Fresenius Medical Care AG (FMS) 2014 Q2 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 Second 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 so much, Patrick. I would like to welcome all of you to the Fresenius Medical Care earnings call for the second quarter and half year 2014, also a warm welcome to the ones joining us on the web today. We very much appreciate all 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 that we have distributed today. For further details please concerning risks and uncertainties please refer to our filings including our SEC filings.

With us today are Rice Powell, our CEO and Chairman of the Management Board and Mike Brosnan, our CFO. And, Rice, with that I would like to hand it over to you.

Thank you, Oliver. Hello, everyone, and thank you for joining us today for our second quarter reporting.

I think my headline for today is going to be strong operational performance in the second quarter. I'm proud of the progress that we've made, particularly as you look at this from a sequential quarter standpoint. Lots of hard work has gone into delivering this set of numbers and I'm pleased with how that has gone.

I think in fairness to try to give you time to have as many questions today as you can I'm not going to go through in the usual format. You've had the figures here for the P&L since early this morning. So rather than go through those, let me comment just on the following.

Again, as I said, we've had accelerated growth sequentially. It was supported by all aspects of the business from a regional standpoint. Anecdotally I would share with you that our revenue, Q2 versus Q1 of this year, is up about 7.6% and our EBIT has improved about 25% second quarter from first quarter, so we clearly are making great progress.

We've made some important steps toward expanding our care coordination business. I'm sure you'll have questions and we'll be happy to answer those for you later in today's session, but obviously you know I'm referring to the acquisition of Sound Inpatient Physicians in MedSpring Urgent Care.

We also are confirming our guidance for this year. Mike will give you some more background on that when I turn this over to him, but all in all those are the three, I think, main points I'd like to make for you off of slide one or slide four.

Moving to slide five where we look at the breakdown of revenue for the quarter, I'm really not going to go through the bottom half of this. The revenue splits among the regions really has not changed appreciably so I won't take you through that. I know you've had a chance to look at it, but let me at least comment and congratulate the regions on their performance.

North America had an organic growth of 4% in the quarter, revenue growth at 6%, quite good and we've very pleased with that.

Looking at our International segment, 7% constant currency revenue growth just shy of $1.3 billion and an organic growth of 5%, I think we hopefully caught some of you by surprise with that performance. We're quite pleased with it.

Moving to slide six, let's spend a moment on the revenue growth just in Dialysis Services. As you know, halfway through the year we'll give you two views of this. Looking at the second quarter first, we are just shy of $3 billion in revenue on the Consolidated Services Group. Looking at that growth in constant currency it's at 8% and obviously you see a very good performance by International and North America at 12% constant currency and 7% respectively. Our organic growth for the combined services entities at 6% and same market growth at 4%.

Now, my slide here shows, just to give you a little more color, we're actually at 4.3% same market growth in International and 3.3% in North America. I think we headed to that level of detail in investor news.

Looking at the first half of the year view, $5.7 billion in revenue from our services businesses and again, you can see constant currency growth at 7%, very strong performance in International at 10% constant currency growth, in North America at 6%. Our organic growth halfway through the year at 5% on a consolidated basis and you can see the same market growth is at 4% for the half year as it is for the second quarter.

Moving to slide seven, looking at our quality outcomes, I'll direct my comments to four measures that I usually like to talk about with you. Looking at our hemoglobin at the 10 to 12 grams per deciliter, which is the way we manage this in the US. You can see that in sequential quarters we've had a little bit of a tick up in the folks performing in that range.

Looking at hemoglobin from the international standpoint, at 10 to 13 grams per deciliter, you can see consistent performance in EMEA and a little bit of a tick up in Asia-Pacific as well.

Our Albumins you see we dropped a little bit in the US. I'm not worried about that. But there's a little chatter in those numbers and you see consistent performance in EMEA and Asia-Pacific.

And the last point I would make on slide seven is simply we are very consistent in our performance on hospitalization days on a per patient basis.

Moving to slide eight, I'd like to spend a little more time here. I think there are some things we should talk about relative to the products business; looking at the second quarter, product revenue in the external market at $886 million constant currency growth of 1%.

Now, let's look at International first. We've got 3% constant currency growth. Let me bring you back to first quarter. We were, I think, around a negative 1% so we've seen a nice swing here, still a little behind where we normally think this business should operate but I believe we'll be able to move into that 4% to 5% territory.

You should know within the quarter we had very good performance in our hemo-disposable products, our dialyzers, our blood lines, our concentrate and the acute product line in International was very strong as well. And our machine business was down a little, not appreciably, down some.

Now let's talk about North America, at a negative 6% constant currency obviously something that we have to think about and wonder why is that the case? And let me walk you through it.

Our machine business in North America is down. It is not down to a loss of market share. I would say it's more down to sentiment, meaning simply that a number of the independent and the smaller chains are hanging on to their capital dollars. They're not ready to make buying decisions on machines yet.

And if you calendarize this, keep in mind that the SGR fix, the Docs Bill fix came on the 31st of March and then throughout basically the second quarter we were waiting for CMS to propose their rule for next year and that rule came in late June. Fortunately for us, the rule mimics what Congress asked them to do, but I do think that period of time and that waiting has probably created some concern by other providers and we've seen the machine business be down.

Now to give you a sense of scope, I'm not saying that we're 2,000 or 3,000 machines down by any stretch. It's in the hundreds, but I did want to make you aware of that.

Now if you look at the hemo-disposable business in North America, it's running in the second quarter at about 3.2% to 3.3% at market rate and that's Q2 and we were at 12% hemo-disposables in Q1. So I still think we're seeing good performance there.

And then lastly, on impact to the down quarter in the US or in North America is if you recall several quarters ago we told you we had walked away from some PD Tender business in Mexico. The price points there had gotten to a level that we didn't think it made sense for us to participate. But I would let you know that in the US, our PD business is up, I think it's around 1.5% to 2% so we're continuing to see some growth there.

I think for the sake of time I won't walk you through the H1 numbers. I think you've seen them there and I think my explanations will suit for now until we get to Q&A if you have more questions.

In closing, again I would say second quarter is much improved from first quarter. I'd like to take a moment and thank all of our employees for that. A lot of hard work operating details, a lot of time was spent making that happen and I appreciate it greatly and it shows.

In April we saw many of you at our Capital Market's Day and I believe we gave you a clear strategy for our future growth and our aspiration for $28 billion in revenue in 2020.

I think you can see that in Q2 we've started walking down that path of how we're going to get there. Not enough, more to do, stay tuned.

In our Global Efficiency Program we've told you that it's going to enhance our performance over time. It's going to make us more competitive and I'm confident to say to you today that as we look at our target for 2014, which is up to $60 million in pre-tax, I believe we will deliver that number. I think we're off to a good start and with that, I'd like to turn it over to Mike.

Thank you, Rice. Picking up on chart 11 and talking a little more about the Q2 P&L, our operating earnings were up 2% or $12 million. As Rice said, we've very pleased also with our sequential quarter improvement in the second quarter of this year in terms of operating earnings.

Margins year-over-year were down a bit from 15.1% to 14.5%; essentially 60 basis points from you find is that the margins effects of North America and the International operating businesses more or less offset each other leaving about a 60-basis point margin effect associated with corporate costs for the second quarter.

So, first in North America operating income increased $10 million; margins declined about 50 basis points. They were down largely due to the gain we recorded in the second quarter of 2013 relating to the last clinics we divested associated with the Liberty acquisition, our growth in care coordination which is at lower margins and then personnel costs, some of the FDA remediation costs we've been discussing. And these cost increases were partly offset by improved commercial mix and commercial rates.

In International, operating income increased $25 million, positive margin effect of about 990 basis points. The increase was mainly due to the margin effect associated with our business growth in Asia and favorable foreign exchange effects.

In corporate we had increased corporate spending due to some exploratory costs related to potential acquisitions in our care coordination business, which we ultimately decided not to pursue. In addition to that, we had higher legal and consulting expenses related to our compliance review as well as some spending related to our GEP program.

Moving to interest and taxes, earnings benefitted from a lower net interest expense due to the interest income associated with the note receivable from a middle market dialysis company, which we disclosed last year. Interest expense was marginally higher with our average debt balances increasing offset by a larger portion of that debt being carried at low short-term interest rates.

Our effective tax rate increased 6.1% from $32.6 million to $38.7 million. We took an unfavorable adjustment due to a recent German Federal Tax Court ruling, which had a 5% year-over-year effect on the effective tax rate.

The underlying tax rate for the quarter is 34.8% and for the year we still expect to be within our guidance which I indicated was 33% to 34% albeit I anticipate being on the high end of that guidance range for taxes.

Our non-controlling interest has increased to $47 million due to the creation of additional joint ventures in the back half of 2013.

As Rice indicated, reporting earnings for the quarter were down 11% or roughly $29 million. The effect of the tax case is responsible for $18 million of the decline, as well as the increased portion of our earnings in joint ventures.

Turning to my next chart and just beginning our discussion of cash flows, on chart 12 you can see not a big change from the prior quarter, an improvement of one day worldwide from 74 to 73 days.

We continue to see good performance in International showing a steady 107 days sequential quarter and in North America you may recall that we had a little bit of an increase in the fourth quarter, which I indicated was due some delays in receivables in Mexico as well as some filing requirements with Medicare in order to receive payments on some of these newly created joint ventures.

We did see a two-day improvement from the first quarter. This can be directly related back to the improvement in the Medicare situation. The remaining day is a consequence of the receivables outstanding in Mexico, which we expect will improve in the back half of fiscal 2014.

Turning to chart 13 and looking at overall cash flows, our cash flows for the quarter were influenced by the year-over-year effect of our accounts receivable picking up one day in cash flows in the second quarter.

In addition, consistent with what you saw in the first quarter, we continued to build up inventories, which was planned as part of various capacity expansions we're undertaking in several locations around the world. We also had an increase in our pharma inventories essentially recovering historical inventory levels, as we had short supply of some of our pharma products in the first half of 2013.

CapEx as a percentage of revenues is up year-over-year but it is in line with Q1 and it is in line with the guidance that we provided for 2014.

Turning to my next chart and looking at our overall leverage ratios, there's nothing new on this front, $9.1 billion in debt, which is an increase over year end of about $700 million. This essentially reflects our acquisition activity and the financing of our annual dividend after our AGM meeting in May.

No remarkable change in our profile and our leverage ratio we think is at very acceptable levels.

Turning to my last chart in terms of the 2014 guidance, you can see that we're continuing to guide in three broad areas. First, in terms of the core business we believe our Q2 performance is in line with our full-year guidance and we do expect improved operating performance as the year progresses. So you can see we're confirming our guidance with regard to the core business.

I did indicate net income of $1billion to a $1.05 billion and I do think it is most likely that we'll be at the lower end of that range. This is due principally to the tax adjustment that I just commented on in the second quarter of $18 million and continued spending on consulting and legal advisers with regard to quality systems compliance and the Granuflo Case in the United States.

At the beginning of the year, we said we anticipated incremental spending of $30 million to $60 million on these matters over 2013 actuals and I said that $30 million of that range was in the guidance. I think we're trending towards the higher end of this $30 million to $60 million range, which could have an additional after tax effect of about $20 million. So between the tax case and the costs running a little bit higher than we had anticipated or that we put in our initial forecast, I think that more than likely we'll be towards the low end of that billion to $1.05 billion range that we provided.

The second area you'll recall that we guided on was we said that our core business excluded acquisitions. So, separately staying consistent with our program for this year, we're indicating based on the acquisitions we have closed to date, that would be to date through this meeting so it would include the Sound acquisition, we would expect additional revenues in 2014 of about $500 million.

In the aggregate the acquisitions we've closed this year will be very modestly accretive to operating earnings and will cover their financing costs. As a consequence, the contribution to earnings after tax for 2014 will be negligible. This is in part due to the one-time cost related to deals we have closed as well as absorbing the exploratory costs we have had as we have evaluated but did not pursue other possible businesses related to our care coordination strategy.

The third point we're adding on is we're also performing to expectation regarding to our progress for the Global Efficiency Program. In the first quarter I indicated a low single-digit positive contribution and we continue to see good performance in Q2 with a positive contribution of about $11 million.

So for the half year, we're at approximately $15 million of positive contribution to earnings related to the GEP program. Our guidance remains unchanged indicating we anticipate a positive contribution to operating earnings of up to $60 million on a net basis for the year.

So with that, I think we can open it up for Q&A.

Great, thank you Mike. Thank you, Rice, for the update and I think, Patrick, we can now open up the lines for questions. We can start with the queue.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator instructions). And our first question today comes from the line of Lisa Clive, Sanford Bernstein. Please go ahead.

Three questions, first the very strong International Services growth, could you give us a bit more detail on where this is coming from? Have you changed your views on going into services in China? We talked a little bit about Japan at Capital Market's Day. Maybe you could provide an update there.

Second question was on the news item I guess about a month and a half, two months ago on signing a small Medicare Advantage deal with Aetna. Can you comment whether that's a fully capitated contract and how you see the opportunity in Medicare Advantage in the coming years?

And then lastly, how should we think about your care coordination efforts that are a bit outside of the dialysis clinic? You know it's clear how integrated care with Medicare Advantage, for example, fits nicely in there. But frankly I think Sound Physicians and also MedSpring seem a bit outside of your core or at least historically so could you just comment about what's you interest in those areas?

Sure, Lisa, it's Rice. Let me get started on these and I may have Mike jump in to help me here.

International Services growth, I would say to you that we had good performance in all of the regions. We've seen good performance in the eastern part of Europe so that continues to be good for us. We saw some reimbursement increase in Turkey that helped us as well and we've not changed -- let me say this -- we're still bullish on service in China but we're still operating under the system we've operated under, which is the partnerships that we've had with the government. That has not changed.

In Japan, yes, we talked about Japan in the Capital Market's Day. We are big believers that as that market opens and when that opportunity comes we're going to jump through that door. Not quite there yet but I would also tell you that I don't want to say much more about it because that's probably one of the more competitive places, Asia-Pacific, that we can operate in in the services business. But very good performance, the folks have done a very good job in all of those areas getting things started for us and continuing to push growth.

In the case of the Aetna contract, without getting into too much detail, it is a fully capitated opportunity. It's about 1,000 patients, which is the size that we ran in the first integrated care pilot on with the government a number of years ago, Lisa, as you will recall.

We think Medicare Advantage is a nice opportunity. We like it. We see good growth in that book of business, if you will, for ourselves. So we think that is an area that lends itself to risk and future ideas about how we might try to approach those patients in marrying outcomes with risk performance, etcetera.

And then your last question on coordinated care and Sound and MedSpring, it's a great question and let me try to do this so I don't up too much time. When we think about our patients and the fact that easily 65% of those patients come to us from the hospital, the thing that attracted us to Sound is much like we do. They base things off of protocols and algorithms that are very clinically developed and are driven toward moving a patient through the hospital efficiently, effectively and planning for the discharge and then managing that discharge into skilled nursing facilities or it could be dialysis facilities, etcetera.

So we think there is a way with Sound to help overcome some of the fragmentation that we see in our patient base as they enter the hospital. Now, granted there's 6,200 hospitals in the US and they're in 100. We're in 1,500. There's a lot of work to do there but we think there's a way that we can learn more about their business. They can help us and we can begin to get to a place where there's a better handoff of dialysis patients as they're moving through the hospital.

And in the case of MedSpring, what we feel makes sense there, a number of dialysis patients, Lisa, don't really have primary care and so they are going to see the nephrologist but if they need a flu shot, if they -- broken bone, whatever, you know, appendectomy, they don't really have primary care so they go push themselves into the ER and that ends up being generally a very long, unpleasant experience and it can end up in hospitalization and it keeps them from getting their therapy with us.

So, we like the idea of taking these urgent care centers, which provide very good, very quick, very competent, effective primary care for some things. We like the idea that this Company with about 14 to 20 of these urgent care centers we can began to build those. You build them and they look a lot like dialysis centers in the geographies that we need them or that we're growing or we want that possibility.

And again, the goal is to overcome the fragmentation of care that we see with our patients when they're outside of our dialysis clinics.

I guess one quick follow up then, I mean in these care centers then would you envisage that most of those patients would -- that walk through that door would be your dialysis patients?

Not necessarily, this is a business that's growing well. I think we would obviously take all comers, but I think from the geographic standpoint if we're in a part of Houston and we have patients that don't have primary care we would certainly send them there close by. So I think it's a synergistic effect, but in and of itself these urgent care centers are going to stand alone and be able, I think, to drive value for us. But we certainly want a place that we know what kind of therapy or what kind of treatment they're going to get. We'd like to be able to put our patients there.

Okay, thanks very much for that.

Michael Jungling, Morgan Stanley

Yes, thank you I have three questions. Firstly on [Mircera], any update whether the product will be available in the United States for you to use this year? Secondly, on US dialysis the growth gap between revenue per treatment and cost per treatment is closing. Do you think there is a chance, a reasonable chance, that revenue per treatment will grow a little bit faster than cost per treatment in the second half?

And then thirdly on the EBIT margin for the Group, what would the EBIT margin have been in the second quarter if you did not have two extra dialysis days? When you sort of highlighted a very nice improvement, but I guess some of the improvement was driven by two extra dialysis days so some sort of comparison to Q1 and Q2 EBIT margins sequentially would be useful. Thank you.

Michael, it's Rice. Let me take number one and give Mike a moment on two and three. He's pulling a couple of things out of our binder here. I would have predicted you'd be the gentlemen that would ask me about Mircera but what I would say is our pilot, it will happen this year. I'm not going to be much more specific from that. We're making progress but once we are actually treating and dosing patients we would let you know that. So, obviously, you can discern from this that we're not quite there yet but we're moving in the right direction. It will come to fruition, Michael.

And on number two, Mike, can you give Michael some -- this was on the revenue per treatment, cost per treatment, (inaudible).

Yes. No I appreciate that. What I would say in terms of the back half, Michael, is I expect small improvements in revenue per treatment on a sequential quarter basis so I do think we'll see some improvements there in the back half of this year but I think we will also see increases in cost per treatment, although I think those increases will be less dramatic on a year-over-year basis in the second half than they were in the first half.

So Q3 I think you'll probably see a similar effect or maybe a slightly improved effect off Q2 and then I think you'll see a better profile in terms of enhancing the margins in the US for the difference between revenue and cost per treatment.

Great and then the question on the EBIT margin, please.

Yes I -- we're still running some numbers here. I mean I have my rule of thumb but I'm not sure I want to use that with you. Yes I'm going to go with my rule of thumb. I would say you're looking probably at about a $15 million to $20 million margin effect, operating margin effect, associated with a couple dialysis days.

Okay and then I have a follow up question sort of on the restructuring efforts. Can you give us a sense of what the net cost benefit is that you've been able to book in the second quarter as you begin your restructuring efforts?

Yes I actually disclosed that. It was $11 million.

Okay sorry I must have missed that, sorry. Thank you.

$15 million on a year to date basis.

Thank you.

No worries, Michael.

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking my questions. I guess, Rice, wanted to start that off on the Sound acquisition. You laid out the strategic rationale. Just wondering what other synergies you think we could ascertain? Obviously, maybe not a whole lot of cost synergies. And then do you know what percent of Sound's revenues comes from hospital subsidies and are you concerned that those could diminish over time?

Yes, Kevin, let's jump into that. So, on the acquisition I don't really believe and we didn't build our models around a lot of synergy from a cost standpoint between these businesses. They operate very efficiently and leanly in a little bit differently than we do in the way they're set up.

But I think the real opportunity we see is just getting our hands around -- can we take this 9.4 hospitalization days on average that FMC has and can we really help find a way with Sound's input to driving that to something considerably less. So we see the opportunity more in that way than we do traditionally when we buy something in the dialysis space and we know there's a lot of synergy there.

We just believe that this is going to help us down the road to be able to get better at managing hospitalization for our patients. And as far as the hospital subsidies, I don't want to guess on that. I think when we looked at it, it was not a huge piece of their revenue and I'm not overly worried about it, but if you'll give me a little time I'll come back to you on that. I do need to look at something on that before I just spout something off the top of my head.

Nope that's helpful and then I guess on the reduction in hospitalization days and readmissions, do you have any of those metrics for Sound? And also, in your earlier response I think it was to Lisa's question, you like the idea of how Sound helps coordinate the care of the patients going into post-acute and whatnot as well. Could we see you, I guess whet your appetite for expanding into hospitalist, the acute and post-acute business, and did you even consider other companies? I think there's a publicly traded company out there in that space.

Yes, it's a great question, Kevin. First, they do have statistics and KPIs on their hospital day reduction and their readmission rates. I'm the wrong guy to try to give you that off the top of my head. It would be dangerous but we could certainly get that for you but they publish that. I just don't remember.

What I would say is we really liked Sound. We know those other assets that are out there. They're all in various stages of their business plans and how they operate. Sound was very clinically orientated. It's run by physicians, built by physicians for physicians. We have a lot of respect for the management team there. We just felt like their approach was more akin to the way we go at things from a clinical standpoint and predicting outcomes, although, we're looking at some different outcomes, obviously.

So we like that. Would we continue to look at that space? Sure, I think we would but I think we've got to recognize we just got this one so we've got to kind of get our feet on the ground. But we certainly would be open; I guess that's the way I would leave that.

Got it and then just one question on dialysis, you in your prepared remarks you commented about the machine business in North America being a little sluggish, let's say. When do you expect that to pick back up? And then also on the disposables, it sounds like growth was down a little bit sequentially. Do providers and the other smaller independent guys, do they stock up and buy early in the year? Is that why it was down? Or I guess can you help us with that?

Sure, what I would say relative to machines, I think that it will get better. Generally I can tell you from all the years I've been doing this, usually in the fourth quarter you will see people as the year comes to a close and they've got CapEx dollars left, they will tend to make some machine purchases.

I'm not going to predict Q3. I mean we're just into it. I've looked at our August numbers. They look pretty good, but I don't want to make that the bellwether for the whole quarter. But I think the comfort you can take, even though I don't like being down, is that it's not somebody else's machines that are being purchased. People are just hanging on to their dollars.

From the disposable side, I have not generally seen people really stock up in that regard. I mean we may be down a little bit. It could be that some people bought more early on, some of the independents, but we deliver so frequently to the chains we tend to not see a lot of variability there, so I don't think it's necessarily a bit piece of that. It could be though that, as you get into the summer season, people that are down south, snowbirds that are coming back our way, sometimes they don't always manage inventory levels as tight as they can because people do miss treatments.

Keep in mind, patients miss on average a couple three, four treatments a year with vacation and travel and things like that. So, it's not an exact science is I guess I would say.

Got it, that's helpful. Thank you.

Gary Lieberman, Wells Fargo.

Good morning, thanks. Rice, maybe just to go back to your comments on Mircera, should we take that to mean that you do expect that Mircera will be used widely by you guys this year?

Great question, Gary; no what I would say is that we would start our pilot this year, and again, as we've talked about this before, this isn't really us trying to prove safety and efficacy. That's been done. We're really trying to get used to longer-acting drug different than short acting Epogen and how do you manage that? How does the -- you know, we go through the logistics of that? So think more in terms of when we get started we would continue with that and then we would probably, if everything is good and we liked it, we would continue to put patients on.

I just think shouldn't read anything into it. It's July and I didn't tell you we dosed our first patient yet. It's not that exact. I guess I'd leave it at that.

Well, I guess in terms of it being available to you, if you're happy with the way the, not the trials, but the sort of the usage goes, will the drug be available to you if you want to buy it in quantity?

I don't know why it wouldn't be. I think we'd be able to find our way through that, absolutely.

Okay and then a question on the income from non-controlling interest. It moved up in the quarter. Were there any additional JVs that were done in the quarter or is there some strength in those assets that's worth talking about?

Mike, you want to?

Yes I'd say two things. First, most of the increase, because we're looking at year-over-year, took place in the back half of 2013. And then more generally I would say and you've actually given me an opportunity to correct a statement I made earlier because as I was going through the cash flow statements talking about acquisitions I just want to correct that really is acquisitions and investments and in the case of sound, as you know, that was us acquiring a majority interest. We did not acquire the company so I think it's, as Rice said, it's very important that that management team continue to manage that business effectively and we obviously have a strong partnership with that business but we acquired a majority interest.

Speaking more broadly, we've done about -- we've done over 20 deals in the first half of fiscal 2014 so very active on the business development front and for several years now more often than not when you're doing those even in for dialysis space they tend to be joint ventures so most of what you're seeing in terms of the year-over-year increase comes from what we did in the back of last year but we're still very active in the space so you'll continue to see us acquiring or investing in joint ventures in a number of markets around the world.

Great and then maybe just finally, is it possible to get an update on the Granuflo litigation?

Yes, Gary. We are just sort of trundling along. We are still at this point not expecting to be in a courtroom, trial if you will, until next year, could be the back half of next year. So we are still doing discovery. I know you guys get tired of me telling you that but we're still doing discovery, prepping ourselves but we don't anticipate trial dates until mid to late in 2015.

Okay great, thanks very much.

Veronika Dubajova, Goldman Sachs.

Good afternoon, gentlemen, and thank you for meeting my questions. I have three if I can. The first one is just on the increase in the revenue per treatment in the international and, Mike, I don't know if you have any guidance and you can help us understand how to think about it on a full-year basis because obviously I suspect that there might have been some tenders in the second quarter which helped, so anything that you can share would be much appreciated.

My second question is just on the GEP guidance and I am quite surprised given that your run rate as of Q2 was already $11 million and the guidance that you had given that it's mostly second half weighted. I'm surprised that you still are only expecting $60 million to come through this year and maybe, Mike, you can help us understand why that's the case.

And my last question is on the Aetna contract. I don't know, Rice, if you can share with us any of the terms in terms of or at least I suspect you cannot share the precise terms of this but maybe kind of put it in the context of how much of the saving would you have to generate to for this to actually be profitable or does it have to be better than what you delivered in a Medicare pilot? That would be really appreciated. Thank you.

Veronika, I'll take the first couple. In terms of international revenue per treatment, we are pleased with the results on a constant currency basis. There was a nice increase in revenue per treatment and I think also what we're pleased with is that was the case for all of the regions, Asia, Latin America and Europe. It's not unusual to see a bump in revenue per treatment, international revenue per treatment, because it includes the Latin American countries and those tend to be inflation adjusted but I think it is a positive piece of news that it is -- it covers all the regions in terms of that effect. No particular guidance for the year on the number but we're pleased with the results and it was global.

In terms of GEP, GEP as you'll recall, I'm still very comfortable with up to 60 because what we're doing is guiding to the net effect for fiscal 2014 so, as the year progresses, that will consider not only the savings but also whatever implementation costs we have to get on the right footing in this program which we anticipate will be a three-year program. So I am very happy that we've got about $15 million put to bed in the first half of the year but we're running 18 projects.

We're making a lot of operating decisions as we go so I still feel pretty good that we will have a positive contribution for the year but I am going to maintain the flexibility that if we need to make decisions and incur some implementation costs in the back half of the year to get the right trajectory for the $200 million we've committed to for next year, we're going to do that.

Understood, Mike, and if I can just quickly, a quick follow-up on that one, in terms of the 15 that you've seen, can you give us the gross and the cost of that? And apologies if I missed this in the call.

No I actually don't have it handy but, again, because we're dealing with 18 projects and the idea is to get to an end run rate, I wouldn't read too much into the gross and the net as we get this thing started out this year.

Okay understood, thank you.

Yes and then, Veronika, unfortunately I am always that tells you I can't do that but I'd have some folks in Hartford, Connecticut probably upset with me if I gave away too much information on that and so I am going to have to pass on the terms of the deal. It just wouldn't work for me to walk you through that.

Okay understood, thank you so much.

AnitaVasu, Redburn.

Just a quick follow-up question on the Sound physicians you honored that's kind of already been covered; one thing I was just wondering in terms of the fact that you're entering in certain areas that use more generalist physicians, how do you kind of expect that to cater specifically to sort of kidney disease and dialysis specifically when you're kind of thinking about integrating it within your existing network? Thanks.

Sure, Anita, a couple of things; the profile of the physicians at Sound in general what we're finding with hospitalists are generally they're in internal medicine. Predominantly there are some that are really trained as primary care and believe it or not there are a smattering of nephrologists that have moved into the hospitalist specialty, if you will. But let's not think of this as an integration where doctors are going to be interspersed day to day practicing together so I think there's really not a lot of difference than what we see today, meaning nephrologists in the clinic dealing with our patients.

Nephrologists generally don't get in to see their hospital patients. They need to be able to coordinate with someone so I think internal medicine quite honestly, which is the preponderance of these hospitalists, is a very similar specialty in terms of the docs being able to understand and communicate with one another and be on the same page. But I don't think it's got to be anything that is really, truly hard and sticky from that standpoint, Anita. I think it will work just fine.

I am more interested in the stickiness that we like is the fat sound is so protocol algorithm driven as we are. That's what I like the most is because then we can look at these clinical outcomes and the inputs and the outputs are analytically derived. I like that versus just thinking about how the physicians will kind of interface together if that helps.

Okay thank you.

Alex Kleban, Barclays.

Thanks for taking the questions. First on Sound, could you just talk about EBIT margins and how you expect those to evolve over the course of time with the deal? Secondly, on Mircera I guess just a maybe more detailed kind of a question but do you anticipate switching patients primarily onto Mircera from Amgen EPO or will you be looking more to initially goes with needle market patients? Thanks.

Sure, Alex, on the Sound EBIT margins I probably won't give you a whole lot of detail. I think we would probably say yes in general you're probably looking at low double-digit something like that. I think we'll put it at that place right now and then when you look at Mircera it's probably too soon for me to really try to walk you through how we're going to handle that. I think that what you ought to consider is they'll be a mixture of this. This is really going to be an independent physician decision as to how they want to do it.

Obviously patients are going to be on EPO and they're going to move off. Then they're going to be new patients as well but a lot of that will come down to how the individual physician wants to manage that process. I just don't want to get too far out in front of sales on Mircera yet but I would say it could work out that way theoretically.

Okay no thanks for that and just one more just EPO pricing for the quarter, maybe you can update on that and also any negotiations of Amgen because I think you have to roll the agreement over for -- by the end of this year for next year if I am not mistaken.

Well, you know I am going to say EPO pricing is too high no matter what but no we did take a price increase. I believe it was back in May I think it was. Is that right? I believe that's right but it was within the quarter yes.

In terms of the negotiations what I would say, as you know, both the European contract and the US contracts are up at the end of the year. We're talking and we're meeting and doing the things that we need to do to sort our way through that so I suspect this will go on for a while. We've got till end of the year to sort through how we're going to go forward, Alex.

But you will be I guess primarily looking for non-exclusives agreement with them this time.

Yes which would be what we have today. I mean they have done -- they're exclusive is with [DaVita] and we've been unexclusive for a while and I wouldn't expect to change that, Alex.

How has that impacted pricing over the course of last agreement? I mean do you have a sense as to where you are versus DaVita in terms of how much increase you've had to take versus what they've had to take?

Yes. I mean we have a sense of that. The way I would answer it is it's really more built around the discount, the level of discounts you get, not so much the actual price of acquisition but let me leave it at that. It probably wouldn't do me any good to get into any more detail than that.

Okay fair enough, thanks.

David Adlington, JPMorgan.

Thanks for taking the question. Just on Sound again, I know you said you acquired the majority but I just wanted you to give us some further color on whether that was near the 50 or the 100% in terms of what majority in therefor what impact that might have on minority interests for the rest of this year.

Yes, David, it's Rice. What I would tell you it's significant. I'd think more about your latter suggestion of a number but it's not that high but it's a significant share for us and obviously mixed in there there's management. The original private equity firm kept some and then we've got two hospital systems that are very enamored with the business model and the way Sound conducts themselves and the work and they're a part of that too. But we are clearly the vast majority.

Great thank you. And then perhaps one then on minority interests in the second half?

It will have an influence on the minority interest but it -- as I said, I confirmed our guidance and provided -- you know, when I gave the guidance with regard to our acquisitions and essentially modestly accretive to operating earnings and not contributing much in the [AT]. That's in part because the deal was done in a half year and because of the one-time acquisition costs we have so I think as you think about the back end of this year better to think of that investment as part of our overall business development program rather than trying to tease out its individual contribution to the earnings.

Okay great and will that be reported within the cash so I would already have a separate line for it?

It will go into care coordination, yes.

Thank you.

Justin Smith, Societe Generale.

I just wondered if you had disclosed the actual total care coordination revenues in the second quarter including under excluding shared if possible?

Hang on, Justin. We had to look that up but I think we can probably give that to you.

Yes we'll get it. It's in our 6-K but we haven't filed that yet. Just hang on one second. Yes we'd report total care coordination rather than break out the pieces but yes care coordination for the three months ended June this year is $208 million in revenues and last year is $138 million in revenue.

Great thank you.

Volker Braun, Commerzbank.

Yes thanks for taking my question. I would like to get back to growth in Asia Pacific. You've increased a number of patients there by more than one-third versus Q1 for more than 6,000 patients. Could you share information which regions are or which countries are affected and what the margin profile could be?

Yes, Volker, it's Rice. What I will say is that we are seeing that improvement or that increase throughout the region. I am going to be very honest with you. I don't want to get into a whole lot of specifics because of the competitive nature of what goes on and we're there in the service business and we're not done yet with some things that we're doing but I would say it's a fairly well spread around improvement that we're looking at and I don't know, Mike, that we want to (inaudible) go into the margin on that.

No, no I don't think so. I agree with you, Rice. That market is extremely competitive right now and we're -- we've indicated a number of times that we think we're well positioned in Asia as a region in terms of the positions we have in the markets that we think are appropriate for our business and the regions strategically very important to us in terms of what we shared with you at the CMD.

But to give you some sense, just keep in mind you've got India, China, Singapore, Malaysia. There are lots of places that -- Philippines, so there's a broad areas there for us to be involved with.

Yes sure. I mean this is the case of for us quite a time now but what has changed the picture? The momentum has picked up quite dramatically and was it just opportunistic or is this a trend that we can expect in the next quarters to remain?

Let me just comment. I think in addition to what Rice said, and we're still working through this but we did have a period of some fairly sluggish revenue growth in Asia over the last couple of quarters and that was, as we had reported to you, largely due to restructuring our distributor network in China. That work is still continuing but the China situation has stabilized in this period of time so I think we're back to a very solid base and that's why you're seeing the revenue growth turn around a bit.

Yes I think we've improved our sales because we were opportunistic with a couple opportunities but I think we'll see a good trend there going forward.

Very good. Thank you.

Tom Jones, Berenberg.

I had two questions actually. The first one perhaps changing tacks slightly, just on the nutritional stakes of your patients, you did mention it, Rice, but the percentage of your patients on albumin with an [albumin/soy] base in [3.5 grams] per deciliter, that's sort of dropped from 86 I think it was in Q4 down to 85 in Q1 and now 82. Is that really just generally in a normal volatility or is there anything that you're doing to make sure that that isn't just normal volatility and returns to a better level?

And then the second question just I talk on about it but Sound, how is it that business to scale because I've been thinking, the 100 hospitals out of (inaudible) it's less than 2% of the hospitals in the US is not really going to move the needle across your whole dialysis network. You know, how is there and more specifically how much capital do you think you need, if any, to expand that business into other hospitals and make it a broad enough network that it's really going to move the needle on your dialysis business?

Thanks, Tom. It's Rice; let me take them both. On the nutritional status you're right, the numbers have dropped some. A couple of things that we're seeing here is, as you well know, we are not allowed to really provide consistently supplements for our patients and so we've been in and out of our ability to provide supplements. New patients coming in, they're able to get some. Then there's a time frame where they can't continue so we're kind of cycling through some of that. It's really not ideal. I wish and I am going to harp on it. I wish we could get legislation that would tell us we could take care of that for patients but it's not the case. You do see a little bit of shift with weather as well. It does move around a little bit depending on the season.

Now, with Sound in terms of scalability, Sound has maintained and they continue their own recruiting department, if you will. They've got 50 people that they use to recruit physicians, quite successfully I might add. We have seen in our diligence that they're able to add a couple of hundred physicians very quickly to bring them into the network so I think their ability to scale as you look at more activity in hospitals is there. They certainly seem to have no issue with that so I am pretty comfortable that we can make that work.

This is not a high capital intense business. One of the things we like about it is the fact that you're dealing with physicians, them in the hospital. If you can get the docs you're not really looking to spend a lot of money on anything from a capital standpoint, so we think this is very scalable.

We obviously went into this thinking about with us being in 1,500 hospitals that was the immediate scalability that we would consider as to how Sound would go from 100 to that and then moving beyond that and then moving beyond that we think there's a path to get there, Tom. It's not a heavy step up, if you will, in terms of being able to scale.

Because it seems to me that the funding in that business is in the sort of expertise and the algorithms and the statistics that they operate and that seems to me something you could pretty much just even if you perhaps even take on existing hospitalists that are employed by the hospitals and just take them onto your books is something you could do pretty easily to be honest. Is that a sensible way of thinking about it?

I think it's very sensible yes, absolutely.

Good.

Whit Mayo, Robert Baird.

Thanks, I've got another Sounds question, maybe just a different angle, but I am just curious what the overlap of Sounds is with your existing clinic business and it does sound like this is a little bit of a learning experience and I am just kind of curious to hear your thoughts around why it's this asset that makes sense versus maybe something targeted and smaller?

Yes, Whit, I can't give you the real detail on the overlap. It certainly is there and we obviously, as you can imagine, put maps together. I just don't remember all of the locations given that we've got so many clinics but if you go through and you look at the large geographic areas throughout the US, we think there's just a really nice growth footprint for us there as we look at this. But again, as I said earlier, the thing that we liked about Sound, two things.

One, very clinically driven; physician started, physician managed for physicians, we like that. Secondly, they have the ability to scale. To start smaller with a smaller company, if you will, if they didn't have the scale capabilities that we saw at Sound, it would be a rough slog I think. We like the fact that they've got the ability. They've got their own recruiting talent and they're able to make that happen so we felt this was the best place for us to get our feet wet and it's quite an experience seasoned management team and that's always important when you're going to go into a new venture like this.

Yes I would just -- sorry, I would just add to what Rice said. When you look at this business and when you look at some of the other business we're investing in in care coordination, these are good businesses that stand on their own. As we go forward, there may be some benefit that in terms of caring for our patients but the footprint of Sound versus the footprint of our clinics is not the reason we invested in Sound. It's a good business on a standalone basis.

No that makes sense. And just as you think about building out the care coordination effort, what other assets and capabilities do you think you need to buy, build or rent, as you sort of assemble that effort? I mean clearly home health kind of comes to mind. Just looking for any flavor on what we could see over the next year or so.

Sure, I would say one thing, Whit, let's -- ways you think about this you have to move off of the US, you know, the North American continent because there are going to be opportunities globally. There's some things we've looked at. Some of the opportunities Mike mentioned that we chose not to pursue, they're things that we see happening here, particularly in Europe, that are going to lend itself to care coordination so let's not just think in terms of the US. In the US we could see Sound expanding. We think there's an opportunity there.

There's still vascular access centers out there that we could look to expand so the asset base we have we can pursue that and push it out, if you will, in the US but I just want people to not lose sight of the fact in the rest of the world there are countries very well developed that are looking at care coordination, albeit a little differently but there are going to be opportunities there and we're evaluating those as we speak now.

Great and just one last one, Mike, just the increase in corporate overhead in the quarter, I may have missed that.

Yes I had said that was due to, as Rice just mentioned, some of the exploratory costs we incurred looking at potential deals in the care coordination areas that we decided not to pursue and also an increase in the burn rate relative to the quality compliance in Granuflo projects that we've undertaken.

Got it, makes sense. Thanks, guys.

And our next question is a follow-up question from the line of Lisa Clive of Sanford Bernstein.

Thanks, a few more questions; just thinking about your Medicare Advantage population, I think in your last annual report traditional Medicare is now 76% of your patients. Is it fair to assume that that 24% remaining is split sort of 50/50 between private and Medicare Advantage? I am just trying to think about as you move down towards integrated care for MA kind of what proportion of patients we're looking at there.

And then second question on Sound, what is the fee structure like? Do you get a fee per episode? Is it shared savings? And I guess more importantly, is there any tied to Medicare Advantage rates? I know we've seen other players in this sort of accountable care organization area get hit with Medicare Advantage rate squeezes and I just want to make sure you're sort of insulated from any changes like that.

And then I guess lastly, feeding into your comments just now on care coordination outside of the US, when we think about that (inaudible) and target by 2020, what proportion should we expect comes from the US? I mean is going to be sort of $4 billion from the US, a billion outside? Is that sort of reasonable?

Yes, Lisa, let me answer that one first. I don't know that we are really that determined in our thinking as to what that split is going to be. Obviously probably not a surprise we got started in the US first. We had these opportunities but I don't think I can really tell you out of $5 billion if it's going to be $4 billion and $1 billion or $3 billion and $2 billion or exactly how it's going to be yet. We're going to let that unfold and see what the opportunities bring us so just sort of stay tuned on that one.

On the sound revenue it's all of the above. They do get a fee per encounter. They do have some shared savings programs as well and then there is going to be a Medicare Advantage bundle opportunity coming to them. I'm not sure it's there yet but I think they're going to look at that. It's in 2015 but today it's basically fee, if you will, per encounter and then shared savings as well, so it's a little bit of all of the above. And then on the Medicare Advantage piece, yes so what I would tell you is Medicare Advantage, yes you're thinking about it in the right way roughly is the way you look at the split. You're good.

Okay thanks and just lastly on this fees for Sound, I guess what I am -- what I was asking about was the Medicare Advantage situation is if there were another Medicare Advantage cut, would that be something that would hit Sound's revenue, EBIT structure or basically profit margin, or would they be a bit insulated from that?

They've got some insulation there, Lisa. It's not going to be a cut that we'd have to stitch up. Let me say it that way. They're insulated.

Okay that's very helpful. Thank you.

Oliver Reinberg, Kepler Cheuvreaux.

Two questions, if I may; Mike, can you just help us coming back to the minorities? As I recall that from the first quarter call, I think it's you guided to about 8.5% of profit before tax should come in as kind of minority charge. Percentage wise we have improved but I think we still track in at about 11%. Can you just talk about is this coming down or could you give us an update the guidance for that?

Secondly, if I just look at the second quarter margins nationally, this really nicely improved out of country per in basis points and turns year-on-year. Is that actually sustainable or is it any kind of one-time currency effect in there? That would be helpful.

And the third question, you talked about the cost in the corporate line for (inaudible) looking some kind of deals that did not materialize. Can you just give us an idea, have they still not materialized because if your diligence wasn't meeting expectations or because pricing in the market were too high? Thank you.

Mike, I'll let you take those.

Okay yes, in terms of minority interest, I think what I've said, both I think in Q3 last year and then perhaps I said something in the first quarter of this year but in Q3 last year I did comment that we were going to be seeing higher absolute numbers in the fourth quarter and that we'd be trending probably towards 9% of operating earnings as we initially thought about 2014. I think for this year probably with some of the activities we've undertaken 9% to 10% would be a good benchmark to use.

Relative to the international margins, I did comment that the beneficial effect was in part due to the growth of the business, also in terms of favorable FX on a global basis, so that did make a contribution to the second quarter as well as some of the growth, revenue growth, that you talked about. Sorry, folks are just showing me what I said in the third quarter and I did say -- first quarter.

That was first quarter, yes.

First quarter, I said 8.5% first quarter so you are correct but I'd say 9% to 10% is a better indication right now. So FX did play a role in the second quarter international operations but I do think we're showing some good solid underlying organic revenue growth in international markets and constant currency growth rates there, which was the significant contributor to the earnings improvement in international.

And third question, I actually didn't write that down.

So I've got it. It's on the deal cost.

Oh yes.

If it was too high priced, due diligence fallout or whatever the, you know, what kind of drove us to not.

Yes it's both. Obviously M&A activity on a global basis is up significantly. Healthcare amongst M&A activity when you parse it out by sector is very, very high and that means you just have to be extraordinarily careful about what you buy and what the real kind of rock solid earnings projections are going to be so it was a little bit of both.

Yes we don't have deal fever, Oliver. We're going to be very careful about what we do so we're just going to be very deliberate in how we do this.

Great, thanks for all the color. Mike, can I just follow up, the currency charge, can you give us just any kind of indication of the magnitude? I guess that it was a kind of one-time effect in the second quarter, correct?

Yes I don't have the number off the top of my head. I mean it bounces all over the place quarter-to-quarter. We'll come back to it, see if we have some specificity to give you.

Great and then the last follow-up with me, is there actually any reason why you're still excluding the kind of savings target from your net income guidance?

Yes and I appreciate lots of folks would have preferred that I include it but I didn't include it for a very specific reason because I indicated that our core business is very well known, very stable business operating consistent with some of the metrics we've shared with you for many, many years but the GEP program is projects' based and we're making decisions on a project oriented basis rather than just locking it into the annual P&L because it's a three-year program. So that's why I separated the guidance and that's why we're commenting on our progress against those goals each quarter.

Excuse me, Mr. Reinberg, did that answer your question?

Yes perfect, thanks a lot.

Sorry, Oliver, I would come back and say it was about half of the margin improvement in international. We improved about 90 basis points. It was about half, 40 to 45 basis points for FX.

Okay.

Veronika Dubajova, Goldman Sachs.

I'll just make this a really quick one. I was just wondering if you can comment on the CMS proposal that we saw at the beginning of the month and specifically I guess, Rice, I don't know if you have any thoughts on the change to the pharma PPI and the rebalancing in the basket and what that might mean for what type of inflationary increases you see post 2015? Thank you.

Yes, Veronika, first I would say boy, what a difference a year makes. I feel a lot better about what they proposed this year than where we were last year. It was nice to see that they're going to carry through on what the Congress had asked them to act on. I think this is a lot -- you know, when we look at the former PPI and some of the changes in there, I actually haven't studied them enough to be intelligent to give you a good comment on that other than to say there are host of changes beyond that.

They've got this five-star program, a number of things they're looking at, so we've got some work to do, not to say that folks aren't looking at it now but I am probably a little behind. So let me not embarrass myself by saying something that's wrong but we will look at it and then you and I can chat another time and we can give you a little more of our position on it but we're still sort of going through it at the moment.

Understood, thank you very much.

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

Thank you. Two further questions, firstly on US collects have you closed any loss making collects in the quarter and how do you view clinical orders for the second half? And question number two is with respect to the paperwork in US clinics. If the capital markets that you mentioned that you weren't as easy to deal with if you're a customer compared to some of your competitors and you would make it easier for your patients. Has this already been reflected perhaps in the organic growth numbers for US collects or is that acceleration yet to come? Thank you.

Hey, Michael, it's Rice. What I would say to you and if you remember, we made the distinction that we would look at closure decisions in a quarter because it can very well take a couple months or longer to actually close a clinic. We made the closure decision in Q1 on eight clinics. In Q2 we made that decision on 11 clinics. I can't actually tell you where they are in the actual being closed because again, there are a number of things that have to be worked through on that but that was the Q2 number.

What I would say about central admissions, which is what we talked about at Capital Markets Day, I think we're improving. I think Mike commented on that. We're seeing some improvement. I don't think we're where we want to be. I'm not sure they're ever going to get to where I want them to be but yes we're making improvements. We're making changes. We're consolidating our efforts among the various admissions offices that we have and getting everybody on the same page, so it's a so far so good but not where we want to be ultimately.

Just from the admissions side, I mean could we see an improvement in the second half from those initiatives?

I think you're seeing a little bit of improvement now and I think hopefully we'll continue to see some in the second half. This isn't something that's going to go from black to white overnight. It's going to be incremental over time but we're happy to chat about it every quarter but it's not going to be a sea change, Michael, in one quarter. Don't think about it that way.

Okay and then how many clinics do you intend to close in the second half?

Don't know yet. Honestly I let these guys sit down and work through that themselves and we really do take it quarter-to-quarter. If you remember back in April, we said we thought we would be considering something around 25 or so, so we're sort of on that pace now. Could it be a few more, a few less? I don't know at this point. I'd have to spend some time with the guys in the US, which I'll do and get a better read of that, Michael.

Okay thank you very much.

You bet.

Okay, gentlemen, there are no further questions for today's call.

Okay thank you so much, everybody, for participating in today's call, very much appreciated your interest so talk to you soon, latest in November for Q3. Thank you so much. Take care.

Bye now.

Thanks. Bye, bye.

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