Fresenius Medical Care AG (FMS) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call Operator. Welcome and thank you for joining the Fresenius Medical Care Earnings call for the First Quarter results of 2014. 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. (Operator Instructions). I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Thank you very much, Patrick. We would like to welcome all of you to Fresenius Medical Care's earnings call for the first quarter of 2014. Also a 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 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 also to our filings including our SEC filings.

With us today is Rice Powell, our CEO and Chairman of the Management Board and Mike Brosnan, our CFO. So that's it from my end already. Rice, the floor is yours.

Thank you, Oliver. Good evening for those of you in Asia. Good afternoon for those in Europe and good morning for the folks that are in the United States. I think my headline today is as follows, slow start to this year but in line with our full-year guidance. As you recall, our February meeting where Mike and I talked about guidance and how we saw this year developing. We had given you a sense that Q1 would be a difficult quarter for us.

Rather than taking you through the figures in the blue shaded piece of this, you can see them. I think it's probably more appropriate if I just walk you through my commentary about the figures.

In North America for the first quarter of this year we had overall good top-line growth. Obviously we had earnings issues. Earnings were impacted by the last quarter of sequestration. The re-basing impact has more than offset what the market basket update provided for us. In summary, we were not able to cover the cost of care as we would have liked to.

Quantification of this, Mike will walk you through in some of his slides in a few minutes. Our international growth was really impacted by two key things. As we highlighted for you back in February, we are undertaking a reorganization of our distributor network in China. We believe it's prudent to get away from one or two large distributors and balance that among some medium sized distributors to go along with these big guys. We don't want to be too concentrated in any particular area and that obviously had an impact on the products business in China.

And then we saw significant delay in product sales coming off of our strong fourth quarter. I'll use the phrase that we went into this year with a hangover from the push that we had in fourth quarter and in a few slides from now I'll give you some more detail and color on that, if I may.

The last point I would make on slide four is that the Company is on track to achieve its full-year guidance and the cost saving target. And again, let me remind you that our GEP target for this year was up to a pretax figure of $60 million net of one-time cost and Mike and I will be happy to answer questions on that was we work our way through into the Q and A.

Looking at slide number five, our revenue breakdown for the first quarter, you can see nice performance in North America with 4% organic growth and 5% revenue growth coming in just shy of $2.4 billion.

Looking on the International space, you can see we're at $1.161 billion, 4% constant currency growth with an organic growth of 3% and then you see the various breakdowns among the pieces of the International business and again, North America at roughly 67% of the first quarter's revenue.

Moving to slide number six and focusing on the revenue growth in dialysis services, again I will speak in this case to the blue shaded area. You can see us at just shy of $2.8 billion in the first quarter for total dialysis services revenue. In the constant currency view, you see that as 5% growth on the total basis, very nice growth at 8% internationally and constant currency in North America at a constant currency growth of 5% in the dialysis services business.

And moving over to the last column, you see the same market growth at 4%, International at 4% and then the North American market we have it at 3% and I think it was exactly about 3.3% so I'll take that extra three-tenths and give that to you as well, if I may. And I think that should suffice for that slide.

Let's go to slide seven. Looking at the products revenue external only and again, looking at first quarter revenue of $782 million you can see that constant currency growth for North America at 5%, very consistent performance with the fourth quarter and then where we've had I would say surprising result is in the International side where in constant currency growth we're down about 1% year-over-year.

Let me try to give you some more detail and certainly we'll answer questions on this at a later time as well. The product growth in North America, just to give you a sense of some of this, the dialyzer business in North America is up 17%, one seven, a large contributor to that is 655 single-use patients that came in the first quarter. As you remember from years past, we used to track, and we still do, the number of patients that we get coming off of re-use and coming on to single use. So we had 685 of those in the first quarter.

We saw bloodline sales up 6%. Venofer sales were up 12% in the quarter and the machine business was down about 4% in the first quarter and some of that is fourth quarter hangover as well. I would say in North America. Now, when we look at international products business, we've talked about the distribution network in China and delays. Let me give you a little more color on this.

I'd say specifically when you consider Asia Pacific and the rebalancing, if you will, of the reconfiguration of the distributor network that was worth about $16 million in product sales for us to give you some sense of that. And we saw a little softness in Korea as well.

Looking at [EMEALA], as I said earlier, the preponderance of the end of the year push or the first quarter hangover really comes from machines and somewhat from dialyzers but the largest piece of this is machines. We've got tenders that, as you know, we began to fulfill at the end of last year. As I've also told you many times before, we do not ratably fulfill tenders on a quarter-to-quarter bases. They do appear to be somewhat lumpy. We do ship one quarter; then we may skip a quarter and come back. We fulfill as requested by the tendering authority.

And also in general not huge markets for us but we are seeing a fair amount of turbulence that affects our products business in the Ukraine, Libya and Egypt, some of the places we've got some unrest. It obviously does have some impact on the product business in those areas.

Moving to slide eight, looking at our global services franchise the key three figures that I will give you; 3% growth in our clinic base, 3,263 clinics as of the end of March of this year; 4% growth in treatments and 3% growth in patients. So we are just shy as of the end of March of 271,000 patients globally and we did 10 million treatments in the first quarter on a global basis.

Looking at 20 de novos in the quarter, just to give you some sense of where that fits, over relatively important periods of time, first quarter of last year we had 15 de novos and then coming out of fourth quarter we had 23 so 20 fits kind of right in between where we've been. We're comfortable with that number and you see the relative contribution between North America and International.

And as we told you, when acquisition opportunities are there for clinics we'll take them. We've been pretty clear that in North America, given all the indecision that was there over the back half of last year, we were very cautious about what we would look to acquire. And I think Q1 bears that out with the fact that we made no acquisition or no clinic acquisitions in the first quarter and a modest number in International. You should not assume it would continue to stay that way in both regions but again, I wanted to just give you a little bit of color on that.

And then looking at our quality outcomes on slide nine, I will summarize by simply saying we see good consistent performance. We see a little movement up or down depending on the parameter that we're measuring but by and large I would say we are very consistent here with our hemoglobins, our hospitalization days, albumins, etcetera so I think we continue to perform at a very stable and high level on our clinical outcomes in our care business.

Slide 10 in my summary slide, I would like to just simply reiterate first quarter is a reflection of what the full-year guidance was communicated to you back in February. Many of you were with us in April in New York City. I think we gave you as clear a strategy for future growth as we can. We outlined the components in the past for how we would potentially get to what I believe is an aggressive but exciting number of $28 billion by 2020.

And lastly, our global efficiency program as we've told you is going to enhance our performance over time, not a huge contributor this year but expecting a lot of good work and results as we go out into the future.

And with that, I think I will pause and turn it over to Mike.

All right thanks, Rice, and hello, everyone. I'll continue on chart 12 of the prepared materials.

Rice has talked in terms of revenues for the quarter so I'll move to the operating margins. Our operating margins were down 10% or $48 million from $493 million to $445 million. This represents a decline in margins, as you can see, of about 170 basis points from 14.2% to 12.5%

North America, the impact from North America was about 130 basis points, international was about 30 and corporate costs were about 10 basis points.

So first in North America, operating incomes decreased about $30 million with a margin effect of about 200 basis points. We did have the carry over effect of sequestration for $18 million. In addition, we had a reduction in the reimbursement due to the rebase of $32 million and, as Rice indicated, this was partly offset by the Medicare market basket increase, which had a value of $27 million.

I'll just reiterate, although the rebase net of the market basket increase is a modest reduction in reimbursement rates, it does not allow for the recovery of the usual cost increases we face in order to provide care in the US and these are primarily related to personnel expenses.

Moving on to the quarter in North America, we did see an increase in our production costs and our distribution expenses that were slightly higher and this was partly offset by income from our equity [vested] investees and also lower legal costs in the first quarter of 2014.

In International operating income decreased about $12 million with a margin effect of about 90 basis points. The increase was mainly due to unfavorable foreign exchange net of the impact of 2013 devaluation of the Venezuelan Bolivar. We also saw our margin effect related to the lower product sales that Rice referred to and we accrued for a small loss related to our internal compliance review in the quarter.

Corporate spending was up about $6 million and this related to some of the changes we recently announced in the Management Board.

Moving to interest and taxes, earnings did benefit from lower net interest costs largely due to increased interest income related to loans we've made to businesses in the United States and lower borrowing rates, which were partly offset by an increase in debt in the first quarter.

Earnings also benefitted from a reduced tax rate, 29.1% versus 33.2% in the prior year. This is due to our internal financing benefits, higher joint venture earnings in North America and a positive effect related to ongoing tax audits that we took in the quarter.

Reported earnings as a consequence are down 9% or roughly $20 million. The after-tax effect of sequestration, the small accrual related to the compliance program and the benefit in tax expense associated with the tax audits largely offset each other in terms of their impact on net earnings for the quarter.

Earnings per share decreased 7% to $0.68 reflecting the benefit of the share repurchase program that we completed last summer net of stock option exercises since that date.

Turning to chart 13 regarding our DSOs, you don't see a big change. We went from 73 days at the end of 2013 to 74 days at the end of the quarter. It's a mixture of good and bad news. The good news is we continue to see very good performance in the international size of the business improving three days from year end to 107 as of the end of the quarter.

Spain was a big help with special collections of $30 million in the quarter. And we appreciate that lots of hard work goes into this metric on a worldwide basis and we appreciate folks around the world staying on top of collections in the business.

In North America this DSO increase of three days from 53 days to 56 days is driven both by the US and Mexico. In Mexico we're seeing some payment delays, which is not unusual. It added about one day to the DSO for the region and we would expect the payments to catch up in due course.

In the US we had a number of changes driven by filing requirements with Medicare with regard to some of our joint venture operations. These do take time for the government to process. The effect in the quarter was two days of DSO and we expect this will right itself in the second and third quarter.

None of these matters changes our expectation for the year on cash flows or the quality of the underlying receivables.

Turning to chart 14 and now looking at cash flows year-over-year. The year-over-year effect with regard to changes in accounts receivable obviously is one day as a relatively modest effect on the overall position in receivables.

We did finally make the payment associated with the Grace bankruptcy, which resulted in a payment of $115 million. This payment was agreed to contractually in 2003 and required the final approval by the courts of Grace's bankruptcy plan before the amounts could be settled. So that's now behind us.

In addition, we built inventories in the first quarter with a cash flow effect of approximately $110 million. This was planned as part of the various capacity expansions we have in several locations around the world.

If you were to look at our reported cash flow of $112 million and you were to simply add back the Grace payment and the relatively high change in inventories we had in the quarter of $110 million, you'd get to approximately 10% of revenues in terms of operating cash flows, which is a more normalized view of our operations.

Capital expenditures as a percent of revenue was up year-over-year but it is in line with our guidance for 2014. In addition, we spent $137 million on a gross basis on acquisitions and investments. For this particular quarter most of that $137 million was related to statutory investments required in our captive insurance company, so it's simply a movement from cash to short-term investments. Remaining amounts were invested in small acquisitions in all regions around the world.

Turning to chart 15, there's nothing new on this front. Our leverage ratio is 2.9 times EBITDA, still below the guided figure of less than three times. Overall we have stability with regard to the ratings from our agencies and our overall debt at the end of the quarter was $8.6 billion, up a little bit from year end.

Turning to chart 16, we are confirming our guidance for the year. We believe that our Q1 performance is in line with the guidance that we provided. We do expect modest improvement in operating performance as the year progresses and you can see clearly the overall numbers that we've indicated at year end as well.

And with that, I think I'll close my prepared remarks and hand the call back to Oliver.

Great, thank you, Patrick, and I think we're now ready to start the Q&A session, Patrick.

Thank you, ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions). Our first question for today, Michael Jungling of Morgan Stanley.

Thank you for taking my questions. I have three please. Firstly, can you comment on US drug inflation costs for the first quarter? Secondly, can you comment on labor inflation increases in Q1? And the last question is if I look at US dialysis services, when do we expect, when would you expect to see a change in revenue growth referred to as revenue per treatment to move more in line with cost per treatment? Would it be the third quarter and the fourth quarter? Some sort of guidance I think will be very helpful. Thank you.

Michael, it's Mike Brosnan. With regard to US drug inflation, we had indicated last year when Amgen increased price, as is typical in our business, we look at managing the pharmaceuticals, both in terms of utilization and also just in terms of our overall sourcing of all pharmaceuticals in the services business.

So the impact in the quarter was a modest positive in terms of Q1. Labor inflation, I think, over the years we've done an excellent job managing the overall cost of labor, getting efficiencies where appropriate that do not decrement the quality of care that we provide the patients.

I think, as Rice indicated earlier and I did as well, with the adjustment that we're seeing on the rebase it's very difficult to mitigate all of your labor costs simply through efficiencies. You do need to recognize the overall effect of inflation on the ability to perform services.

So that's, at least in part, the effect you're seeing in terms of the cost per treatment increases versus the revenue per treatment increase.

With regard to the underlying rate, I think it's a fairly modest rate of inflation in labor year-over-year.

Third question in terms of US services and revenue growth, what I would say in terms of revenue per treatment and cost per treatment because we haven't guided on this for a number of years but as we get into the year and we see how the year is developing, I do from time to time make some comments.

So I would say with regard to revenue per treatment you do see two effects. You see the overall effect of the growth of our care coordination business, which we now disclose separately in our filings and you see the underlying pressure on the services business due to sequestration due to the rebase and the fact that the rebase is essentially taken away the benefits associated with the market basket increase.

I would expect that the overall revenue per treatment will improve slightly in the back half of the year but I think this improvement will be really related to the care coordination business as opposed to the underlying dialysis services business.

And on the cost side, I think you'll see over the balance of the year some mitigation, some reduction in the cost per treatment from what you're seeing in the first quarter, but in large measure this is due to the fact that the first quarter relative to the rest of the year has fewer dialysis days. So 76 days in Q1 and then it grows to 78 and 79 days over the course of the year. So I think on the cost side you'll see the total cost per treatment relatively stable after considering those days.

And then when you look at that at care coordination versus the underlying dialysis services business I think you'll see us continue to invest in care coordination and I'll think you'll see a modest positive effect in the back half of the year related to services.

Great, very helpful and then my final question is on cost savings in the first quarter, gross. Can you highlight what the savings were and also what they were net meaning the implementation of the cost savings program? That's all, thank you.

Yes, I think that relative to the cost saving program we had indicated in our guidance for 2014 that we expected to see up to $60 million this fiscal year and that number is on a net basis. That's after considering costs associated with implementation.

I think in the first quarter I'm happy to report that we did see a small, modest positive low single-digits in Q1 related to the GEP program on a net basis.

Thank you very much.

Lisa Bedell Clive, Sanford Bernstein.

I just have a few questions on care coordination. At the Capital Markets Day you indicated that the care coordination business was $500 million in 2013. Just to confirm this is Fresenius Rx Spectra Labs and vascular access and within Spectra this does include the Shiel acquisition?

And then second, could you just give us some indication of what care coordination did in Q1? I apologize if I missed that. I'm just trying to get an idea of the year-over-year growth for the quarter, both including and excluding Shiel and I'll stop for that at the moment.

Hey, Lisa, it's Rice. We're going to have to do a little work on Q1for care coordination or I may give it more in an annual number. But let me just get back to your first question.

Yes, so we said care coordination last year was about $500 million and the components of that are FMCRX vascular care and the Spectra book of business including Shiel as well. So you got that right.

On care coordination and what it did within the quarter, we don't really have it broken down that way but let me give you a couple of things that I think will probably be helpful to you. When you look at FMCRX kind of on a full-year basis if you remember in February I had said to you that they were going to be shy of $300 million in revenue, think about $275 million in that range, $280 million.

We're looking at what I would say high teens growth for the full year this year, okay, so there's a pretty good pop that's coming from that business.

When you look at the vascular access business we had told you in the full-year wrap up that they were shy of about $200 million. They were in the $190's million range and we're seeing right now based on the way we look at it, about 5% to 6% growth there keeping in mind that one of the things that hurt us with vascular care was there was a 10% cut on reimbursement. Now the 10% didn't hold. It ended up I think might be somewhere in the 5% or 6% range I believe. But that's just trying to give you directionally some sense of what's going on right there.

And I don't have numbers I can give you on Shiel at the moment but let me say a couple of things about Shiel. At this point in the integration all the employees are migrated into our system, our payroll, all of that. Very importantly, the assignment of all Shiel's commercial third-party payer contracts have been moved into our book of business at this point and all the licenses that we need to operate the laboratory have been reassigned to us.

We had a slow start in January and February with Shiel, mainly because it was such a terrible winter and there were a lot of issues in just being able to manage I think it was something like 49 snow days up and down that New Jersey belt. The good news is when I look at requisition volume in March, we're up about 10% so we're seeing a nice pop in the number of requisitions in March. What we saw in January and February was kind of flat to a little down and I think a lot of that really was just generated from trying to get through the winter and some of the integration activity that we needed to have go on.

Let me stop there and see if we know any more on the quarterly side.

Let me just comment because we do now disclose care coordination. It's in the 6-K for the first time that you'll see after the call, Lisa.

Okay great.

We're disposing revenues of $161 million, up from $110 million Q1 of 2013, so that's about a 27% growth -- excuse me, that's about -- sorry, I was going to say that Shiel is worth about $27 million of the $161 million so it's 6% growth with Shiel about just over 20% growth of that.

Okay and then just one last question, when do you expect to start building out your care coordination business outside the US? Is it fair to assume that the ramp up of that really is a bit further out, perhaps two or three years from now?

That's a great question. I would say it this way. We are actively looking at the paths that we're going to take in all the regions. Certainly when you look internationally it may take a little longer in some places as we look to how that's going to manifest itself but know that we're active globally on it. It may well be that some things happen sooner in the US or Europe and Asia but we're moving on all those fronts and I don't really think I can predict to you who is going to pop first. I think it's more logical that we may see that in North America sooner than perhaps internationally but we're doing this all in parallel. We're not doing it serially so we're looking at all the opportunities.

Miss Clive, did that answer your question?

Yes that's fine thanks.

Veronika Dubajova, Goldman Sachs.

Thank you for taking my questions. I only have three, two of which are pretty sort of financial so, Mike, for you the first one was could you give us a sense for what revenue per treatment cost per treatment would have done excluding the care coordination expansion in services that you saw in the quarter? That would be really helpful.

The second one is just if you have any guidance in the tax rate for the full-year given the improvement in Q1? And my third question is for Rice. Rice, given the sum of the movement that we've seen on the ESCO front from CMS, I'm just wondering if you have any thoughts on how the pilot is progressing there and kind of what kind of contribution we might be expecting from care coordination on the Medicare side let's say in 2015 or 2016? Thank you so much.

Yes so let me do it in reverse order, Veronika. So when we look at where we are with ESCO, I can tell you that my socks are rolling up and down at this point. We think it is a good thing that they took the rebase out after the third year. We think that's important that they're not going to call back whatever savings we could generate but unfortunately the rest of the architecture of the ESCO as it sits today is really putting a huge burden on physicians to get into the program and obviously we can't do this without our docs and so I think from our standpoint as an industry and in FMC specifically we are still telling CMS that this thing just isn't likely to take off and have a lot of performance, if you will, or activity around the US because docs are going to be very nervous about the way it continues to be structured.

So I am going to say to you that that whole concept of ESCO we're going to have to have a little more wait and see attitude. I think there are some meetings that are scheduled off and on through the next quarter but our gut reaction to this is just that we appreciate that they took the rebase out but we still think it's way too much of a burden on the individual docs and I'm not sure how many are going to gravitate to wanting to get into the ESCO. And obviously as you think about this and we've said this before, this may be something that we end up pursuing in sort of a different look but yet care coordination and the private side of the business, if you will, versus continuing to wait on the government. I mean we'll continue to work with them but it's just not happening fast enough for us with the right construct. Mike?

Yes thanks, Rice. Since we're going in reverse order, the answer to your second question is I don't see Q1 having a big effect on the overall guidance I gave on taxes for the year. I think I indicated in February [33% to 34%] so we see that roughly within that range.

Last question, I think for the most part having now moved disclosure of the revenue with care coordination, we've always provided a lot of detail on revenue and cost per treatment in the US. We reported out. I'm not sure I'm ready to take the next step and provide even more granularity on that. Other than the qualitative that I made to Michael's question I think as we've said in the past and I think for the last couple of years, most of the revenue rate increases and most of the increase in cost per treatment is related to the care coordination business. That with the underlying growth rates that we just -- a few minutes ago, and then qualitatively as we commented on costs in the US we indicated that the personal costs were not [many] and the pharmacy costs a very modest positive in the quarter, so I think that gives you a pretty good sense in terms of revenue on that front.

Understood. Okay thank you very much.

Christoph Gretler, Credit Suisse.

I have actually two set of questions. The first relates to your same store growth now and I notice internationally now that's been really a strong [point]. Maybe could you elaborate on a country level and on where you have seen in particularly good growth? And then the second part of this question relates to the US where I notice that you're continuing to under grow your competition so I was wondering do you think you are where the market is or and your competition is now ahead or basically do you have any sense about the market rate and the reason why you basically now see lower growth? That would be interesting.

And then the second question is just on this care coordination and contractually it is actually the right way to think of as a per treatment on a per treatment base because I guess now some of these businesses they -- I guess the driver of it is now less treatment so that's why I am not sure whether that's the right driver for these type of businesses. I was just wondering now your thought on that. Thank you.

Hey, Chris, it's Rice. Let me see if I can give you some color on one and two. Yes on the same store treatment growth rather than kind of drag you through country to country what I would say is we're seeing nice contributions from our de novo program and having that work for us. As you recall, probably early last year we were somewhat behind, not comfortable with where we were going on the pace of things. That's picked up. We've seen nice growth there and so we're happy with that, particularly in Eastern Europe and we are continuing to see growth in Asia as well. So I would say it's not anything outside the norm of where you know the hot spots are in general in the international markets.

Great question on DaVita and what are the differences, two things I would say; I believe we are at market growth. I think somewhere around 3% to 3.5%, 4% makes sense. Certainly my hat is off to DaVita with their growth rate. The other thing I do have to just make sure and I can't give you a detailed answer. We don't necessarily calculate these things the same way. If you go and take our clinical indicators side by side, you look at mortality rates, you look at a number of things, we calculate them differently. We agree that we do it differently, no big deal. It's just not the same. I suspect that some of the case here in the market growth is as well but I'll probably leave it at that. I think that's probably as good as I can give you at this point. And, Mike, you want to pick up the third point?

On care coordination and the metrics, I think for the moment coming out of what we've done historically we'll probably continue to report revenue and cost per treatment inclusive in the US. I think that we now supplement that with the additional disclosure of the separate revenue figures for care coordination, which gives the investment community some additional flexibility in terms of how they might want to look at that business and the ability to parse, take that out of the equation, if you will. As we develop these businesses and as they become a much bigger part of our overall business in our planning period, we will undoubtedly come forward with some additional metrics, additional ways of looking at that business, so I'd see that as something we'll develop over time.

Okay thank you. Thank you very much.

Ed Ridley-Day, Bank of America Merrill Lynch.

A couple of follow-up questions please; first of all, your product revenue growth and the Chinese impact, could you give us some color on the visibility that you have that is a delayed order or cancelled order and the phasing of both the Chinese business and indeed the international products business through the rest of the year? Given the lumpiness that you've highlighted and the number of uncertainties, where should we be looking really for the full year for international products? That would be my first question.

Ed, it's Rice. So a couple of points I would make; in the case of China specifically, yes we have pretty good visibility as to what's going there and what I would say to you by the reconfiguration of the distributors it's not that we're seeing cancelled orders. I would think of it more in the way that we're seeing inventory pushed out through the system being consumed and it's not a loss of business as much as I would say probably a delay, if you will, of business.

Now, that should begin to turn the corner and come around in the back half of the year I think. We'll see some improvement there but I wouldn't lump all of international in there so when I think about EMEALA, Europe, Middle East, Africa and Africa and Latin America, I certainly want to see the hangover get cured and start to see some progress in the second quarter, if you will, and I believe that we will. And remember we were at such a hot rate in fourth quarter; I think we were around 7% or 8% growth internationally and we talked about it then to say you know, 4% to 5% is probably more rational.

So clearly this is down but I don't think it's so lumpy you're going to go from a negative one to eight, back and forth, and get whipsawed. I would like to see us back into that 4% to 5%. I mean I'll take 8% if it's there but I don't think I would predict that. But I am kind of separating China in the one hand because I think we've got more control over that versus just the generally opportunity when I look out across the EMEALA franchise.

Thank you; that's very helpful. And just a couple of follow-up questions onto the other questions that have been asked, on care coordination so on Shiel I mean clearly there was a first year benefit from the integration of Shiel given the timing of the acquisition last year. I thank you for the color on the growth there but you previously guided that Shiel revenue for around $100 million. If we take a quarter of that I mean $20 million, $25 million, are we in the ballpark for the first quarter?

I gave you the number, Ed. I told you it was $27 million for--

Yes we were at $27 million, Ed. You maybe you didn't hear Mike.

No I didn't. No thank you.

(inaudible) we were perfectly aligned.

And just in terms of a follow-up on the tax rate as well, so we should expect effectively a reasonably material high tax rate through the rest of the year. It does seem that your tax guidance to the previous question is a little conservative.

Yes I think I'll stick with the 33% to 34% for the year and we'll see what develops as the year progresses.

Okay thank you.

Tom Jones, Berenberg.

I was wondering if you just cycle back to the products business for the first question. You gave us a very helpful breakdown of the near split between growth rates and machines, consumables, (inaudible) and dialyzers and etcetera in the US. I wondered if you can make some similar comments in the international business? And perhaps also you can make some comment and qualitative if not quantitative about volume and price trend in the international business? Really I am just looking for a bit more comfort that what we're seeing in Q1 is just a temporary blip and that we should be back on trend for Q2 and beyond.

The second question was just on international pricing. You had a pretty strong quarter on the back of what was also a pretty strong quarter in Q1, 2013. Just some thoughts about how you're thinking about the international pricing landscape for this year? And then the final question, I'm just curious as to what prompted the investment in your captive insurance business at this juncture. It was a fairly significant amount of money. I just wondered if there's anything operationally you can see on the horizon that's prompted you to make that investment at this point rather than any point in the past.

Hey, Tom, it's Rice and I'm going to let Mike certainly handle number three but let me try to give you a little more detail on the products when you look at the split. What I would say is internationally where we saw the most pressure, if you will, or performance disappoint was in the area of machines, number one. And I would tell you second, that is dialyzers but there was the most pain around the machine business. Think of it in terms of I was disappointed somewhere in the 2% to 2.5% range. Dialyzers were less than that but obviously those are two great product line for us and so when they don't come through it creates some pain for sure.

From a volume and price trend what I would say is the volumes are still there. As Mike mentioned, we made a conscious decision summer time last year to begin to build inventory because we've got some expansions that we're putting through, which means brick and mortar in some of the large factories and we always try to build inventory just because we can't always bring the construction project in right on time.

From a price standpoint we do continue to see pressure. I think we talked a little bit about that in the full year that we're feeling pressure from some of the Japanese companies as they particularly try to get stronger positions in China for one, Korea, other places like that, so I think that pressure is there. I know you'll ask me so I'll go ahead and say we're not seeing or feeling pressure in the US yet from Gambro Baxter but it will come. It's a little early at this point but we're not seeing too much there.

And then as we look at reimbursement rates, particularly in the international markets, we commented on that a little bit. We do see a little pick up in certain places and then it goes away someplace else, so I would say we are continuing to feel that there's pressure there, no huge whacks like we've been seeing in the US and all the consternation that caused, but we do see the give and take and I don't think that's enough for us to fundamentally, Mike, believe we can tell you. It's all going to go down or it's all going to go up. We just sort of see the puts and takes as they come. So I think it's a little bit steady as she goes on reimbursement.

And on the captive insurance?

Yes, Tom, I wouldn't read anything in particular into the investment. Essentially it's based off the annual audits that are required and you have to meet a certain amount of statutory capital in short-term low-risk deposits to support the business. One of the reasons you see the number go up and we've done this each year for a number of years but one of the reasons you see the number go up is because as each year progresses we have an additional year of tail in the captive insurance company so you're covering a higher quantum of risk because you've got additional years captured in the captive. We also have an option as to what we put in the captive and we've had very good experience historically so we tend to put more risk through the captive as the years have gone by. This has been in place for over a decade.

Okay so not the operational to worry about?

Correct.

Good. And if I could just cycle back on the products business and pricing in that area, I mean it seems to me that pricing has never been great in the products business but the press seems to ratcheting up notch by notch over the last couple of years and, as the big incumbent in the hemodialysis space, you're probably the one with the most to lose. I mean what steps are you taking to try and defend price and maintain share in that space? Are you doing anything different with your businesses or just kind of good products, good prices wins the day.

I would say a couple of things, Tom, and we believe that high quality at a fair price does win the day but the pressure is there and so where we've got to go and we're down that path and it's working in certain markets is we've got to deliver more predictable outcome from our products being used in the therapy and being able to get payers to realize that we're going to put you in the best position to reduce hospital days, better outcomes for patients etcetera.

And we really do believe in that so let me give you some examples. We do draw our premium reimbursement in select European countries for hemodiafiltration and we continue to push that therapy and try to educate as many payers as we can around Europe and Asia that this is an opportunity and you need to seize on it. And obviously in the US where there's a much smaller available market to us because we've got such big shares, we've always been about trying to go in and show people how to use our product to get the best outcome.

I'm actually one of the guys that believes the government's QIP program where they whack providers if they don't get certain quality levels placed to our product vertical integration position because we can go in and try to directly link that for people to get them to understand that they're buying value. There's always going to be the price argument. You know that but I think that's how we believe we have the better ability to maintain share and not just completely maintain because we're dropping price.

Okay that makes sense.

Holger Blum, Deutsche Bank.

Yes hi, Holger Blum, Deutsche Bank, just two questions from my side. Firstly, of a more technical nature from your Capital Markets Day I rather had the impression that the minorities should be divesting rather in line with the earnings momentum. Now we have a very big gap in Q1 and in the one-off or is Q1 the run rate to extrapolate going forward or will that portion of minorities rather increase going forward?

The second question related to [Belforo] and maybe you can share your impression since the launch and maybe say to what extent you managed to get onto tier one co-pays for an under reimbursement less that insurance funds? Thank you.

Hey, Holger, it's Mike. I'll take the first one, no surprise to you I'm sure. The -- to be honest, I'm trying to think back to our Capital Markets Day and I just didn't have a chance to look at the transcript for the call today. But I did go back and look at developments towards the back half of last year.

There was a question in Q3 about expectations and I had indicated that with some of the changes we had in our underlying because we continue to adjust the franchise ownership positions with our physicians in terms of buying and selling that coming into Q4 we were looking at something on the order of about 9% of operating earnings and that was up over the course of 2013. Full-year 2013 we were at about 6.5% so when I look at this year I would say, just to give you some additional insight, I'd say probably in the range of plus/minus 8.5% of operating earnings is where I'd expect minorities to be in in 2014.

Holger, it's Rice on Belforo so obviously, as you know, it was toward the end of the month of March when we launched it so there's not much to report there from a revenue or profit standpoint but you're asking about the impression is great because that's the way to consider it.

What I would say is we are getting a lot of interest from the physician community. That has gone very well. We've been very active seeing physicians and talking to them about the product and the benefit so that's gone well. We have gotten ourselves secured contracts in the managed care market in a couple places. I can't tell you exactly who. I just don't stay that close to the detail.

I would say we've got a number of folks that we've made presentations to and we're waiting to hear back from them so I would say we're progressing. We're getting some places that we want to be in but we're not done yet. I think we're going to probably work all the way up through the summer into early fall before everybody we've gotten in front of is going to come back and give us a decision, so it's a little early but first impressions I'm pleasantly surprised and we've just got to keep doing our job and selling and calling on docs and working with the managed care folks.

Great thank you.

Konrad Lieder, Equinet Bank.

I've got a question particularly on one-time costs, which may be included in the Q1 results, particularly on the global efficiency program you mentioned that you have $100 million in implementation costs. How much of this has been already incurred in Q1, if my estimated of $20 million would be too high?

And furthermore, you spoke of higher quality and compliance costs, which should be to a large part of one-time nature of $30 million to $60 million in 2014. How much of this has been incurred in Q1?

And I've got furthermore one question on the headcount development. Your headcount is up 5.4%, sales [call] for only up 3% and I do not fully understand what you're building up the headcount for and when this headcount will translate into higher revenue growth because as I also see cost per treatment is up. This far the cost issue, which you currently have on your margin side and less on the revenue per treatment side in my opinion, so maybe you can elaborate on the higher costs or investments into headcount translate into growth. Thank you.

Okay, Konrad, Mike Brosnan. I'll take the first two. In terms of one-time costs for GEP, I think we guided on a net basis so I'll probably continue to do that in terms of my commentary during the year and, as mentioned before, on a net basis in Q1 we did see a small single-digit millions net benefit.

You're absolutely correct over the entire period we anticipate to get the net $300 million of sustained savings that we would invest about $100 million over the entire period so the number is correct but I think the good news for Q1 is on a net basis we had a positive, not a negative, as I had indicated.

In terms of higher compliance and quality costs, you're absolutely correct. I guided that we'd have an incremental spend of $30 million to up to $60 million and that I had included $30 million in the guidance for 2014. Consistent with that guidance, when I look at the first quarter in terms of incremental spend on those issues we had about $6 million so I think it's consistent with the guidance that I provided for the year.

So, Konrad, it's Rice. A great question on the headcount; up 5.4% versus sales of around 4%, why would you do that? Keep in mind we don't break out, and I'm going to throw some terms at you're here that you'll chuckle about, but we don't break out same store headcount, if you will. What's buried in that 5.4% is the acquisition of Shiel and the headcount that came over. If we buy clinics, things of that nature, so some of this is acquisition related and we really don't look at it again from kind of a same store view. I guess that's something we could think about doing.

But I would say this just to give you a sense of us and our seriousness about headcount. Back in February we put a hiring freeze on. Now what does that mean? It means that we looked at the budgeted headcount for incremental people to come into the Company and we froze that and now for incremental new hires to come in the Company it has to come all the way up to a Board Member to be approved. Now, that may seem overly drastic to you but that's the only way through my whatever 30 some years I've been doing this to know that you can make sure you can control headcount when you're a global operation like we are.

And then if somebody is in the Company and they leave and they are a replacement, that has to get vetted at a very senior level, just like a level below the Management Board but keep in mind on the service side of the business both in the States within the US, individual states, and numbers of countries internationally, we are required by law to maintain certain ratios of nurses to patients or technicians to patients so we don't always have total flexibility in how we manage that.

The product side of the business probably lends itself to a little more control in that regard and then from the administration side of the business. But when it comes to caring for patients, and not that we would ever want to put anybody at risk anyway, that's a fairly well known and directed location by location set of ratios that we have to maintain, Konrad.

Okay thank you.

And our last question for today is a follow-up question from the line of Michael Jungling of Morgan Stanley.

Thank you, only two more questions. When I look at International EBIT and adjusted for currency it seems to be quite flat. Can you sort of explain the outlook for the remainder of the year, whether the International EBIT should grow? Maybe my analysis is wrong but your EBIT is sort of down 2.2% in the first quarter. You had a bit of a currency effect it seems that's sort of flattish so the outlook for International for the year would be useful.

And then the second question I have is just going to corporate EBIT, you had minus 71 this quarter so there up 11. Can you just provide a reconciliation of the ins and outs of what happened in the quarter and what that number should look like for the full year? That's corporate EBIT please.

Yes just give us a minute, Michael, because we're at a level of granularity we usually don't go to and so I'm looking at a couple of things.

So, Michael, we've gone to the three-ring binder. Give us a minute. We've just got to look some stuff up.

Yes on the corporate spending, Michael, I would say some of the things we've talked about I commented on a relatively small effect in Q1 relative to the Management Board. We've commented on incremental spending associated with some of the quality and compliance initiatives we're undertaking, a pretty good piece of that would show up in the corporate spend so I think year-over-year you will see an increase in corporate. It's obviously considered in our overall guidance but you will see a good portion of the $30 million that I alluded to falling into corporate, not all of it but most of it. So you're probably looking at corporate being up let's say $20 million to $30 million year-over-year if that's helpful.

And on the International EBIT just bear with us a second here; no we are seeing despite the currency effects we're seeing an improvement in International EBIT over the course of the year so I think it's reasonable to expect is that business grow. Keeping -- yes product should recover as Rice indicated earlier.

And just in terms of FX for sure you do have year-over-year effects but when we guide we guide at current rates and, as we looked at some of the exchange rates in the international market relative to our guidance, we're actually not seeing big changes in terms of spot rates today versus the rates that were in effect when we guided for 2014 so I think even though the explanations year-over-year will always include exchange rates, I think relative to our guidance and dollars for the year, we're anticipating to see increases in the international business.

So, Michael, the flatness in International EBIT is more a function of a weak products business in Q1, not much else?

Yes I think that's fair.

Great thank you.

Okay, gentlemen, it seems that was the last question today from the phone lines.

Great. Thank you so much, Patrick. Thank you so much, everybody, for participating, much appreciated. Going to talk to you next in Q2 end of July. Take care, folks.

Thank you very much.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.