Fresenius Medical Care AG (FMS) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Jasmine, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care earnings call on the second quarter 2017. (Operator Instructions)

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

Thank you, Jasmine. We would like to welcome all of you to the Fresenius Medical Care earnings call for the second quarter 2017.

I will start out the call by mentioning our cautionary language that is in our safe harbor statement as well as in our presentation and in all the material that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings.

For organizational reasons, this call is limited in time as we actually need to leave for the airport to see many of you in London tomorrow. (Operator Instructions) With us today is Rice Powell, our CEO and Chairman of the management board. Rice will give you a general business update and go through some of the highlight of the quarter. Also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook.

I will now hand over to Rice. The floor is yours.

Thank you, Dominik. Good morning, and good afternoon to everyone. Thank you for joining us.

I'm going to begin my prepared remarks on Slide #5. We have put Slide 4 in for you just to give you some guidance on where we're going in terms of our patient growth, employee growth, treatment and clinics. But it's self-evident, so I won't take the time to go through that.

Now beginning on Slide 5, we are starting with the first half results of the year. And then in my future slides, we will get into the quarter. When you look at first half of the year, and as I typically do, I am not going to read numbers off a page for you. You've seen that already. But we've had a solid start halfway through the year. We are right where we need to be in terms of the guidance that we had given you in February. We feel good about how we've fallen into the right zone, if you will. And I'm here today with Mike to tell you that we are still confirming guidance as we go through the year. And we feel good about the things we need to do in the back half of the year as well as the things we've done well in the first half of the year.

Now turning to Slide #6, and looking at the second quarter specifically. Yes, we've had some headwinds with income, net income. You've seen that in the material that we have produced for you today, and you've had a chance to look at it. What I would say is, really, the earnings have been affected by basically 3 large buckets of activities, if you will: foreign currency transaction; losses, and Mike will be happy to take you through that in some detail; we've got some higher bad debt expenses, and we can answer those questions you have on that, that really sits in the Care Coordination side of the house; and then we got higher personnel expenses, which a number of you had anticipated based on what you've written this morning. And we're happy to talk about that as well, although we think it's fairly uneventful at this particular point in time.

Now turning to Slide 7, our top line growth. All the regions performed well here. I'm not going to go through a lot of detail. I'd like to make the majority of my remarks on the next slide. What I would just point out, we've seen a little bit of a shift. When you look at the contribution from the regions, North America, fairly consistently at 72%; but we've really seen a pickup in Asia at 9%; and a little bit of a decline in EMEA at 15%; and Latin America's fairly stable at where they typically are, but we'll take you through that. You see the organic growth rates that we've got here, and we'll talk about those some here in the next few moments.

Now turning to Slide 8, and focusing on the quarter in Health Care Services revenue. I think, obviously, the key point when you look at the global enterprise, 9% constant currency growth, good organic growth and are seeing market growth at about 3%. Obviously, the Care Coordination book of business, particularly in the U.S., is growing quite strong at 29%. And for the first time, you see Care Coordination for Asia-Pacific. Obviously, the vast majority of that is the Cura deal in Australia, but we also have now put a few odds and ends of Care Coordination business in Korea, Taiwan, a few places like that, into this category now. So you can see it as we track it, and it continues to grow.

Specifically, beyond Care Coordination, our North America revenue per treatment at $351, slightly down from prior year at $352. Not a lot of movement there. And in fact, if we didn't round, you would find that it's fairly small in terms of differences in pennies on the dollar, if you will.

Cost per treatment, even though we're talking about revenue, you want to know that. You've seen it already. Cost per treatment moved very little in the quarter year-over-year as well, looking at basically $283 in the current quarter we just finished versus $282 in the prior year. So we feel good about that.

Now specifically, in Care Coordination, we have continued to book revenues for the Bundled Payment for Care Initiative. So this is our second quarter in doing that. The revenues that we booked primarily cover the third quarter of 2016 and a little bit of catch-up in some previous periods. When you look at the ESCOs, we've now booked 4 consecutive quarters. That's working fairly well for us. And I'm happy to report that we are now sitting with a patient census in our ESCOs of 26,000 patients as of the end of June, keeping in mind it was phase 1, and now we're into phase 2. And as we had projected to you back at the Capital Markets Day, we think a full year patient census somewhere in the range of 28,000 to 30,000, give or take. We'll see where that ends up, but we are progressing nicely there.

My hats are off to Asia-Pacific. They've had a very good quarter, not only the combination of new Care Coordination with Cura, but also in their core business. As you see, they're doing quite well, so we feel good about that.

Now looking at EMEA, their growth really is in line with their patient growth, so we think we're okay there. We're going to talk more about what I think was a fairly exciting products quarter later down the road. So we won't mix that with Health Care Services, but we do see some good things going on there.

In Latin America, we have very strong growth, driven by higher reimbursement. And we mentioned this to you in the prior quarter, Argentina, Brazil and Chile is where we've seen a pickup in reimbursement rates in Latin America, and that's working well for us.

Turning to Slide 9 and looking at the quality outcomes. We continue to operate at a high level of stability, some movement, but nothing that is statistically significant. And again, typically I like to point out, at least for me, personally, we like at look at the dose of dialysis. And as you go across the regions and you look at the difference between Q2 and Q1, it's a very stable performance as it is for albumins and hospital days as well. So we continue to see our clinical quality doing well and being stable. Happy to take any questions on that, should someone have them later in today's session.

Now moving to Slide 10 and looking at the Dialysis Products side of the house. Let's first go with our largest product business. The largest region is EMEA at 41%. You can see that EMEA had constant currency growth in the second quarter of 6%, and that's up in the prior quarter of 1%. How did we do that? Couple of things that happened, as we had hoped they would. We saw more product sales into Russia, then we felt like we missed on in Q1, and they picked up and beyond in Q2. We've got some tender business that we're now shipping and fulfilling, that we had hoped would've happened sooner. But it is coming to fruition, so we're seeing that happen as well. And across the product mix, it really is nicely done in the areas of machines and hemo disposables and some acute business growth as well. So pretty much everything is hitting on all cylinders here. We are still seeing extreme competition in hemodialysis in-center piece of this. We do think it will continue, but we're holding our own. But that is still a very hard-fought battle by our sales folks on a month-to-month basis.

When you then look at Asia-Pacific, very good performance with the folks in Asia, when you see second quarter at 15% constant currency growth, up from the sequential quarter of 8%. And this is really sales of all products. Everything is selling well in the bag, if you will. And so they're making great progress. Particularly in China, we're seeing good progress there.

Now if you go to North America, it's kind of hard to say there's good demand when you see a 0 in constant currency there. But let's take a minute, and let's break that down. I have been in this position before. So the real miss in the quarter for the North American team is hemo equipment. We clearly saw softness in the independent and smaller chain market. People just held onto their money. They didn't put their money out for capital equipment. We've seen this from quarter-to-quarter in the years, and it will come back. We think people generally want to spend their capital budget that they have. We're seeing the large customers continuing to buy at a very equitable rate, if you will. So we're not worried about this. We think it will come back.

What you don't see on this slide, that I think is worth mentioning, is if you look at the product disposable business in North America, we had 7% growth. So above-market growth in the disposable side of the house.

Now breaking that down further, hemo disposables grew at 5.6%, which is very strong, and our PD growth was at 18%, 1-8 percent. So we see lots of good news on the product side. Yes, we're disappointed on the machine side in North America, but we've seen this happen before, and we believe that will come back.

And lastly, Latin America at 10% constant-currency growth in the second quarter, up from first quarter at 6%. And that's predominantly driven by dialyzers and then hemo solutions and some other hemo disposables, like bloodlines and things of that nature. So a good story, an evolving story on the product business, and we're very comfortable with that.

Turning to Slide 11, and my last slide. I think that the highlights that we've listed for you -- I'm not going to read them. I think they speak for themselves. Again, I would point out, we continue to feel good about these value-based programs. They're continuing to develop.

I think the last point I would leave with you, before I turn it over to Mike, is simply that we have put the first half of the year behind us when we close this call. It'll be done. And we're moving on to the back half of the year. We feel confident about what we're going to need to get done in the back half of the year. We're going to continue to execute on our 2020 strategy. And we know what we need to do, and we're going to go do that.

And with that, Mike, I'll turn it over to you.

Thanks, Rice. I'll follow Rice's discussions on Chart 13 focusing on the back half of the year first. And all my commentary will be on the right-hand side of the page, which excludes the impact of the VA agreement. So our revenues, that Rice detailed, are up by 9% constant currency, which is in line with our guidance. Our operating income increased EUR 76 million to EUR 1.144 billion. That's 7% currency and 5% constant currency, and that reflects a 70 basis point decline in margins from 13.5% to 12.8%, a 60 basis point decline if you look at it on a constant-currency basis.

Net interest increased by EUR 2 million, but if you look at it on a constant currency, it actually declined by EUR 2 million. And this reduction was driven by the benefit of repaying some senior notes last year, which carried higher interest rates than our average. And that was partly offset by higher comparable average debt levels in fiscal 2017. Taxes, only a slight decrease of 10 basis points from 31.2% to 31.1%.

Our non-controlling interest was EUR 136 million, up in comparison to the last year. Not surprisingly due to an increase in the operating income of the joint ventures, and to a lesser extent, some physician buy-ins in the joint ventures with dialysis clinics in North America. This is partly offset by lower non-controlling interest in Care Coordination, driven by the vascular business. And net income was up EUR 46 million or an increase of 10% current -- or 8% constant currency, in line -- again, in line with our guidance.

Turning to Chart 14. And just -- 14 is just to give you a very high-level reference slide to guide you through the developments of the first half regarding our constant-currency growth, our currency translation effects in the 6 months and the impact of the VA agreement, both in terms of revenue and net income.

Chart 15, if we turn to that, now talking about the second quarter. And again, I'll focus on the right-hand side of the page. Revenues increased 11% or 9% constant currency, also, again in line with our guidance. Operating income increased EUR 20 million to EUR 591 million or 4% compared to last year, and this reflects 100 basis point decline in margin from 14.2% to 13.2%.

Net interest expense increased by EUR 5 million. This was, again, driven by foreign-currency translation. And at constant currency, the increase was EUR 3 million. This, again, is a consequence of the same effects that I just mentioned for the half year. And the tax rate was down 20 basis points. No particular drivers in that rate reduction.

Our non-controlling interest was EUR 69 million, slightly above the prior year. And our net income was up at EUR 10 million or 4%, 2% on a constant-currency basis. And on the left-hand side of the chart, you can see we're also at about 2%, and constant currency was flat in terms of net income growth.

So Chart 16 is, again, just a very high-level reconciliation for revenue and earnings in terms of big drivers for the quarter. And I'll turn to Chart 17, and start talking a little bit about the regional margin profile. So again, this is excluding the VA agreement. And as I mentioned a few moments ago, the margins worldwide declined 100 basis points to 13.2%. But at this point, I want to comment on a significant driver of this reduction in margins. The currency translation effects account for 70 basis points of margin decline off the 100 basis points that I just mentioned a moment ago. And this is a consequence of the strengthening of the euro against many currencies and in particular for us, the U.S. dollar, the Brazilian real, the Chinese yuan, the Russian ruble and the Turkish lira, just to mention a few of the larger effects. As you know, not all of these currencies are economical to hedge. And for hedge positions we do take, we do not routinely hedge the complete exposure. That's consistent with our financial policy for as long as I have been with the company.

So the bottom line is when you look at the unfavorable currency transaction effects, it reduced our constant currency EAT growth by almost 7 percentage points in the second quarter. So but for these effects, our earnings growth in the quarter would be around 9%.

So typically, as I do before I go through each region on the chart, I generally give you the weighted effect of contributions to worldwide margins for the regions. So the 100 basis points that I mentioned, there was a decrease in margin from North America that contributed 80 basis points. EMEA was 40 basis points. Latin America was 10 basis points. Corporate costs and the mixed effect of the company improved margins by 20 basis points each. And the effect of foreign currency translation, as you saw on Chart 15, was a decrease of 10 basis points.

So now looking at the chart in North America, operating income was up EUR 14 million to EUR 470 million or about 3%. And in total, margins decreased 110 basis points from 15.7% to 14.6%. This decline was driven by Care Coordination.

So more specifically, when you look at our dialysis business, the operating margins decreased by only 20 basis points from 18.4% to 18.2%. This decrease was the result of higher personnel expenses and higher direct costs, such as medical supplies and rent, partly offset by higher income, driven by a gain from a consent relating to pharmaceuticals, lower bad debt expense and lower costs for pharmaceuticals in the clinics. And there was an unfavorable translation effect worth about 10 basis points for North America.

For Care Coordination in North America, we were down about EUR 8 million in earnings or 50%. Year-over-year margins decreased 210 basis points from 3.3% to 1.2%. This was driven by higher bad debt expense related to our development of the emergency medicine acquisitions that Rice mentioned; and the impact from the lower revenue for vascular services, which we've discussed as a consequence of the rate reduction at the beginning of fiscal 2017; and higher costs for pharmacy services. This decline was partly offset by the favorable impact from our hospital-related physician services business, and that increase was driven by earnings recognition under the BPCI program, as Rice mentioned; also, partly offset by higher revenue related to our laboratory services business.

In EMEA, operating margins -- excuse me, operating income was down EUR 11 million or 9%, and the margins decreased 310 basis points from 20.7% to 17.6%. This was driven by foreign currency transaction effects and due to the investment in the Xenios acquisition, that we indicated in the first quarter. Other than those 2 effects, the margins in the regions were flat -- in EMEA were flat year-over-year.

Turning to Chart 18. Asia-Pacific's earnings were up EUR 11 million or 17%. Operating margin decreased 30 basis points from 19% to 18.7%. The decrease in margin, again, was primarily due to unfavorable impact from foreign currency transaction effects, and this is partly offset by favorability from business growth. There was a prior year base effect cost that we incurred in 2016 related to the change in the management board, which obviously has a favorable effect this year; and favorable results in terms of our manufacturing costs in the region. Translation effects were negative 20 basis points in Asia.

And as Rice mentioned, with the advent of Cura as a Care Coordination activity in Asia-Pacific, we took the opportunity to include some legacy Care Coordination in other Asian countries, and we'll include them in this category as we go forward.

Turning to Latin America. Latin America was down EUR 2 million from EUR 14 million to EUR 12 million, with margins decreasing from 9.3% to 6.8%. 250 basis points of this was also due to unfavorable impacts from foreign currency transactions, a follow-on translation effect as well for Latin America. And this was partly offset by reimbursement rate increases that Rice mentioned that mitigated some of our inflationary cost increases. Corporate costs decreased by EUR 7 million due to lower costs associated with our compliance investigation.

Turning to Chart 19 and moving to cash flows. Again, starting with the first half on the right-hand side of the chart. Operating cash flow was positively influenced by the VA agreement and also the seasonality of invoicing in the first half of the year. This resulted in cash from operations of 11.7% of revenues compared to 9.7% in 2016. And as I did in the first quarter, if you adjust for the seasonality of invoicing in the VA agreements, cash from operations would've been 10.2% in the first half compared to 9.7% in 2016, so again, an increase in terms of cash as a percentage of our revenues for the first half of the year.

And then if you look on the left-hand side of the page at the second quarter. Again, operating cash flow benefited from the seasonality in invoicing leading to a very impressive EUR 883 million operating cash flow, representing just under 20% of revenues compared to 15% in the comparable period last year. And on an adjusted basis for the same 2 effects, cash flow was still very strong at 14% in Q2 compared to 11.4% in the second quarter of last year. Our CapEx is consistent on a percentage of revenue basis, nothing extraordinary there. And our free cash flow is strong at just over EUR 500 million.

Our net debt, which is our debt minus cash on our balance sheet, has decreased from EUR 7.4 billion at the end of December to EUR 7.3 billion at the end of June. And our leverage has improved to 2.2x debt-to-EBITDA, down from 2.3 at the end of 2016.

Turning to Chart 20. As you no doubt saw, we refinanced our credit agreement after the close of the quarter. We topped it off a bit from current levels. But importantly, the amendment simplified the facility. It is now unsecured and, therefore, consistent with an investment-grade company structure. As a consequence, we anticipate any future notes issued by the company would also carry an investment-grade rating, consistent with our corporate rating.

And my last chart, quite simply, we had a solid first half, as we expected. And this supports our guidance for 2017. Therefore, we are confirming the outlook for 2017 with the indications of revenue growth at 8% to 10% constant currency and net income at 7% to 9%; excluding the Veterans administration, as indicated at the bottom of the chart.

So with that, I will turn the call back to Dominik

Thank you, Mike, thank you, Rice for the great presentation. And I will open the line now for the 2 questions each of you, and hope we can make that work this time. Okay.

(Operator Instructions) The first question comes from the line of Veronika Dubajova of Goldman Sachs.

They are both about North America. The first one is on the revenue per treatment development. Obviously, there was quite a substantial sequential decline in the revenue per treatment from Q1 to Q2, and I was wondering, Rice, Mike, if you can give us a little bit of insight into what proportion of that was driven by mix? What proportion was driven by some of the new commercial contract rolling into the base? And third, was there anything else that happened here? And my second question is on Care Coordination. Mike, if I look at your guidance, assuming it still holds that the margin will be better in -- slightly better in 2017 than 2016, it does imply that you'd have to deliver about EUR 60 million of EBIT for Care Coordination in the second half of the year versus the EUR 8 million that you delivered in the first half. Can you give us a bridge as to how you're going to get there? And maybe talk about what some of the tailwinds will be for the second half.

Sure, Veronika. In terms of revenue per treatment, just to highlight a couple of things. As Rice indicated, we're off about $1 year-over-year, and the same is true of cost per treatment. And at that level, this literally is a rounding issue. So we calculate this to the penny, and we report in dollars (sic) [euros]. So literally, both of these are essentially flat year-over-year, just as a starting point for the discussion. In terms of detailing out the revenue rate per treatment, I'd say, a couple of things, Veronika. First, we had a lot of discussion last quarter about the fact that we were showing a pickup in revenue per treatment in Q1. And we reaffirm the number of times that we were maintaining our guidance, where revenue would grow 0 to 1%. And confirming our guidance, we still think that's the case. So I think there's no surprises in the development of our revenue per treatment in the second quarter, and it's consistent with what we've been talking about in terms of both -- some of the activities, like getting the contracts closed as well as other developments on the revenue per treatment side. So for the quarter, I would say, there's a little bit of each of the things you'd mentioned, a little bit of rate, maybe a little bit of mix. And then, frankly, the dominant effect in the quarter is, as you go through each quarter in a health care company, you're constantly adjusting the revenue you're recognizing from treatments based on the insurance that patients present when they have their treatment done. And you go through your receivables process, and sometimes you've got some movement in terms of whether they actually have the coverage they indicated when they came into the clinic or whether it needs to be rebilled to a different insurance coverage at a different rate. And then there's a noise level of that in virtually every quarter, some quarters are bigger than others. So when you look at that, particularly sequentially, you see that revenue effect in Q1 versus Q2. But I'd say, it's very steady, very consistent with our guidance. We're just a little over 1% when you look at the first half revenue per treatment, and we're confirming that -- the range that I'd indicated to you back in February. In Care Coordination, I won't challenge your numbers. They sound reasonably correct. I think in Care Coordination, it's pretty simple. We did say we do better than 2.6%. We've confirmed, and I expect we will do that. I think we're looking to see improvements in a number of the businesses inside Care Coordination. But I think what I'd highlight relative to help you bridge the gap between first and second half, we indicated last year that we got to revenue recognition on the ESCOs. And that was a relatively modest program. When you think in terms of the back half of this year, you'll see the additional 18 ESCO sites kicking in, in terms of revenue recognition. In addition, we started revenue recognition on BPCI in the first quarter, and we indicated we had booked through June of '16. And in the second quarter, we booked an additional quarter, so we're at Q3 '16. And I would also expect we'd see an acceleration there as we get into the back half of this year. And those 2 things should account -- should help you bridge to the acceleration in margin in Care Coordination in the back half.

Next question comes from the line of Tom Jones of Berenberg.

One is just on the vascular business. I just wonder if you could give us an update on how you're thinking about that business. Things looked pretty bleak at the start of the year, although you put some measures in place. But then we've subsequently seen the rate proposals for the rates under your new structure, and they patched up a little bit better than we might have expected. So some commentary around how that restructuring in -- is progressing, and how you see the outlook there will be helpful. And then just pick up on a comment in the release. Wonder if you can give us some more detail what you mean by consent agreement on pharma. Some color there will be useful, too.

Okay, Tom, I'll take those. Thank you. So yes, on the vascular side, I'd do it this way. From the conversion strategy going from [site 11] to the ASCs, we think we'll have about 40% of those facilities done at the end of '17. And then we should be probably another 35% done end of '18. So we're kind of 3 quarters of the way there. The remaining facilities are in some states -- all of these are in states we have to get approvals in, but a couple of states are a little harder, a little slower than others. But let's leave it at roughly 75% of what we want to see converted should be done by end of next year. It will progress as we go through this year. Now let me remind you that, that 60% increase that we saw in the ASC rates is draft or proposed. We hope that's going to hold, but it's not the final, final, so we'll have to see where that goes. But we're continuing to work the plan as we had laid it out for you. And then on the pharmacy side of this, on the consent side, this has really got to do with our joint venture activities. I think somebody asked me several quarters ago if we had determined exactly how we were going to distribute and move all of these product. And I said at that point, we had not. So we've moved down the path. We've figured that out. And as a result of some of the decisions we've made, there were some consent payment made, not a real big deal but that's basically what it is. And as you know from history, we don't really get into the details of those contracts because they're with multiple folks, but that's the basic premise of what took place.

And I know shouldn't have a follow-up, but is that a nonrecurring cost or a recurring cost?

It's not going to be coming back. It's nonrecurring.

The next question comes from the line of Ian Douglas-Pennant of UBS.

I've just got a follow-up on Tom's answer just then on this consent agreement in pharma. If it's related to the JV, does -- is that also related to the increase in income from equity methods, investments this quarter? So can we assume that it's something of the order of EUR 7 million or EUR 8 million of income from that? Or am I just completely off in the way that I'm thinking about that?

No, no, no. Go ahead. Yes, Ian, the -- just to elaborate on what Rice said. It is related to JV activity, but it is -- the agreements were actually between [B4] and the parent company, KGaA. So when you're looking at equity income or income from equity-method investees, it is not included in that growth. So what I would tell you is when you're looking at the growth, and I would specifically say if you look at the half year for equity method from investees, that's probably a good run rate to think of the back half of fiscal '17. But they're -- it is not in that equity-method investee's figure.

Okay. So what I'm really trying to get at is trying to gauge the rough size of it and the impact on the dialysis margins in the quarter. I mean, can I assume that it's negligible, and you're just mentioning it for completion. Or is it we're looking EUR 5 million, EUR 10 million there?

Ian, it's -- let's put it this way. It wasn't a quarter buster or maker, if you will. It's not huge, if that helps. I'm not going to tie you down to dollar amounts, but it's not a big thing.

Okay, fine. And then my other question, if that's okay, is the bad debt expense in Care Coordination. Again, I'm assuming that's a lot smaller than it was last quarter. Should we expect further bad debt expenses in the second half of this year or have you fixed that issue? I did notice a footnote still in the release.

Yes. No. I commented on Q1 as well. That's really a consequence of the fact that we did some acquisitions and started moving into the emergency medicine space with Sound. And the patient profile, the census is very different in the emergency room than it is in terms of patient admits for the general population. So you tend to have a higher bad debt expense. So you'll see that until our acquisitions annualize out, you'll see an increase in Q3 and Q4. And then maybe by Q4, it'll start to flatten out in terms of a year-over-year comparison.

Yes, as you know, Ian, we're not going to turn these people away. So it's a little bit they come in, they get treated, and then we find out in the ER side of this that we're not going to be able to collect it. The other issues on bad debt that we've talked about some time ago with Sound, that's been cleared up.

Okay, great. You should look and see whether you can write that off as a charitable donation to the community.

Nice for an answer, not a question. Thank you.

Next question comes from the line of Patrick Wood of Citi.

The first one is probably a dumb question, and apologies if you've already covered it. But the EMEA margin change year-on-year on Q2, could you give us a sort of a sense of how much of that structurally was the FX side versus reimbursement and things like that? The only reason I'm asking is because for the sort of 300-ish bps delta, that seems quite a large amount for a margin change based on FX. And equally, would you expect that to come back a little bit at the back end of the year? That would be helpful. And the second one would be just if you guys had any comments on the bipartisan letter that was sent through covering the CPA side of things, and whether you think that that's giving a direction in terms of politically, where things are going on charitable premium assistance or whether we shouldn't read too much into that?

Sure, Patrick. Let me just answer one piece of your #1, and we'll going to let Mike answer the EMEA margin change in more detail. But we did see some reimbursement pressure on the service side of the business in EMEA. And that was, we had some reductions in France, Poland and U.K. And you go ahead Mike on the...

Yes, the -- no, absolutely, yes. The -- yes, the big effects, as I indicated, were the transaction losses and the investments in cardio. And I'd say, it's -- I'd look at it as 2/3, 1/3 between those 2 in terms of margin. And what I'd say about currency is, when you're looking at EMEA, you're looking at a business that incorporates about 40 countries. So if you will, the complexity of that region is quite different than some of the other regions relative to the revenue and earnings.

Yes, and Patrick, we're happy to see the bipartisan letter on charitable premium assistance. We felt good about that. We think it actually has some impact. Where we are, just quickly, we're still on a holding pattern on things or as they were. We agreed with the government that they weren't going to do anything to try to upset the injunction. They've said that they want to do some rulemaking in the fall, and so we are meeting with folks, talking with people, offering our thoughts on how this goes forward, et cetera. So we're working DC monthly, weekly, and we're still just carrying forward. I'd say there's no big change right now. But rest assured, we're working it, going through it. But we haven't seen any real change in direction one way or the other at this time.

Next question comes from the line of Lisa Clive of Bernstein.

First question, on your products growth in the U.S., so you did mention some deferral of machine sales. I just want to check on that. Baxter had some pretty good growth in the quarter. Do you think you potentially lost any market share on the machines side of the business? I know you guys have like 90-plus percent share. So I'm just wondering if Baxter's maybe trying to make a bit of a push into that market. Second question, you mentioned in the prepared statement this morning acquisition activity. I believe it was in China. Or was that Asia-Pacific more broadly? If you could just give us an update on what your thoughts are? And I know China is potentially a very interesting market, but reimbursement's not quite there yet. So any update on that would be great. And then lastly, on the California bill that's sort of still hanging out there. If it does pass, and you do have much more strenuous staff ratios, which I know you deal with in several other states so this is nothing new. But what in particular could you do to mitigate? Is there a straightforward way of shifting more patients to home dialysis? Could -- would you keep centers open longer? Just trying to understand what are the sort of ways that you can mitigate something that could potentially increase your cost structure a bit in that state.

Sure, Lisa. So a couple of things. On the product side, it's not machines. With Baxter, I can tell you exactly. They took some dialyzer accounts. We haven't really seen anybody take machine share loss from us. And so there are some dialyzer accounts out there that we swap from time to time, and they took one back. But that's what it was in that one. Let me answer #3, because that's -- we're all perplexed. We didn't make any acquisitions in Asia-Pacific beyond the Cura deal, which was April last year, unless there's just been some clinics or things like that, very small. So maybe we misspoke or whatever, but it's just been small stuff that wouldn't hit the radar screen. The California bill, so it is in committee at this point in time. Obviously, if it were to go through, the biggest issue that we see -- because it has been redrafted, and they took out some of the penalties and things that were in there that I complained bitterly about in the first quarter. What's still in there is they're asking for a 45-minute break for the staff after a dialysis treatment. And the issue for us is that, that's going to impede care mainly because our shift structure of a Monday, Wednesday, Friday, let's say, Tuesday, Thursday, Saturday, 2 shifts a day, if we have to implement that 45-minute break, we're going to have to stop those shifts, and we can't get them back. So it really is going to be a negative impact on capacity in what we do. So we are talking to lots of folks about that and just making sure they understand the ins and outs of this proposal that sits in committee today. Now in the big scheme of things, what could you do? Sure, you can look at more patients moving at home. And how you would do that? You would have to look at, do you have marginal clinics? Are you going to keep them? What's going to happen? So we're looking at both. We're a lot more focused on trying to educate legislators. We're getting good support from patients. We're getting support from some of our staff and physicians that, "Guys, we can't just go in and start cutting off shifts, and expect it's going to get better." In fact, it's going to get worse. So stay tuned on that one, Lisa. We're going to see where it goes. But we're working that from a fact base and a data base, if you will.

The next question comes from the line of Michael Jungling of Morgan Stanley.

Firstly, on Care Coordination, when do you think you'll have a firmer grip on the doubtful debts? I think your discussion at your CMD just recently indicated that the worst was behind us. Is that still the correct assumption? And question number two is on the 2017 net income growth guidance. Given the change in FX and also the transactional margin exposure, what does your constant-currency growth mean for reported growth in 2017?

So Michael, I -- this will be strange. I'm going to take the first one because I know Mike's covered this a number of times. So the doubtful debts we're talking about in Care Coordination, this is some acquisitions that were made in the Sound book of business in emergency medicine. And so some of them were done late last year. Some of them were done early this year, so we've got to cycle through that to see where we get to a natural level. But the rest of the bad debt in that book of business is stable, and we're kind of through that. So we're going to need a couple more quarters, I think, to average that out, if you will, or see where it's going to go. Mike, I'll turn over the net income guidance to you.

Yes. Michael, I have to admit, I'm not quite sure I followed your question.

So would you -- yes, could you reask that please, #2?

Yes, I was just curious. Your net income growth guidance of, let's call it, 8% for the year, what does it mean for reported growth? Meaning, not in constant currency but on a reported basis.

Okay. I thought you said quarter growth, not reported.

Okay. Sorry. Misheard you.

Well, we specifically didn't guide to that, so I'm not sure I'd want to guide to it now, particularly that currency is so volatile, as we've just discussed in Q2. But why don't we keep going and we'll come back. And we'll take a closer look and we'll come back with something or come back with a demurral.

We won't forget you. Let us look at -- and see if we can come up with something for you. We're punching a calculator at the moment. Let's go to the next questions, and we'll come back to Michael.

The next question comes from the line of Inês Silva of Bank of America.

I essentially have one left. On the cost in the dialysis in North America, the cost per treatment, the inflation was still below around 1%. So my question is, where there things that sort of offset the wage inflation? And should we expect the wage inflation to -- the negative impact to annualize in the third quarter of '17?

Yes, Inês. It's Rice. So we think the wage inflation is fairly stable. Unfortunately, we don't think it's going to wane, but we where we're getting traction -- and we talked about this a little bit last quarter, is the things that we're trying to countermeasure that with. So first thing is we've actually purchased a fairly rigorous scheduling software. And we're using it in the clinics, and it's really helping us to be a lot more efficient in how we schedule things. We're learning that we spent too much time doing some jobs, if you will, or activities we shouldn't have. And so we're able to do this in a more effective or efficient way, if you will. That was one. Secondly, we've gotten down, we cut our temp labor, because that's always inefficient and expensive. So that's helped us. And thirdly, we've realized that where we are hiring, if we can hire -- or not expensive. But if we can hire experienced staff versus bringing new staff in that requires more training and then we spent a lot more time with training and have to refresh, it does make a difference. So you may pay a little more for an experienced person coming in, but then you don't spend nearly the amount of money on training. So those are some of the things that we are working on. It's going to continue to be work in the coming quarters, but we hope if we can keep making enough progress, that we can have some impact or some leverage against the inflation that's out there.

So just to confirm, you don't think the negative impact you've seeing from this wage inflation will decrease in the second half because you started seeing it last year.

Yes. I think it's going to be there, particularly as I'm saying, as we're hiring more experienced people, we're going to have to work hard to avoid that inflation creeping up. But I don't think we're going to see it really tail off in a big way in the back half of this year.

Okay. Michael, coming back to you, and I'll give you an indication, I guess. I wouldn't call it a guidance. But as we look at an indication for current currency earnings growth, and specifically, if I look at the rates that were prevailing at the end of the second quarter, I would say current currency probably would be in the 8% to 10% range, if that's helpful.

So the next question comes from the line of Ed Ridley of Redburn.

Firstly, on the U.S., Rice, you've kindly updated us both at the Capital Markets Day and earlier results this year on how many of the private counterparts you've renegotiated with. Is it still 3 of the majors? Or have you concluded any further agreements? That would be my first question. So follow up on the European reimbursement, just so my understanding is clear. It still, Mike, you -- it still seems that you're saying that basically, the bulk of the margin effect was transactional effects in Xenios. Is that correct?

Yes, maybe if I take the second question first, Ed. Yes, the way I described the margin effect, I said it's essentially transaction losses and the investment we're making in Xenios. And beyond that, the margins were flat. As always, in every region, we've got pluses and minuses relative to the margin. So in effect, when you talk about that reimbursement pressure that Rice mentioned, we just mitigated that by managing the rest of the P&L in Europe.

On the payer side, as I said at the Capital Markets Day, Ed, so the 3 big ones are done. So we've got some smaller ones that will probably end up getting done over the course of the back half of the year. Generally most of them get done in the fourth quarter, but some will be a little bit earlier than that. But the big ones are done, as I'd indicated in the Capital Markets Day.

And to be -- if you want to answer this, but in terms of the second quarter, do we see the full quarterly impact from those 3 or not?

I don't think I'm going to answer that one for you. It gets a little ticklish for me if we do. But -- so let's just leave it at that.

The next question comes from the line of Gunnar Romer of Deutsche Bank.

Gunnar Romer, Deutsche Bank. The first one on Care Coordination international, if you can just briefly update us on the integration of Cura. And also, I think you're now recognizing some smaller activities in other countries. Just out of curiosity, what that is and whether you're pushing those for more growth going forward? And then second question would be on the pharmacy business. Maybe if you can just update us on where you stand here, given the pressures you're seeing. How you're working through that? And what we should expect for the second half?

Okay. So Gunnar, in the Care Coordination international, the Cura integration is working well. We're pretty much on track with where we thought we would be. I don't really know how to give you anything closer. Maybe a better way to say this is we've got an integration team of Cura management and our management in Australia. And they're working and meeting monthly, all the blocking and tackling you do for an integration. And at this point, we're hearing all of that's going smoothly, so no issues. Now the other pieces of Care Coordination -- and I'm going to look at Mike, but I think I got this right. We have a little bit in Taiwan. It's a vascular access business, and then we've got some in a couple of the other countries. But it's really no more than like 3 countries that we're in. So it's not a real big contributor here.

Yes, 3 or 4 countries, but consistent with what I've said about our activities in Asia, we're not going to go to the country-level detail because we, frankly, don't want to signal to other folks interested in where we to go next where we are already are. So -- but it's a number of countries in Asia where we have some legacy Care Coordination activities.

And on the pharmacy side, I'd say, there's 2 things: We continue to push back on what we call these direct and indirect fees that we're getting from the pharmacy benefit managers. And that's really kind of a door-to-door fight. But that has had some impact. I think we mentioned that to you previously. And I think everybody, if you've watched, you've seen that one of our branded drugs (inaudible), there's a generic coming out, and that's going to have impact on us as well. But those are mainly the things that we're looking at.

The next question comes from the line of Oliver Metzger of Commerzbank.

The first one, from product business, you gave already some explanation. So it's definitely a nice acceleration of first half to the previous year. So would you describe a good performance rather as medical care specific? Or do you see, in general, a more accelerating market environment? And to my second question, just very simply definition. So the European Non-Dialysis Products are mainly Xenios, is this correct?

Yes, Oliver. So the non-health care products, that is Xenios. That's correct. I think we've talked about this previously. That's membrane oxygenation. Predominantly, we see that in the cardiac space as well as it's becoming more prevalent in chronic obstructive pulmonary disorder or COPD. But that's what that is. If I understand your question correctly, your first question, what I would say is the acceleration that we're seeing in the growth, I think it is more -- it's good products, but we are seeing markets pick up. Meaning, the tenders that we won, they're now calling for product to be shipped, and we're just getting into all the spaces that we want to be in, if you will, selling our products. So I don't think it's any one thing in particular, but I do think we're seeing some of the problem spots from tenders in EMEA and things like that. Russia wasn't tender-related, but they just didn't buy much in the first quarter. We're seeing those things pick up. So I would say it's a combination of what we're doing and what the markets are demanding.

Okay. So thank you, everyone, for taking part on the call and for speaking with us. And we thank you for the discipline with the 2 questions. That was good. And we'll say goodbye.

All right. Thank you. Thanks very much. Stay good. Bye-bye.

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