstanding, that's down about $400 million year-over-year and it's an increase of about $300 million from the first quarter, largely due to financing the dividend and the share buyback program in the second quarter. Our leverage is as expected and within guidance and we've had no material change in our ratings over the quarter.

And turning to my last slide, Chart 17, Rice has already indicated that we're confirming our guidance as was well established in some of the material that came out after our announcement this morning. We highlighted sequestration last quarter and we indicated that while the government might modify all or a portion of it, that likelihood diminishes as the year progresses.

As we've seen no movement in Washington on the sequestration issue at the half-year mark, we have reduced the top end of our guidance range to incorporate formally the comment that we made in the first quarter of this year.

As a consequence then, our performance range continues to be greater than $14.6 billion in revenues or a 6% growth rate and a net income of $1.1 billion to $1.150 billion for the fiscal year.

To deliver this operating performance, we expect the second half of the year to be substantially better than the first half of the year. On the top line we expect North America to continue to grow its expanded services portfolio and to continue to improve payer mix.

We also pick one additional day of the dialysis days that we lost in the first half and we expect the product business in the US to post stronger results in the second half of the year.

In Europe the currency has had a negative effect on the top line but we continue to believe this is within our parameters regarding our guidance. Venezuela is behind us in the first half of the year. The products business in Europe is expected to have stronger results due to tenders in several countries and the provider business will have the full-year effect of our start-ups from the first half or the full half effect of our start-ups from H1 plus additional start-ups in the back half of this year.

In Asia we're expecting strong product sales in our key growth markets. In addition, we will have additional cooperative dialysis centers in China and we will have the benefit of a product acquisition closing in the second half of this year.

We do see some cost headwinds on the guidance, as I indicated, in the second half. Particularly in the US we have the issue of the cost increase of pharmaceuticals as a result of the Amgen price increase and, as I also mentioned earlier, we're seeing increased costs related to key legal cases and the cost of enhancing our global compliance program.

We continue to believe we'll deliver the performance indicated for 2013. We currently sit at the low end of that guidance range in terms of earnings.

We've also increased our acquisition and investment guidance from $300 million to $500 million. We see opportunities to close deals at that level or magnitude this year. As always, we will continue to be opportunistic should assets come to the market that we find attractive.

With that I'll turn the call back to Oliver Maier. Thank you.

Thank you, Mike. Thank you, Rice, for the [data] presentation. I think right now we can open up the lines for questions.

Thank you. Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions).

The first question today comes from Michael Jungling of Morgan Stanley.

I have three questions. Firstly, on the net income guidance it seems that you need to deliver around $305 million per quarter in the third and the fourth quarter to achieve your guidance. That's $50 million or so per quarter higher than we've seen in the first half. Can you be a bit more detailed as to how you think you'll achieve the extra $50 million per quarter in the second half?

Secondly, on net interest is the quarterly run rate in Q2 of $103 million a good guide for the remainder of the second half? And the third question I have is on a [Omantis]. Do you have any more details as to why we have seen some adverse reactions when using your [Connex]? Any more details as to that would be very appreciated. Thank you.

Michael, hi. It's Rice, nice to hear from you. Why don't we do this? Mike, If you want to take the first and second questions and then I will come back around on Omantis with Michael.

Sure, Michael. In terms of net income I think I can't challenge your math. That's -- those are roughly the same numbers that I get to. I tried to be fairly detailed in my comments about the guidance anticipating that a number of you would have questions. That's why I went into some specificity with regard to both the products and services business by region around the world so we are expecting a substantially better performance in the back half to support the bottom line forecast.

In addition, even though I've indicated it's reasonable in the US to assume roughly the numbers that I spoke of in terms of cost per treatment, we will be doing traditionally the steps we take outside of the GDP program that Rice has already addressed to try to mitigate some of those costs in the back half to produce the earnings that you get derivatively from taking the first half out of the results.

In terms of the quarterly interest rate, I think that's a reasonable run rate for the balance of the year, Michael.

Michael, on Omantis your timing is impeccable. What I can tell you is that [Takata] has been working with FDA and they are just almost at the point of getting agreement with FDA on a study that will be done in our clinics. It is a DNA type of study where they're going to be trying to understand what could potentially be within the individuals that had the reactions. Is there something we can learn or understand there?

So it's a fairly scientific approach to what we're trying to do but they continue to work and be very active in understanding what went wrong. So that is an update for you and, as I say we'll be participating in that study and don't know how long it will take. I'll have to talk to the medical guys and see what they think will take it in terms of timing and evaluation of the data, things of that nature but you should know that they have not stopped. They are continuing to work and try to understand how they can make this better understood, if you will.

Great and maybe a follow-up question for Mike, if I look at your full-year guidance then, would you say that you are very confident that you can achieve it at sort of like an eight out of 10 because my math's -- and despite your positive comments, I still sort of get the feeling that maybe some downward pressure on your guidance so some sort of confidence level as to your guidance would be very helpful.

I think that we're -- I'll use your number because there's not much point in creating a debate over the index. I'd say we're confident that we'll achieve the low end of the range. I indicated that we're moving towards that because of some of the cost pressures that we see as I outlined but -- so I think we'll be in the range and right now as we look at what we're dealing with, I'd say we're on the low end.

Great, thank you.

Veronika Dubajova, Goldman Sachs.

Good afternoon, gentlemen, and thank you very much for taking my questions. My first one is about commercial rate and the type of increases that you're seeing year-to-date and I guess, Rice, I just wonder if you want to comment as you look out on a two to four-year view. I mean it does seem like the commercial rate increases have decelerated significantly since where we were at pre 2008-2009. I am just wondering how that is you think about forward, what may be the medium term expectations on that.

My second question is on the international revenue per treatment numbers and for development there at first half. Mike, I don't know if you have any comments on how to think about that on a full-year basis.

And the third one, I know you're not going to say much about this, the (inaudible). Nonetheless, curious when you look at the CMS proposal for the bundle I guess from a methodological perspective, what was the biggest surprise to you? And do you think that CMS might be receptive to hearing some of your thoughts on that?

I think I'll comment on at least the first two. The -- in terms of the three to four-year outlook I think we're going to hold that for the Capital Markets Day at the end of the year. We're working towards developing that more strategic view so I think it's best to address that at that point in time. The -- but we've actually relative to the current year provided, I think, a fair amount of color starting in mid 2012 and running through in terms of what the near-term expectations are with regard to commercial pricing.

In terms of the revenue per treatment for international for the full-year I shied away from giving a forecast at the beginning of the year and I am probably going to continue to proceed the way we have rather than give you an estimate. I mean when you look at the revenue per treatment, particularly in the US, you're looking at something on the order of 1% to 1.5% on a year-to-date basis. We do expect to see some improvements because of the strength of the second half performance that I just indicated.

On the international side I probably wouldn't provide a separate level of guidance for that.

And, Mike, if I just can jump in quickly there, I mean are there any particular countries that are driving the strength, that have driven the strength in the first half of the year on the international side?

No. No I think I wouldn't say there's any particular short list of countries. I think we're getting good performance on a global basis.

Understood thank you.

And then on your third quarter question in terms of the bundling, I know you've spent some time.

Sure. No, Veronika, it's Rice. You know, as best we can tell, I think what drove this very surprising proposal is the fact that clearly they just carved out and looked at some things that they wanted to look at around drug utilization. We argue that that's not really what a bundle is. You have to look at the inputs, all of the inputs, into the process. The mathematics that they used were pulling out select information and taking 2007 and projecting it onward as to what they thought drug pricing would be and we just think it's flawed in the math.

Now, we're not arguing we're better mathematicians but we're arguing that there's a more logical way to do this and these are exactly the things that we'll be putting in our response and it's what we've been doing as we've had the chance to meet with Congressional members and their staff. We've been really down in the detail talking about the mathematics of what got proposed and why and how that needs to be overcome.

And, Rice, if I can follow up on that, I mean any numbers you can provide us on what your cost per treatment is for a Medicare patient. I'm going to push my luck here and then I'll jump back into the queue. Thank you.

Yes it's probably not going to be helpful for me to go into that level of detail at this point, Veronika.

Lisa Bedell Clive, Sanford Bernstein.

Number one, on the rate cut proposal part of it arguably comes from the fact that the Fiscal Cliff Bill was perhaps worded fairly badly. It seems like that Bill gave a pretty specific instruction to Medicare to look at utilization from 2007 to 2012 adjusting for price changes, figure out how much less money the clinics were spending and simply to reduce the total bundle by that amount. Now that clearly, as you've mentioned, has not.

And then looking at the total bundle and is therefore unfair but that is what was passed in the Bill and my question is therefore will Medicare fall back on the argument that they need another bill passed from Congress in order to be able to fully fix this? Yes there's probably some math calculations that they got wrong that could be fixed but in order for $29 to go down to a much more reasonable number, do we need an act from Congress? I think that's my first question and then I'll follow up with a few more.

Yes, Lisa, hi. It's Rice. Let me take that one. I don't disagree with your point. Go through and you look at the taxpayer relief Act you could say that CMS was simply following a bad set of directions as they were written in the Bill. We have had that conversation with a number of people. We are offering alternatives to how things could be done beyond just another piece of legislation.

Let me stop there because I am learning as time goes on here I just don't want to be too detailed at the moment on the phone because these are real discussions that are ongoing so I think you can appreciate we will try to bring not only as FMC but as the industry there's so much cooperation among large, small patients, physicians. We are all working to try to offer valuable alternatives but I don't discount what you're saying that CMS could certainly take the position that we were just following a bed of -- you know, a set of bad directions, so to speak.

And then I guess the follow-up question to that is if CMS holds firm on the position that they can't do anything without another bill being passed and because congress is not always the most efficient, the oiled machine, nothing does happen before November 1st, what is your sort of fall back plan if a very large rate cut happens? My understanding is both you and DaVita as well as a lot of the small independent clinics lose money at specific locations.

Could you just give us an idea of what proportion of your clinics would potentially be vulnerable to having to close down and is that obviously a very much a worst case scenario but in order for you to maintain provision for as many patients as possible, is that some -- is that a path you would have to go down?

Yes so let me say this, Lisa. Again, let me try to be helpful without overextending myself because these are delicate discussions. What I would say to you is we certainly know I am not willing to offer what as proposed this would mean to our franchise. We understand that. That's part of the comment in my finishing statement is that we have to look at worst case and know what that means. We will do that. We are doing that now. Let's hope that it doesn't come to this.

If it were to come to pass that there needed it to be a bill passed we will work diligently on that as well but you should consider that our efforts in Washington we're going to try to make sure there are several ways to approach this so that we don't have all of our eggs in one basket. But at the same time, given the magnitude of what has been proposed, I would be irresponsible as a CEO and Chairman of the Management Board to not be looking at what does this mean in the particular region if it were to come to pass. But I don't think laying that out or having any more discussion today is probably going to be helpful for us. We are literally -- we've got folks in DC as we speak so let's not, if you will, escalate the situation. Just know that we are resolved at what is here today cannot stand or we will affect access to care. Let me leave it at that.

Okay great and then fair enough on that. Final question, integrated care, I assume you submitted some applications. Is -- have the structure of that program changed at all in terms of the potential they'll allow you to enroll more patients? And when will we hear news on exactly how many patients you'll enroll and is that program sort of scheduled to move forward and I guess Q4 was the original time line?

Yes so what's happened, Lisa, is the program has slipped some. I think that CMS has realized with the magnitude of what they proposed, many of the providers that were looking and thinking about the [SCOs], if you will, have bigger fish to fry. Let me give you a couple of bullet points just so you're aware.

CMS is looking for applications. What we find now is they lag a time line a little bit longer. They have made several changes to what was initially proposed. In the very beginning they were looking for 500 patients in a site. Now they've dropped that to 350 patients in an SCO and that's really to, I think, stimulate smaller providers to participate. Last week brought two things, two changes. They eliminated the requirement for a third Medicare provider other than Dallas's clinics and nephrologists. Now, we like that because we didn't really understand the sense for CMS requiring us to have outside of the ER, ESRD people, another person standing there as, if you will, the third leg on a stool.

Now, if we need to do something, bring somebody else in to improve patient care, we'd be willing to do that but we wanted to do it voluntarily and not have it rammed down our throat is the way it was laid out in their proposal. The other thing that they've done is they've moved the savings that are required. They've moved them out in time, meaning that in year one where there was supposed to be a 1% as a savings guaranteed, they've listed no savings in year one and then year two is now 1%, etcetera, etcetera. So we've seen a little movement in this.

I will tell you that we like what we see this far but unfortunately there are still parts of the program that really, in our view, don't incentivize physicians and providers to jump into this in a big way. So I think there's more to do there but we are totally, totally focused at the moment on what we need to do with this proposed rule if that makes sense to you.

Yes that makes sense. Thanks.

Kevin Ellich, Piper Jaffray.

This is actually Brad in for Kevin. You mentioned again that the pair mix in North America improved again sequentially and that you expect it to continue to improve in the back half of the year. Could you just talk a little bit about what's driving that improvement and how much improvement you're actually seeing?

We may both answer this. I think we typically don't disclose the details in terms of precise calculation of mix because there's a lot of moving parts in it but I think importantly when we started to see some movement outside of our historical range we talked about it in the third quarter last year and we are seeing some very solid increases from the beginning of this year through Q2 so we feel good about the trend.

We think we're doing the right things everyday operationally so, as we've said before, this is basic blocking and tackling that you need to get your employees organized, oriented towards the right opportunities and then succeed in terms of performing these kinds of treatments, so I probably wouldn't want to comment beyond that. I mean we've gotten into some detail in the past in terms of exactly what we're doing but do you want to comment?

Yes, Kevin, what I would probably say to you is we went back and reengineered the way we bring commercial patients into our clinics. Do we make it easy for them to pick up the phone and call? Some of this sounds very simple I know but it was really just a re-look at our process adjusting how we do things, putting more emphasis in other places. That's what I would say.

I don't want to get into too much detail because obviously we don't want to give the secret sauce away but clearly we were not functioning as well as we could have. We were perhaps not listening as intensely as we needed to and I think we've done a better job. We've made changes fundamentally in how we approach these things and we are seeing that progress so we feel pretty good about it but I don't know that I want to give you too much more detail on that.

Okay great and then just one last question; in regards to the [Goldway] efficiency program I understand you don't want to provide any quantitative impact but I guess in the last call you had mentioned you would maybe expect to see some sort of benefit in the back half of the year. Is that still true or would that be pushed more until 2014?

Yes what I would say there is I don't think I want to get too much into where we end up, what the contribution may or may not be in the back half of this year but what I think maybe will give you some comfort is we're not going to stay silent on this forever. We do intend that in the future here we're going to come back and give you more color on it.

We obviously want to see where some of these variables that are up in the air at the moment, such as the re-base proposal and things that we're working on and having conversations with people that are going to be impacted when we ask them to begin doing things a different way, perhaps to be more efficient, it's just not the right time right now so let me leave it at that but know that we know we've got to give you more guidance on this and we will get there.

Great. Thanks, guys.

Martin Wales, UBS.

I have three questions. Firstly, just looking at 2013 in isolation, you gave us guidance for the year in February and we're now halfway through the year obviously. What has surprised you purely on the 2013 numbers in terms of where you are versus where you expected to be when you first gave that guidance, putting aside sequestration obviously?

The second question, you talked about the consequences of the proposed [ESR/DPPS roof], if it stays. I know you don't want to talk about Fresenius Medical Board of the consequences for the industry as a whole if the rule stays as it is.

And finally, I understand that from what you're saying your focused on getting this rule amended and consequently the comments [VSRD] demonstration, care demonstrations being delayed some in terms of your discussion being delayed somewhat, is there any attempt by either the industry or CMS to link the two together in any way in terms of the negotiations?

Guy, it's Rice. Let me do this. Let me take your, if you don't mind, I'll do three and two. Mike, you do one.

We're not trying to link integrated care to the proposal. I probably gave you that impression and I shouldn't have. All I am saying is from a focus standpoint we've been just completely focused on our 60-day response window to get into the proposed rule change and so we haven't done a lot of work on what was a fairly constant set of work and meetings we've been having on integrated care. I think other providers have given CMS the same message that this is such a big shock what you proposed for '14, we're going to be totally focused on this. So it's not that they've tried to link it or we're trying to link it. It's just a matter of how you marshal resources and where you have them focused when you get something of this large a nature suggested to you.

It somewhat sounds like we should anticipate further delays beyond the end of August. The CMS seems to be currently talking about for [CEC].

Well, here's what I would say. If there are several of us that really want to participate in the CEC. We are absolutely focused on making sure that we put our best foot forward on the rebase proposal. That could happen. I'm not predicting it but I am just saying I know where my focus is. I know where Ron Kurbich and the team in North America's focus is so I think that's a possibility. We'll have to see how that plays out. I don't know that I could be much more specific than that or practical for that matter.

On the proposed rule to the industry, I didn't want to turn this into a big numbers discussion but I would just say this to you. I think it is the first time in my history in the industry, and I've been around a long time, that I have seen complete total focus and work together from physicians, patients, providers, large, small, medium sized, tiny, you name it people understand what the magnitude of this cut means to them individually and to the industry collectively.

I'll just give you two numbers. If you look at MedPac's report they suggest that the big guys on Medicare have a 2% to 3% margin and they suggest that the little guys are half a percent to maybe 1%. If you take this cut coming in at 12%, do the math. How do you make that work? And that's where I made my comment, "We are below the cost of care." So I think this is equally as problematic for everyone. Everybody will have issues at different rates, if you will. Don't take that as reimbursement rates. People have different issues depending on where they sit in their size and scope but nonetheless who loses in this, if it stays this way, is the patient. That's what we cannot lose sight of.

And I think just to come back to your first question, an interesting one. So I guess that said here I'd comment on a few things. One is, and perhaps not surprisingly because we included it in our guidance range in February, we were disappointed that sequestration stayed, that no action was taken, particularly when you think about everything we've just talked about in terms of being below the cost of care for dialysis patients that some accommodation couldn't be made in sequestration so relative to our guidance I think that was a disappointment. I think we're very pleased, as Rice just mentioned, that we're seeing very good organization, good level of effectiveness in the US with regard to addressing the [pair/mix] issue that we've talked about. I think we're also very pleased to see the strength of the product business in the US.

When I look in other parts of the world, we see very good growth in Latin America. That was -- you know, we expected positive results but I think that's a pleasant in terms of what we were thinking at the time we gave our guidance in February.

We're also pleased to see that we continue to get good traction in terms of expanded services because that is the stepping stone to the integrated care, which we have made clear over many years we very much want to do in the US. and then lastly, on the disappointing side I mentioned the running costs associated with some of these key legal matters and we were off a bit in terms of our expectations were for the year, so that was a disappointment in terms of just the spending level.

So on balance we dug out your spreadsheet from February with the sequestration scenario. It would put you not far away from where you are [each one]?

Oh without sequestration? I think we gave you the numbers to do that math on that. We'd be about $20 million better at--

Yes sorry, that's not my question. If we looked at your forecast including sequestration, your internal forecast in February and we had a chance to look at that now, would it be pretty close to where you actually came out in the first half?

You know, I think that's fair plus/minus.

Pretty close.

Yes it's pretty close.

Okay well, thank you very much. That's all very helpful.

Ed Ridley-Day, Bank of America.

Firstly, on your very strong and encouraging product growth, particularly on the disposables, Rice, if you could talk to that because although 12% is very strong, is that really an underlying growth that is sustainable into the second half? It seems much faster than the rate we are used to in the market. And if you could talk a bit about to that and also if you could give us an update on your retail product growth as well.

Okay hang on one second. I've just got to flip a page here. Let me start with the 12%. No it is a big number and let me be very honest with you that we picked up some significant business as a result of one of our competitors having some issues and we believe that we will keep this business because the level of their issues are significant and so it was what I call one of those bluebirds that you're ready to go. You have capacity. You're ready to close and we were able to do that.

Now in terms of the product business in the US in the second quarter, the growth rate was 7.3%.

Yes sorry and that was for the -- for all the products or including also just separately the drugs?

That excludes the drugs. Again, the way we look at that is when you say rental products I go back to just thinking about the stuff I used to sell when I carried a bag, dialyzers machine kind of thing. They didn't (inaudible) for me to sell back in that day but if you look at it from a total renal products standpoint, it's right at 6%. We're just a little big above 6% so all in, as you refer to it as renal products, we're just a hedge over 6% in the US for the quarter.

Okay thank you and in terms just follow-up on my first question in terms of the disposals and actually the machines, I mean given the uncertainty around US reimbursement, and the introduction of sequestration, you're not seeing any of the smaller customers maybe putting off newer or new CapEx?

We've seen some of that, absolutely. I think I mentioned in the first quarter we were down I think almost 2% in our machine sales and it was right in the independent, the very small independents. We've seen some pick up of that in the second quarter this trend but it would not surprise me that, as we look at Q3 to Q4, I think it's going to be lumpy. They're very consistent growth and in the medium size, large, even some of the smalls but get down into what I call they're at like a mom and pops but when get into the very small independent clinics here, which has to connect, we know they turn off at any point in time. That is not necessarily the largest bulk of our business, if you will.

Thank you very much and just a quick follow-up. On the litigation, the [Granifer] litigation, can you confirm the number of cases now filed in the MDL and also could you update us on the time line of that trial?

Yes, as we talked in the last quarter, Ed, I am not going to give you the number of cases. We know it. It's just probably not beneficial to give you that but we have a number. It seems to have peaked at let me say that. And we still think we are on a path where we won't see this in the core system, the multidistrict litigation in Boston for a while. We are still preparing discovery, deposition, all of those things are still going on but we are a ways away from actually being in a courtroom with a trial at this point.

Okay thank you.

Tom Jones, Berenberg Bank.

I had two questions really. One was just to kind of circle back to Lisa's questions and maybe ask it in a slightly different way and perhaps pull all the questions together but how would you summarize the kind of tone within Congress that you're getting at the moment? Are you being handed out the door as yet another whining corporate complaining about a government cut or are you generally getting a fairly receptive ear from legislators? Maybe I'll just leave that question at that just at that point.

And the second question was you mentioned several times you expanded services portfolio as being a positive factor for you. Maybe you could just give a little bit more detail and color on that, the magnitude, the scope of what's going on there and perhaps how big that could get for you in the out years?

Yes, Tom, let me -- this is Rice. Let me take your first one. I like the way you repackaged that but here's what I would say. We haven't been shown the door. Keep in mind that the dialysis industry hasn't gone into the bundle and over the last 25 years seen the kind of mortality improvements that we've seen in this patient base. And you know the history; we worked for years without increases and we always found a way to improve quality and to do better for the patient.

People do listen when we come in. Everybody in Washington, I guess short of CMS, is stunned by the severity of the proposed cut. We had very good dialogue. We talked to people. I didn't get a door slammed in my face. I think we made the points we needed to make. I think having the small providers there, I know they were there when I was there, saw them at different times, having physicians in, having patients in. It's made a difference. It's there most coordinated I've ever seen it but I've not heard or spoken to anybody where we've not been able to get in and have an audience and lay out the facts as we see them.

And answer questions, the one thing that continues to impress me when you get into health staff for Senators and Congressmen, is they're very quiet people. They ask good questions and I am happy to be challenged because that makes the process better but I'm uncomfortable, Tom. I don't know where this is going to go. It's too big but I am totally pleased and comfortable with how hard we're going at it. It's a consolidated consistent effort in the industry and we are getting the access that we need. I'll stop there.

That's helpful and the expanded services portfolio?

Well, we've talked a little bit about this last time. I think last quarter maybe even with Lisa and what I had given her in terms of where I thought these businesses could go over the next year or two, we were looking at the vascular access business and okay -- Mike just gave me a piece of paper but what we were looking at was we believe we could be somewhere in the $200 million if we really knock the door off, $250 million, $300 million over a two-year window, recognizing we were about a year before and in the pharmacy business that has grown tremendously. We're looking I think at somewhere in the $300 million range with that one over the next couple of years and we were at probably $70 million or so last year I think, so it just gives you some sense of the scope I think.

And here's the way I look at it. You've got two businesses kind of have come from a standing start with a nice acquisition there as well with American accessed care. Very quickly these could be a $0.5 billion, three quarters of a billion dollars for us as we go out over the next year or two if we continue to see the kind of growth and penetration that we're looking for.

Perfect, that's helpful and just one maybe quickly follow-up question, just a couple quick words on the Injectafer and how that kind of sits in things at the moment?

Yes so for us with Injectafer we as FMC will not be selling that product in the US. It's not really a stage five product so that's a product that will still sit in the loophole to American regent book of business, although as a JV partner we'll see benefit from that and we'll enjoy having ownership in the JV.

But we looked at that product some time ago and we saw the strength of [Benafer] and we -- and the fact that Benafer patients are in three times a week. They get their dose. Injectafer is a longer acting. It really did to our mind, didn't seem to have a very great fit right at that time for us in stage five. But we'll enjoy success in the JV but we'll stay focused on Benafer and the other things that our sales people are doing in stage five with that approved.

Okay that makes pretty good sense. You've got a pretty good track record of picking the right dialysis drugs or certainly avoiding the wrong ones anyway so that's probably makes a lot of sense. Thanks a lot.

Holger Blum, Deutsche Bank.

If I can just follow on on Benafer, I think there was some pressure last year. Could you say how there the volume and trends have developed year-to-date?

Second question would be again on the guidance topic where you reconfirm the net income guidance? I just wanted you to come back to the statement in the full-year press release when you guided for this year you had the two points be to $0.5 billion EBIT target mentioned for this year though. Do you stick to that one as well and although again on -- would that work on an organic basis? Thanks.

Hey, Holger, let me ask Mike if he'll take your second question. Your first question on Benafer, I've got to rattle some paper to check something. I don't know it off the top of my head so, Mike, if you're okay with that, I'll come back around.

Yes. No I'm fine, although it will be a quick answer, Rice. Yes in terms of the guidance, and thanks for pointing it out, Holger, because I didn't get into the detail of after tax and operating earnings. We reduced the after tax to -- by $50 million and in the detail of our disclosures we reduced the operating range. It was $2.3 billion to $2.5 billion. It's now $2.3 billion to $2.4 billion.

And on the second part to your second question, we do believe that we can achieve the after tax earnings organically, meaning I think what you're really getting at is not so much acquisition related but more related to kind of large special one-time effects. So we're not anticipating any large special one-time effects to achieve the guidance range.

Okay thanks.

I'm going to come back to you on volume. I'm not dodging. I just don't have it in front of me and I don't want to take a guess but I can get it for you and we'll come back to you on that, okay, if that's all right?

Yes absolutely. Thank you.

[Alex Cloban], Barclays.

Thanks for fitting me in, just two questions. You mentioned a bit earlier but in terms of the activity you're seeing from individual patients, patients groups, stock fishing groups and dockers, how large is the share of voice from that part of the debate versus the industry? So are we talking about see selected people? Are we talking about kind of on this patients coming in and talking up speaking up in Washington?

And then secondly, just on the $9 to $10 cost retrievement increase, could you confirm how much of that is from Amgen and what that might look like heading into 2014? Thanks.

So, Alex, I'll take the first one and, Mike, you want to take number two? I don't know how to portion it out from a percentage basis, Alex, but here's what I would say. We've had a number of patients send letters into their Congressmen or their Senators. We actually have a number of patients. These are FMC patients, that will be out into the various Congressional regions in August.

As you know, there will be a recess here of Congress in about a week and a half and then they will be at home, so we've got people mobilized to be there as in providing busses and taking people to where they need to go. So I would say this is extremely active and patients are doing this, not only as individuals but through patient associations. There have been letters written. There have been meetings on the Hill, things of that nature, so I would say in the foreseeable past we've not seen this level of activity. It is much more ramped, if you will, than I've ever seen it before.

Okay very clear, thanks. And then on the Amgen?

Yes I think maybe the best way to think of it because it's a number of moving parts, but if you just looked at what we anticipate the cost will be this year and spread it over the full-year's treatments, even though the increase isn't effective January one, it's about a dollar in terms of what we anticipate for treatments this year.

Okay perfect. Thanks a lot.

Brook, I think we have time for one more question.

Thank you. The last question today comes from Lisa Clive of Sanford Bernstein.

Well, Tom asked a few of my questions already but I will just ask one further question on the ancillary businesses. You gave us update last quarter that I think you have increased Fresenius RX enrollment from 20,000 patients at the end of 2012 to about 30,000 patients at the time of the last conference call. Could you maybe give us an update on where that is today?

And then second question, I guess two parts, first is you increased your target acquisition spend for the year. Is that going to be mainly ex US markets or do you see some opportunities in the US and particularly if you could just talk a little bit about where you think the most interesting opportunities are in the medium term for growth of your international services business?

And then lastly, also on international growth, you had mentioned some slowdown in the UK and Spain a few quarters ago. Have you seen the end of that and in general could you just give us some commentary on the pace of privatization of dialysis services in Western Europe?

Sure. Lisa, let me take your first one on the pharmacy. Yes we had said I think it was at the end of first quarter we were around 30,000 patients. Today we're in the mid to high 30s, not quite at 40. I think we're probably somewhere in the 36 to 37 range and then the estimate is we had given you back in February is that we were hoping we'd be very pleased if we were somewhere in the 45 to 55 range, didn't know that we could get to 60,000 patients. I think we're looking more realistically at the high 40s, maybe 50 would by my best guidance for you on the pharmacy.

So that would be by when, by the end of this year or--?

Yes by the end of calendar year '13.

Okay.

And then I'll let Mike talk about the acquisition target increase and then we can come back around and I can talk to you about UK and Spain and go from there.

Okay. Yes, Lisa, I don't think our view has changed about the opportunities around the world. We continue to see opportunities in many, many markets including the US, so I think when you look at that $500 million, we'll continue to close deals in the European theater, Latin America, Asia and the US. In the US obviously it will be more on the extended services side of the business in terms of opportunities there. And there will also be opportunities, both in terms of services as well as products opportunities on the acquisition front.

Yes, Lisa, I would just add we've got a product acquisition that we're looking at in Asia--Pacific that should close yet this year. I think Mike mentioned that, nothing huge but things that we like and that we think make sense so we're trying to be as opportunistic as we can.

And then UK and Spain what I would tell you if you remember when we talked about Spain, we had some tenders that we had not been able to get into there. You lose some, you win some. Well, lately we're winning more than we're losing so we're feeling better about that, particularly on the product side and even we're seeing some nice progression on our service side so I think we've seen a nice turnaround there. The UK I'm not sure has changed so much. I don't think the dynamics there where we're seeing more hospital based provision of service versus being done in standalone clinics, if you will, we're not sure that that has changed appreciably since the last time that we spoke.

Okay thanks.

There are no further questions at this time. I'll turn the conference back over to Mr. Maier for any closing comments.

Great. Thank you so much. We really appreciate you guys joining for the second quarter call and looking forward to talking to you next time. Thank you so much.

Ladies and gentlemen, that now concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.