Fresenius Medical Care AG (FMS) 2015 Q2 法說會逐字稿

Thank you very much, Christine. We would like to welcome all of you to the Fresenius Medical Care earnings call for the second quarter, first half year of 2015. As always, also a warm welcome to the ones joining us on the web today.

I would like to start out the call by mentioning our cautionary language that is in our Safe Harbor statement, as well as in our presentation, all the material that we have distributed today. For further details concerning risks and uncertainties, please refer to these filings including our SEC filings.

With us today again is Rice Powell, our CEO and Chairman of the Fresenius Medical Care Management Board, and Rice will give you a general business update and go through some of the highlights of the quarter and the half year. And we also have with us today, Mike Brosnan, our Chief Financial Officer, who will cover the financials and give you a little bit more detail on the outlook. So Rice, with this, the floor is yours.

Thank you, Oliver. Welcome, everyone. We're glad to have you with us today as we go through second quarter and the first half of this year's results.

My headline for the quarter is that the underlying performance of the business is quite strong and we are very pleased with what we've been able to accomplish in the second quarter. The organic growth in all segments of the business is extremely strong. Yes, the international business did have some operating earnings pressure as a result of currency impacts in the quarter, and Mike will take you through some of that later in today's discussion.

We are making very good progress in our Care Coordination segment in the second quarter and first half year and we'll give you some more highlights on that shortly. And we are confirming the outlook for 2015 and we've had a slight alignment, if you will, in our revenue projections for the 2016 guidance and we'll walk you through that today. We remain very comfortable with where we are with these guidances that we're providing for you.

Not on my slide 5 where I begin my comments, I would like to just highlight to you, looking at the first half of the year, this will be your slide 23 I believe in the Investor News, but just very quickly, when you look at the three key metrics in the first half of the year performance for Fresenius Medical Care, 16% constant currency growth in that revenue, just shy of $8.2 billion. Our operating income is up 5%, and our net income is up 3%. So again, we believe the underlying performance of the business is quite well in the quarter, additionally for the first half of the year as well.

Turning to slide 6, taking a moment to go through our revenue breakdown, obviously you know that we are at $4.2 billion in the quarter, 15% constant currency growth. We're very pleased with that. A little outside the normal range that we operate in, you can see that North America generated 70% of the revenue in the quarter. Very strong performance from the North American team and we'll obviously give you some more color on that later in the presentation.

But looking at North America, 7% organic growth, 17% revenue growth, very good performance. Internationally, 14% constant currency and organic growth of 9%, so we feel very comfortable with how we're progressing in our revenue within the quarter and the first half of the year.

And then looking at the segments, I won't take you through each one, the information is there for you, but obviously we're seeing very good constant currency growth in Asia-Pacific and Latin America. A little bit of pressure in EMEA, but we're comfortable that that will improve as we go through the year as well.

Looking at slide 7, looking at our service franchise for the first half of the year, so we're looking at six months into the year, you can see that our clinic base has increased by 3%. We're at 3,421 clinics. You can see that our treatments are up 6%, so we're just shy of 22 million treatments halfway through the year, and we're at 290,000 patients, up about 3%. So the franchise continues to progress, we're pleased with where we are, and we continue to make progress in that area.

Turning to slide 8, let's take a moment and talk about the healthcare revenue. A couple of things I'd like to highlight. Beyond the obvious at $3.345 billion and constant currency growth at 18%, you see very good contributions from both areas for organic growth, 7% in North America, international at 8%. And you can see our same market growth has consistently performed at around 4%, up from the days of 2.8% to 2.9% several years ago. We're making great progress there.

And in Care Coordination, let's highlight and take a moment to look at approximately $470 million of revenue in the quarter, 149% constant currency growth, and very importantly, organic growth at 24%. And in the prior quarter I believe we were in the mid-30s, so it's pretty solid performance here two quarters in a row. And in healthcare, you can see that North America drove about 81% of the revenue in the quarter.

Turning to slide 9, I would use my term we had a very hot products quarter. The growth is good. I won't read numbers to you on the page, you've seen them obviously. But when you look at the constant currency growth in the quarter, in North America at 9% followed by a very strong 10% on the international side, that gives us an 8% rollup. It is very good performance. I had a chance to look earlier in the day at Baxter's performance, who I think is really our most appropriate competitor, they were 3% constant currency growth in the quarter and we sit at 8% today. So obviously we are making great progress there out with our sales forces around the world.

This brings me to my summary, slide 10. And again, I would say simply that the positive trend in our organic growth will continue. A very specific comment for the United States, our utilization of Mircera continues to go very well. The results are good, things are in line with our expectations. And I would say to you at this point, at the end of Q2, we have approximately 45,000 patients that have had multiple doses of Mircera and we're calling it at the end of Q1 we were at about 1,000 patients that had multiple doses. So we obviously believe in what we're seeing here. The clinical data looks good, we're moving forward, so we're quite pleased with that. I'm sure you'll have questions and we're happy to answer them.

The investments in Care Coordination and integrating those new assets continues to go well. We believe that we're on track with that and we're happy to walk you through some of that detail when Mike takes over here in a second, but we feel good about the state of play that we're seeing in the Care Coordination business.

And lastly, we are reconfirming our guidance for 2015. We are on track there. And with that, I will turn it over to Mike, and let him walk you through the remaining details

Thank you, Rice. Good morning and afternoon, everyone. Rice spoke to the quarter in terms of revenues, so as customary, I'll move to the operating income. You can see on chart 12 I believe in your slide deck, our operating income declined by $9 million to $547 million or 2% over last year in the quarter. As Rice noted, the half year is up 5%.

Margins year over year dropped 150 basis points, from 14.5% to 13%, and I'll come back and talk about the details of that by segment in a later chart.

Net interest income is up $4 million or roughly 4%. Not surprisingly, that's reflecting the increase in our average debt levels year over year because of our acquisition activities in 2014. And that was partly offset by favorable translation of our Euro denominated notes.

Taxes, you can see on the page the effective tax rate is dropping from 34.8% which is an adjusted number. We had an $18 million charge that we explained in the second quarter last year related to a very specific case in the tax courts here in Germany not involving us, but we had a transaction that was similar to the one where the tax court made its decision. So we've adjusted for that to show the change year over year.

I think the best way to talk about the tax rate is that if you looked at the first half, it's slightly over 32% last year and this year. And I would say that we guided to 33% to 34% for the year, so we're essentially at the low end of our tax guidance for fiscal 2015.

Non-controlling interests, as you know, we now present all the componentry of that by segment and by business, so there's no need for additional comments here in the overview. And reported earnings for the quarter are up $7 million or 3% to $241 million.

So moving to chart 13, and we'll talk a little bit about the performance of each of the segments in particular as it relates to their margin performance. So as I indicated a few minutes ago, year over year we're down about 150 basis points. The weighted contributions of that margin decline, North America contributed 100 basis points, international, the international segments contributed 30 which was 20 basis points from EMEA and 10 basis points from Latin America. And then our corporate costs reduced global margins by 20 basis points to give you some sense as to how the segments weight into the total business.

Moving to North America, operating income was up $27 million to $428 million for the quarter. Margins were down a bit and they were strongly influenced by the comparatively lower margins in our Care Coordination activities and the stronger growth in this business when compared to our dialysis business.

Delivered EBIT was up $7 million or 2% for the quarter. The dialysis business within North America, the operating margins were down 60 basis points from 16.4% to 15.8%. This was largely due to personnel costs, some slight increases in our operational costs related to activities that took place in the second quarter, higher legal and consulting costs due to the Granuflo matter, and FDA remediation. And this was partly offset by favorable payer mix and rate effects and lower net cost of pharmaceuticals on the services side of the business.

Care coordination earnings were up $20 million or 113% in the quarter. Year over year margins declined from 9.1% to 7.8%. And as you know from our Q1 discussion, this is due to the significant change we undertook in this business in the back half of 2014 and the operating cost investments we're making in the Care Coordination business which we can certainly elaborate on in the Q&A. Delivered EBIT for Care Coordination was up $10 million due to the increased operating income partly offset by increased non-controlling interest expense due to the partnership business model.

It's also worth noting that earnings and margin improved from Q1 2015. The solid performance in all of the businesses and some timing effects including lower integration costs incurred by Sound in the second quarter for the Cogent integration versus Q1, and slightly lower investment in the healthcare risk management business in the second quarter.

Turning to the international segments, before I enter into a detailed discussion of each of the segments, I'll point out one developing factor that influenced all three segments and that is operating income in the second quarter was negatively impacted by the foreign currency development and I'll explain this more on my next chart. But accordingly, when you look at EMEA, EMEA was down $34 million and earnings were roughly 20%. The unfavorable currency effect more than explains this decrease. Margins decreased from 21.3% to 20.1% or roughly 120 basis points. As I indicated, largely due to the unfavorable currency developments when you consider both translation and transaction effects as we always do.

The margin was also impacted by a higher SG&A including the costs of enhancing the compliance program and these effects were partly offset by a favorable impact of manufacturing costs due to increased volumes and efficiencies and lower bad debt in the region.

Asia Pacific was up $12 million in earnings or 22% with the operating margins unchanged at 17.8% and delivered EBIT growth was slightly less due to some management contract arrangements, but still very strong.

Latin America decreased by $4 million in terms of earnings to $16 million with a margin decline of a little over 200 basis points largely due to the unfavorable impact of manufacturing costs related to inflation and unfavorable foreign exchange. These were partly offset by increases in the revenue rates in Argentina due to the inclusion of transportation costs in the reimbursement rate for that country.

Commenting on our corporate costs, which is not on the page, we had increased corporate spending by $10 million with an impact of 20 basis points. This increased spending was due largely to increased legal and compliance costs. Going back to last year, you may recall that we commented on our compliance investments as well as our FDA remediation and the Granuflo matter together. And we indicated we had an incremental spend in 2014 of $100 million with an acceleration of that spend in the fourth quarter. What you're seeing in the second quarter and in the first half is we've continued to spend at approximately the rate we saw in the last half of 2014. So it doesn't represent a change in our approach, it's simply the annualization of the ramp in spending that we saw in 2014.

For Q2, this resulted in an unfavorable impact of $20 million. That figure affecting both the corporate numbers and North America numbers as it relates to Granuflo and FDA. Corporate spending did benefit from the favorable foreign translation effects which partly mitigated the increase in legal and compliance costs.

Turning to chart 14 and talking a little bit about currency, I'll make a couple of remarks before I comment specifically on the example that I'm providing you on the chart. As you know, we always look at both translation and transaction effects when we talk about the impact of foreign exchange on our business. For translation effects, which are the result of year over year changes in exchange rates, we saw both in Q1 and in Q2 a virtually unchanged, unfavorable effect in comparison to the same quarter last year with regard to foreign currency rates, particularly the dollar/Euro.

The transaction effects are very different between the two quarters. Transaction effects are the result of mark to market calculations that we do from the end of the prior quarter for any currency period that has not been hedged. Transaction gains and losses are mainly incurred by those subsidiaries that import from our production sites located in the Euro zone or that are required to invoice customers in a currency other than their native currency. In Q1, many local currencies appreciated against the Euro from year end and generated favorable FX effects which offset the unfavorable Q1 translation effects.

In Q2, many local currencies slightly depreciated against the Euro from the end of the first quarter. So what we're showing you on the chart is the yuan versus the Euro and you can see, if you look at the continuum from the end of last year through Q1, which is dotted vertical line, and into Q2, you can see on the top there are two negative red bars, if you will. And those depict what I commented on with regard to generally what we've seen on translation, that being that for both the first and second quarter, there was a fairly consistent unfavorable exchange effect due to translation into our dollar reporting currency.

When you look in the marks just below the line, you see a positive effect for Q1 in the green plus sign and a small negative effect with regard to transaction gains and losses in the first and the second quarter. The -- so when you consider that, you can see in the yuan that that led to an unfavorable transaction effect in the second quarter which did not mitigate the already unfavorable translation effect.

Overall, our currency guidance has not changed in several years and remains in place today. We typically take the view of a full year when we're providing our outlook and obviously what you see in the second quarter is, when you're looking at shorter periods, you can have unusual swings between translation and transactions.

So turning to chart 15 and beginning our discussion of cash flows, what you see here is days sales outstanding. There is essentially no change sequentially for the whole group. DSOs remain stable at 71 days. North America was down one day due to some strong cash collections in the second quarter and the international segment is virtually unchanged, just up one day from the end of Q1. And it continues to be within the band of what we consider to be reasonable performance in the international segment of the business.

Turning to chart 16 and looking at our cash flows for the half year, and also our debt levels, we had very strong cash flow development s in the first quarter and when you combine that on a half year basis, you can see at 10.2% operating cash flow as a percent of revenue, our performance continues to be strong in terms of managing our balance sheet and our cash collections. CapEx is in line and cash flow is performing nicely with a positive $355 million.

What's not shown on the page is our debt level, but I can just comment that our debt level did come down from the end of the year to $9.3 billion. It's a little under $300 million of reduced debt from yearend 2014 and that's obviously after payment of our dividend in May. And our leverage is down at three times market in the second quarter which is within our guidance range.

Turning to chart 17, which is my last chart in prepared remarks, as Rice indicated we confirm our outlook for 2015 with a revenue increase of 5% to 7% or 10% to 12% constant currency, and increase in net income of flat to plus 5%.

I'd like to just give you a heads up with regard to two transactions that you'll see in the second half of 2015. The first is that we are divesting our dialysis service business in Venezuela given the difficult economic environment in that country. And the second, which was previously announced, is we've transferred some of the European marketing rights for some of our renal pharmaceuticals to the [V4] Fresenius Medical Care Renal Joint venture. We expect to incur a nontax deductible loss of around $30 million from the sale of the service business in Venezuela ad this loss will be cut in half by a gain on the V4 joint venture transaction on an after-tax basis. Both of these transactions are considered in the outlook that we provided to you today.

Turning to 2016, as you saw this morning in our published materials, we've tweaked the revenue projection for 2016 from a range of 9% to 12% constant currency to a new range of 7% to 10% constant currency. I'll remind you this does exclude acquisitions. We've tweaked the revenue figure to reflect what we've been commenting on in our calls regarding the development of our Care Coordination business. And in particular, we've been indicating the delays we're experiencing in the Bundled Payment Care Initiative, the BPCI program, which finally had a start date of April 1, 2015, and is having the growing pains you would expect from the development of such a large program by Medicare. The reporting has seen some delays and the program is sorting out which participants will manage the events captured by the program.

We also continue to see a delay by CMS in the launch of the ESCO program which, based on our most recent information, we believe now may start in the fourth quarter of 2015. Despite this adjustment, we believe our pipeline of opportunities is still robust in the Care Coordination business and we believe as Rice indicated, this is developing very nicely for us over time.

As discussed, we see very little effect on our bottom line as a consequence of this change in the revenue estimate, so our net income guidance for 2016 remains the same at 15% to 20%. With that, we look forward to continuing to move towards our long term 2020 targets and

I'll turn the call back to you, Oliver.

Great. Thank you very much, Mike, thank you very much, Rice, for your comments and I think this team is ready to open up the lines to Q&A.

Michael Jungling, Morgan Stanley.

Thank you very much and good afternoon, good morning. I have three questions. When it comes to net income guidance for 2015, your 0% to 5% growth, is it fair to say that after your first half performance you're more likely to come toward the bottom end of that 0% to 5% range?

Question number two is on net interest costs for Q3 and Q4. Is Q1 and Q2 a guide, meaning the minus $102 million net? And then finally, on minorities, how to model. Can you provide some guidance as to how minorities will look like for the full year as some sort of ratio as you desire, maybe minorities divided by EBIT or some sort of ratio that we can use? Thank you.

Okay, it looks like those all may be for me, Rice.

Go ahead, Mike.

In terms of net income for 2015, I wouldn't prognosticate the low end of the range, I'd just stick with the guidance of 0% to 5% at this time. Net interest expense, Mike, I would say yes, I think first half is reasonably indicative. And for minority interests, my suggestion, because of all the additional granularity we now provide, the best way to think of that is probably to look at the trending in North America, particularly because we now provide delivered EBIT for both the dialysis business as well as the Care Coordination business. And if you look at those relationships relative to the operating income, I think that's probably the best approach.

Kevin Ellich, Piper Jaffray.

Hey, guys, thanks for taking the questions. I guess, Mike, going back to your comments on Care Coordination and the margins, I wanted to see if we could get some more color as to what's causing that to go down. And also, what initiatives are delayed in 2016 that drag the revenue bands down? Thanks.

Hey, Kevin, it's Rice. I'll let Mike answer on the Care Coordination margin piece of this. What I'd say quickly on the delay is just what we're hearing when we talk with our folks is that particularly in the case of BPCI, data transfer from the government back to us is very slow. It is happening, but it's very slow. We are anticipating that that's not going to go as smoothly as we had hoped, so that's going to cause some delay. The ESCO is, as Mike said, fourth quarter, so there is going to be virtually no revenue coming out of there that late in the year if it sticks to even being fourth quarter. So we're just trying to take the knowledge we have and give you guys as close an estimate as we can that we're going to see some of that push out without much impact obviously on the bottom line. And Mike, you want to talk about Care Coordination?

Sure. Kevin, I'd say a couple of things about the margin. When you look year over year, particularly when you think about first quarter 2014 and second quarter 2014 against -- marrying that up against the business that we call Care Coordination today. And you know that we were extraordinarily active in the back half of 2014, shaping the Care Coordination business that we're now managing today. And consequently with that there was a change in margin that we talked about when we gave guidance in last quarter.

So it's a bit of apples and oranges because you're looking at a much smaller business with a different level of componentry in terms of what constituted our legacy Care Coordination business in the second quarter of 2014.

I think with the additional disclosure we have now and your ability to trend, for the business that we now look at, when you look at Q1 and Q2 you see a substantial improvement in margin from about 3.5% in the first quarter to the numbers we're reporting today. And I alluded to it in my comments that we're seeing strong performance in each of the underlying businesses in Care Coordination. And the margin improvement Q1 to Q2 was also influenced by the timing associated with the operating adjustments we're making.

Just to remind folks, I indicated that we anticipated about $10 million of integration costs for the Sound integration, excuse me, the Cogent integration into Sound. We anticipated a doubling of our operating cost investment in the urgent care facilities from $10 million to $20 million, and we anticipated a doubling of our investment in our Healthcare Risk Management business from $20 million to $40 million. So those numbers for the full year 2015 are holding steady. But when you look at Q1 and Q2, in addition to strong performance in the underlying businesses, we did have some timing effects in that. There was more of the Cogent integration in Q1 than in Q2 and there was a slightly lower investment in the Healthcare Risk Management business in the second quarter which has no bearing on our plans for the year, but did improve the margin. So it's really underlying organic performance of the businesses and the timing associated with the investments we're making that caused the margin improvement from Q1 to Q2 in Care Coordination.

Great. Just one quick follow-up for Rice. I guess could you tell us how much ESCO benefit did you guys, had you previously expected in 2016? And I guess also, on top of that, with the switch in ESA to Mircera, how much benefit should we expect in 2016 as well?

Kevin, two things. There's a big difference in those two activities. I would tell you the ESCO contribution in 2016, I don't remember exactly, but it's not huge by any stretch. Now in the case of Mircera, there is significant contribution there. We've guided you to that. That's why you see such big numbers in earnings growth 2016 over 2015. So obviously that's a big piece of what's driving this guidance going into 2016 along with GDP and a couple of other things that are really helping us there. So there's kind of night and day difference between those two.

Lisa Clive, Bernstein.

Hi. A few questions on Care Coordination. You've shown very strong organic growth the past two quarters. Could you just give us some clarity on where this is coming from? Is it specific areas like Fresenius Rx or the hospitalist business? Are you wining any new integrated care contracts ? That would just be helpful.

And then also, your reduction in guidance, revenue guidance for next year, implies around a $300 million, $330 million revenue kick down. Is it fair to think of this as what you think the annual revenue could be for your hospitalist business from BPCI or are there sort of other things going into that?

Hey, Lisa, it's Rice. What I would tell you, I'll take one and then Mike, if you want to take number two, relative to the Care Coordination, it's a fairly balanced approach. I mean we're seeing really good growth with Sound as well as the pharmacy. The other businesses don't scale as largely there but vascular access is doing well. So it's a fairly I'd say spread around performance that we're seeing there so I wouldn't attribute it to any one business, keeping in mind, NCP is there, it's contributing as well. So we're pretty comfortable we're on a sound basis if you will, across all those businesses. And Mike, you want to talk about the revenue guidance takedown?

Yeah. What I would say I guess to start is remind folks that when we were initially talking about our guidance for 2015 and 2016, I indicated that in the legacy dialysis business, for both 2015 and 2016, we were looking at about 3% to 5% constant currency revenue growth. And I don't see any need to change that underlying prognostication today. And so therefore, obviously in 2015, the 10% to 12% had a lot to do with the fact that we had undertaken so many acquisitions in 2014.

And then in 2016, similarly, the balance was largely associated with all of our Care Coordination activities. So just to remind folks of that because I think that the growth figures for the legacy dialysis business look very good relative to those indications. So the $300 million, I wouldn't quibble with your number, it's a little north of $300 million, it's a 2% change in the range of revenue. I think I wouldn't attribute it all to BPCI and ESCO although I think that represents the lion's share. Because you've got major programs being undertaken by the US government that build over time and so they are somewhat sensitive to what the start date is of the program.

And then similarly in some of the risk management activities in Care Coordination, if you're looking at working with our customers and developing risk sharing pilots and risk sharing full programs, that will build over time as well. So I wouldn't say the $300 million is entirely due to BPCI and ESCO, but I think they represent the lion's share of it.

Okay, and then last question, just on your revenue per treatment, it was up nicely in the quarter for your US business despite the fact that Medicare was again flat. Is this an indication that the private side of the business is back to that sort of historic 3% to 5% growth range? Is that something that we could get comfortable with? And maybe if you could just provide some commentary on your thoughts on the private rate outlook today.

Sure, Lisa. I think we indicated at the beginning of the year we didn't have any major contracts up for renewal. So that continues to be the case. As you all know, we do a number of multiyear contracts with escalators. We've also been indicating now for a number of orders that we're seeing, positive payer mix effects in our revenue rate. And I think that rather than give you a pricing or percentage guideline, I think we would anticipate to continue to see those kinds of improvements on the payer mix side that are helping revenue rate progression in fiscal 2015.

Lisa, it's Rice. We're continuing to see a nice increase and we measure commercial treatments per day and that continues to improve. The guys are doing a really good job.

Okay, thanks very much.

Gary Lieberman, Wells Fargo.

Thanks. Good morning and good afternoon. This is Brian Holstead on for Gary. I wanted to go back to Mircera. Just wanted to get a sense from you guys if you're comfortable where the current patient utilization is right now. Do you think it can continue to increase? And just on the sequential improvement that you called out from the pharma costs, was that all from Mircera or any sense of just the magnitude of what that, how that's benefitting cost per treatment?

Yeah, Brian, hi. It's Rice. What I would tell you is, we are pretty comfortable with the utilization that we're seeing with Mircera among the patients. There was a little bit of equilibration had to go on between fast, short acting and long acting, but we're comfortable that we've pegged that the right way. So we're okay there. We feel pretty good about that.

And relative to the pharma costs, what I would tell you is it's kind of a combination. We saw a little bit of dose drop. Not a lot, but a little bit of that. Part of it obviously is Mircera has a different price point surer than EPO does, but I would say in combination it's really no one big thing. But we feel pretty good about where we are these days and how we're progressing with Mircera and how patients are tolerating it, how it's being administered in the clinics. That's going well.

Okay, great. And then on the proposed ESRD rule in the US, I was just curious for your thoughts on the changes proposed, the reduction to the base rates were offset by the increasing adjustment factors. Just wondering, why do you think CMS is approaching reimbursement, the rate this way? And how those changes might affect your guys' business?

Well what I would say, Brian, is that we've seen how they did the math. We've gone through it, we're preparing our comments. Commentary period is still open for about another month. The drop in the base rate is a little concerning and looking at all the attention they're paying to the adjusters seems a little strange to us. But we're going to cover all that in our commentary when we go back to them. And obviously we're spending a fair amount of time down in DC talking with folks. But hey, at the surface level and the big picture, if they're telling us 3/10 of a percent increase, we're happy to take it. We'd like to see that come to fruition and our commentary and our questions are going to be around making sure that we can be comfortable and clear that that's going to be the case in the way they did the math.

Okay, but -- and you are comfortable with their estimate for how it would impact the industry?

Well what I -- you're never going to hear me say I'm comfortable with something coming out of CMS. But what I'd say is we understand their math, it seems logical. But we have some questions that we'll build into our commentary to try to raise our comfort level, let me put it that way.

Okay, yeah, I guess I was just trying to confirm that the percent change that they estimated seems consistent with how you guys are feeling about it. It sounds like that's what you're answering. Thank you for taking my questions.

Alex Kleban, Barclays.

Hi, thanks. I was going to ask two actually. The first is on Mircera and the distribution structure. Just wondering what impact we might be able to think about in terms of tax rates. And seeing as how the product will be flowing from a low tax jurisdiction into a higher tax jurisdiction, are there any ways that you can work with that to do that in a more tax efficient manner?

And then the second question is about biosimilar and it's more of an historical question. But in the European side of the business, what kind of conversion rate did you experience historically when you converted initially from Amgen over to biosimilar in those times and how does that influence your thinking about what you can do in the US or what you might see in the US potentially next year? Thanks.

Alex, let me take number two and then I'll let Mike comment if we have any commentary on the tax rate opportunity. Just a little history, we at FMC in Europe were not big users. We never made a big conversion to biosimilars. The conversion work that we have done was going from Aranesp to NeoRecormon which is a Roche product. We've had some of that conversion go on quite well. No issues. The biosimilars never really got much traction here in Europe mainly because there were so many other branded products out there for people to choose from. The biosimilar section of the business is just not that large. So I can't tell you we've got much experience with that. But we're pretty comfortable moving within branded products is what I would say.

And then on the Mircera distribution structure and the tax rate, I'll be curious to see what Mike's going to say about that.

Yeah, I'll make a couple of comments that might be helpful to you because I'm not going to go through the distribution structure in terms of ports. But this is an arrangement between the V4 Fresenius Medical Care Joint Venture, which is a Swiss company, and North America. And consistent with our existing arrangement with the joint venture, you don't see the tax rate of the joint venture showing up in our financial statements because we receive a dividend from the joint venture. And those dividends are 95% tax exempt here in Germany, so 5% of the dividend is taxed at the normal tax rate here in Germany. So it is a beneficial structure from a tax perspective, but you wouldn't find all the pieces in our financials because it's a dividend from the JV.

Okay, thanks. I know this is technical, I'm just going to try to push a little bit more. But will this be the JV selling directly to Fresenius Medical North America or would it be the JV selling to potentially European Fresenius Medical Care Company that then sells into the US Fresenius Medical Company?

Yeah, the flow will be from the JV into North America, exactly.

Okay, thanks a lot for clarifying that. I appreciate it and sorry for the technicalities.

No worries. Thanks.

Tom Jones, Berenberg.

Good afternoon. I've got a few. First I was wondering if you could just make a bit more comment about the corporate costs in H1. And particularly around what's going on around your Granuflo case. Was there a significant pickup in current core case preparation costs in H1 or something of that nature that despite those costs, that we should then expect it to kind of tail off as we go through the rest of this and into next year? So that would be question number one.

Question number two, on the Care Coordination, we've talked quite a bit about BPCI and ESCO but haven't really talked a huge amount about the Medicare Advantage Chronic Special Needs Plan program. I wondered if you can give us some color on what you're thinking on that kind of part of the Care Coordination venture and what that might mean in terms of revenues, margins, that kind of thing.

Then I've got one follow-up for Mike after that.

Okay, Tom, it's Rice. So corporate costs H1, we can answer this with talking about Granuflo. Generally where we are at this point in time, we have a small number of cases that are going to court in September in St. Louis, Missouri. These were cases that did not get swept up and placed into the multidistrict litigation which is going to take place in Boston. So we're going to sort of get our first bite at this in September. And then I would tell you in the overall big schedule of things, we are right now booked for the trials in the Boston area to begin sometime in the mid to late part of fourth quarter. So this is really kind of coming right here to us, so obviously as we continue to get ready with discovery and witness prep and all of that, we're spending a lot of money on this. But to give you a sense of timing, this is all going to be upon us in September in a small way with a few cases and then with a much bigger situation in the fourth quarter. But we're comfortable with where we are. We like our defense, we like what this looks like it's going to be for us. But you don't know until you get into it. So that's really what we've done is prepare ourselves for it.

And then on the Medicare Advantage CSNP what I would tell you there is we've made application, so we've got a couple of places that we're looking at those applications coming back to us. We think probably Q3 we'll have a better idea of where we're going to be. Remember that this new business venture, we're thinking we're going to start somewhere in the 900, maybe 1,000 patient range, so I'm not sure unless Mike's got any commentary on revenue, that we could really give you anything there. But we probably should tell you to hold that question and come back to us in Q3 because we think we're going to know some more then as a result of just the process we're going through with the government.

I noticed you applied for a few HMO and PPO licenses. Is that just the old state here and there where you've done that as kind of a trial basis? This isn't something you've started to roll out for the whole of US, is that fair?

Yeah, we've been very selective. We have our states that we really like that we're really strong in and so we've tried to be thoughtful about where we would do it, but we're not looking to blanket the country for sure. You're correct on that. We're going to be very particular about where we go. But we do think it's time for us to move into a couple of those areas and get our feet wet.

Perfect. And then the follow-up question for Mike. Thanks for the FX transaction/translation chart, it's quite helpful. But I just wondered if you could give us an indication of where the minuses and plusses sit for Q3 and Q4 at current FX rates. Then maybe just jump around, the Venezuela business, yes, you're going to take a charge when you sell it, but what kind of losses are going to disappear off your P&L as a result of the sale of that business?

Okay, I think you're combining FX and Venezuela.

Oh no, two separate questions.

I had to listen carefully. Well, all of our FX is not related to Venezuela, so that may be comforting. Yeah, I think the best way to deal with the exchange is we've refreshed our guidance for 2015 and we indicated on the chart that that's a current rate. So I think to the extent to which folks are looking at 2015 today, and saying there's a little bit more of a headwind in July than there was in February, I would view that as a positive that we think it's within our bandwidth to deal with that in our full year guidance.

I'd be reluctant to prognosticate the pieces for Q3 and Q4 for the very reason that when you look at shorter periods of time, it's very hard to nail down how those two are going to behave in a particular quarter.

And then Venezuela, what kind of losses should we be thinking about disappearing as a result of the sale of that business?

You want to go ahead?

I'll go ahead. I was just going to say, Venezuela we're doing more because we've had over time, I think the first one in 2010 and then another one a couple of years later with regard to de-valuations. And when you look at what it takes to manage a business in-country in Venezuela today with kind of the infrastructure that's in place, it's more operational than to avoid any kind of significant earnings hit. So I'd say the earnings hit is de Minimis. But when we looked at how effectively we can manage the business in-country and the quality of the services that are being provided, we thought it was a better to divest.

Sure. Are you still going to sell products there?

Yeah, Tom, that's what I was going to say. Let me give you a little bit of the scope here. So we'll stay in the products business. We've been in that business with a long term distribution that we've got a great relationship with. But to give you a little bit of sense, this is 16 clinics, it's about 3,300, 3,200 patients that are affected. But it really is, as Mike said, we got to the point that regulation and reimbursement was very difficult. We're hearing about reuse of blood lines, reuse of dialyzers, which has always been the case. We just got a little nervous that we weren't going to be able to maintain the kind of levels of quality that we wanted. So this is a little more preemptory if you will than reactionary. But I guess I'd leave it at that.

Fair enough. I wouldn't want to do business there.

Ed Ridley-Day, BofA Merrill Lynch.

Good afternoon. Thank you. First of all, Mike, I understand what you're saying about Care Coordination. Can you give us any additional clarity on the growth rate say at NCP versus Cogent in the period that we just had?

No. As we've said before, with all the granularity we're providing, we're kind of staying firm on not going through each of the component businesses inside of Care Coordination. Other than I indicated in the second quarter that all of the underlying businesses had good growth in the second quarter.

Okay. In terms of the international business, obviously we know you're looking for acquisitions. Can you give us any update on that?

Ed, what I'd say is, we love to fish, so we're always fishing. We've looked at some things and I guess I'll leave it at that. We want to be good stewards of our investment monies and I would say if you were to really strip into the P&L and look at things you'd see we have deal expense there because we're looking at things. But we'll tell you when we've got something on the line. Go ahead, Mike.

Yeah, I was just going to say we haven't changed our guidance on acquisitions. So yeah, we're still guiding to 400 and we've spent considerably less than that through June.

Yeah, so I'd say stay tuned on that one, Ed, to be honest.

Okay, that's helpful. And in terms of just organic performance in international services, clearly very strong. Is there anything sort of exceptional there? I mean is there any reason why you would highlight that that should slow going into 2016?

No, I think we're pretty comfortable with the rates that we see. Our same store growth looks good. I think we're winning as many as I would say reimbursement battles as we lose, so I think at this point we would say probably, Mike, steady as she goes?

Yeah, I think that's fair.

Great. Thanks.

Veronika Dubajova, Goldman Sachs.

Good afternoon, gentlemen, and thank you for taking my questions. I only have two as most have been answered. And they're both for Mike. The first one is, can you give us any guidance on the investee income for the P&L for the full year, especially with Mircera ramping up? Obviously I think we've got to be thinking about different numbers than what you reported in recent years for that, so that would be quite helpful.

And the second one is, if you have any guidance on the share count for the full year. Thank you.

What was the last one, Veronika?

Share count for the full year.

Share count for the full year, okay.

At this point I wouldn't want to parse out the investee income any more than just confirming the guidance that we have for the year. Just we'll stop there I think. It wouldn't -- I'm not sure it would be particularly helpful to folks.

On the share counts, I think you're asking me to prognosticate how many shares we'd have outstanding at the end of the year?

Yes. I mean it seems like you've had some options that have been taken up and the share count didn't increase in the quarter and I'm just wondering if you have a sense for how much more there is to go before the end of the year?

Well I think relative to the stock option exercises, with all of our legacy stock option plans, as folks know, if you did a deep dive into this, we have a period of time where we still have some ten-year stock options that were outstanding. So they're literally you're talking about 2005, 2006. And then in the more current plans, shorter term options.

So I think what you're seeing now in terms of some of the exercises is people are addressing the expiration dates of those two tronches, the ten-year tronches and the four-year tronches. And that's why you're seeing a little bit more in terms of share activity for the stock options. It's typically a couple of million shares a year. I can't predict what individual decisions people will make, but I think when you look literally at the kind of shares that are available to trade in the options program, it's because you're dealing with ten and four-year lives associated with the programs that have been placed in the last ten years.

And Mike, any plans from you to maybe start a little bit of buyback to offset that dilution? Or should we be thinking about no buyback from you guys given M&A opportunities you see on the horizon for the next couple of years?

I figured that's where you were ultimately heading with your question. I haven't indicated anything relative to a share buyback, so I wouldn't comment further on that today.

Okay, thanks very much.

Gunnar Romer, Deutsche Bank.

Good afternoon, everyone. Gunnar Romer with Deutsche Bank. Thanks for taking my questions. The first one with regard to Care Coordination and the margin development, I was wondering whether you can comment around the margin development in the upcoming quarters. We've now seen quite a substantial sequential pickup I think you've alluded to, although there's different drivers. I was wondering whether you can guide us to the progress in the second half and also into next year.

Then second question would be with regards to the margin on the delayed revenues, whether that's in line with what you've guided previously for 2016. I can recall it was a high single digit margin, so I was just wondering whether on the delayed revenues you would have expected kind of a similar margin here.

And then last but not least, again, on Care Coordination, what's your expectations around organic growth now given the delay when you look into 2016? Thank you.

Okay, thanks, Gunnar. The question was asked earlier in terms of prognosticating Care Coordination margins for Q3, Q4 this year. So I think there's enough moving parts I'm not inclined to do that other than providing the insight that I already have relative to where that business stands today.

The margin on the delayed revenues, I think the best way to look at 2016 is as we indicated, we tweaked the revenues a bit, a couple of percentage points. We made no change with regard to our earnings forecast. So I think consistent with what you might expect with programs of this type, they represent a significant opportunity for the company, but in the early years of a program you wouldn't necessarily expect a high margin performance. So that is why we can adjust our revenue figures and have really no consequential effect on our earnings after tax projection for 2016.

The other thing you mentioned about organic growth, if I understood your question correctly you're really asking about the core legacy dialysis business if I understood you. And in that case for 2016, as I indicated earlier on the call, I think we're still considering 3% to 5% organic revenue growth for the legacy dialysis business in 2016 and that's holding.

Just one follow-up up if I may. Basically you're trailing rather towards the upper end of that 3% to 5% rate currently, and I guess you've been indicating that you're quite comfortable with current run rates here. Now thinking about 2016 again, the remainder would eventually come from growth in your Care Coordination business, if that's right?

Well no. When you think about incremental revenue growth in 2016, when I say 3% to 5% in 2015 and 2016, that's 3% to 5% in 2015 and then an additional 3% to 5% in 2016 in the core business. Unless I misunderstand your question. So all of the incremental growth in 2016 is not related to Care Coordination.

The core business is also growing.

Yeah, the core business is still growing.

That makes perfect sense there. I was just wondering whether beyond the 3% to 5% growth you're expecting for the legacy business, that's all organic growth in your Care Coordination business.

Yes. We agree.

All right. Thank you.

Oliver Reinberg, Kepler Cheuvreux.

Good afternoon. Three questions if I may. Firstly, coming back to corporate costs, I think in your prepared remarks you talked about what we currently see is mostly the annualization of the cost increase from the second half last year. I think you so far also guided for a total reduction of corporate costs in the full year. So should we actually expect a significant reduction in the second half? Or can you just update your full year guidance on corporate costs here, in particular what has changed?

And secondly, also on costs, and I think you alluded to three factors that have higher cost investments. The Cogent integration, more costs for risk management, as well as urgent care. In total we talked about an increase of costs of $40 million. How much of this have you actually booked in the first half?

And third question, I mean obviously we see kind of consolidation in the US insurance space. Can you just generally talk about your first impressions thinking about this? And can you also indicate whether the slight adjustment to the 2016 sales guidance also refers to potential delay of any kind of partnership model that you had in mind? Thank you.

Yeah, Oliver, I think Mike will take one and two and then I'll speak to the insurance consolidation question three.

Okay, thanks, Rice. Oliver, in terms of corporate costs, in February I did indicate that we saw the ramp, and to provide some benchmark to everyone I indicated that while we had seen the increase, I didn't anticipate that corporate cots would be more than $360 million in fiscal 2015. And I pointed out that it's a little hard to provide a benchmark relative to the three individual costs because some of those are incurred in North America, and some of those are incurred in the corporate cost centers. So the guidance I gave actually related to total corporate costs for the company for fiscal 2015 and I indicated that I did not expect it to exceed $360 million. And then we're poking a bit here with regard to your second question, so why don't I let Rice answer your third question and then we'll come back and comment on it.

Sure. Oliver, this merger mania as I will call it, in the insurance industry in the US, we don't perceive that there should be a big impact there. I mean the contracting that we've done with the big players that are in this merger mania, if you will, those contracts are fairly consistently structured between the big folks. And so we don't see a merger really changing that dramatically. We think the dynamics are going to probably be pretty much the same What we don't know is what the Federal Trade Commission will do or not do with some of these mega mergers. So we'll see where that goes. But we don't think it has a huge impact on our business And as you look at health plans and negotiations and things we might be doing, generally those are with subsidiaries of some of these larger companies and I don't think it would slow us down particularly. But we'll have to look at that and make sure that's the case. But at this point we think we can continue on in spite of what we see some of these big mergers taking place.

And Oliver, I would say roughly half has been incurred in the first half.

Great. And the corporate cost of $360 million for the full year still applies as guidance?

Yes.

Thanks a lot.

David Adlington, JPMorgan.

Good afternoon, guys. One question and one request. The question is around your North American dialysis margins. Obviously down a little bit despite those mix benefits and cost savings coming through and early Mircera. I was hoping you could help with some color in terms of how you expect margins in North American dialysis to develop for the rest of this year and beyond and maybe at what point we'll get some year over year stabilization.

And the request was really, the way you disclose your data now, could we get that historically for Q3 and Q4 just to help us rebuild our models? Thanks.

David, do you mean Q3, Q4 2014?

Yes, please.

It's in the Investor News.

Perfect. My mistake.

That's okay, it's in the tables in the back. Yeah, with regard to dialysis margins, I guess I would say, because you can see from just the way the year is unfolding, that we would expect some improvement in the back half of the year relative to the dialysis margins. And we see that both from the point of view of seeing some of the positive trending on revenue per treatment and also some positive trending on the cost per treatment to improve the margin.

And if you look at sequential quarters, David, you'll see that that improvement bares itself out.

Great. Thanks, guys.

Frank Morgan, RBC Capital Markets.

Thank you. I was curious given your appetite, what sounds like your appetite to do acquisitions and lack of interest in share repurchase, could you talk a little bit about your leverage and your leverage targets, where you see those levels going over say the next year or two? Thanks.

I'll let Mike take that one.

Yeah, we typically don't give multiyear guidance on leverage other than to say that we see ourselves as a high quality, high yield company. Where officially, with one rating agency rating us investment grade, we are a crossover, we typically have no difficulty attracting the investors from all walks of life to give us a very reasonable average cost of debt.

The -- also typically what I'd add to that in terms of managing prudently as a high-quality, high levered, high yield company is that we will be opportunistic. So when you look at our guidance on acquisitions over many, many, many years, I'd say a decade or more, we give some indication, because we believe acquisitions are a part of our business model, that if we see assets on the market we will be opportunistic and we think we can manage the increased leverage very effectively.

So given all that, I typically stick to just the current year in terms of leverage guidance and point people to our demonstrated corporate history where if we do lever up we can bring that leverage down, back into a 3 plus range within 12 to 18 months after a major transaction. The -- I'll stop there.

Okay, that's fine. Thank you.

Thank you. Ladies and gentlemen, due to time constraints, we have reached the end of the question and answer session. Mr. Maier, I would now like to turn the floor back over to you for closing or additional comments.

Great, thank you so much, we very much appreciate it. The only further comment I would have is actually that in the back of the presentation we are indicating that in November we are planning to have a what we call Meet the Management on Care Coordination. One meeting will be in New York on November 18th and there will be another one in London on November 20th. We will send out the save the dates recently but I thought I going to give you a heads up that we will have an event at the end of the year on Care Coordination. Which it's not a capital markets day, but we will discuss more educational, what Care Coordination is all about, strategy, etc., etc. So with that, thank you so much for participating and looking forward to talking to you soon. Take care. Thanks.