FRESENIUS MED ADS Q1 2010 Earnings Call Transcript

| About: Fresenius Medical (FMS)
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FRESENIUS MED ADS (NYSE:FMS) Q1 2010 Earnings Call May 4, 2010 9:30 AM ET


Oliver Maier - SVP of IR

Ben Lipps - Chairman & CEO

Mike Brosnan - CFO


Lisa Clive - Sanford Bernstein

Kevin Ellich - RBC Capital Markets

Ilan Chaitowitz - Redburn Partners

Martin Wales - UBS

Julie Simmonds - Piper Jaffray

Tom Jones - Berenberg Bank

Andreas Dirnagl - Stephens

Kevin Ellich - RBC Capital Markets


Good day and welcome to the Fresenius Medical Care earnings release of first quarter 2010 results conference call. At this time, I’d like to hand the conference over Mr. Oliver Maier. Please go ahead, sir.

Oliver Maier

Thank you so much Marian. Good afternoon and good morning, everybody. I would like to welcome you to our first quarter results conference call. I’m joined today by Ben Lipps, our Chairman and CEO and Ben will address our strategic priorities and give you a general business update. Our Chief Financial Officer, Mike Brosnan will then discusses our first quarter results in greater detail and addresses our growth outlook for the full-year.

We will use slides for the presentation today, which has been posted on our website and link that will sent to you separately by e-mail. I would like to remind to you that our comments today will be gathering to our Safe Harbor statement, which means to the course of our presentation today, we make certain forward-looking statements and actual results could vary materially. We will use non-GAAP financial measures to help you understand our underlying business performance although the measures reconciliations are provided in our investor news.

So with that, I would like to turn the call over to Ben. Ben, the floor is yours.

Ben Lipps

Thank you, Oliver. Ladies and gentlemen, a very warm welcome like to extend that to our Board members, our employees and associates around the world and those who are joining us on the Internet. As Oliver said, I'll cover basically the business update and Mike will cover the financials, and then we'll open it for questions-and-answers.

Turning now to page four, before I start, I’d like to say we’re pleased with the good start to the year. It was a very good quarter. We’re on track for achieving our targets, our guidance for the year and I’d like to also emphasis that we continued to have excellent quality in both our products and our services and I’d like to thank the Board and all of our employees for their extra effort and making sure that we continue to provide the best quality products and services for use on the patients with dialysis.

Now as I moving into some numbers, we’ve recorded revenues of $2.8 billion for the first quarter that was a constant currency growth of 10% excellent constant currency growth, 13% actual currency and an 8% organic. We’re pleased with that as continued for the last few quarter.

I’d also like to say that we had, as Mike will show you very strong underlying operating performance that we were able to digest currency devaluation in Venezuela and still end up with a 7% increase in net income. So all-in-all, we’re quite pleased with the start to the year.

Turning now to page five, let’s look at the revenue by region. We saw excellent revenue growth in all the regions, North America turned in $1.96 billion at a very strong revenue growth at 10% in an actual, organic of 8% that continues to the excellent track record that we saw last year.

North America accounts were about 68% of our revenue on a global basis and if you turn to international, we had a very strong quarter international revenue growth $922 million. We had constant currency growth of 8%, again significantly above the market and our organic growth in international was 6% again excellent.

Now looking at Europe, which is about two-thirds of the international, we had a 15% revenue growth in actual currency, 7% in constant currency. Asia Pacific turned in a very good 9% constant currency and the leader in terms of constant currency growth was Latin America at 11%. So to sum it up each of the regions performed very well with respect to revenue growth and we’re quite pleased with the start to the year.

Turning now to page six, let’s talk about the dialysis services on a global basis. We saw very strong organic growth of 9% on a global basis. North America achieved revenue growth in the services of 12%, again a high watermark and also 9% organically. If you look at international, we continue to rise quite strongly in actual currency at 19% and returned in 9% for constant currency revenue growth.

That was led by Europe, which turned in a 12% constant currency growth and so both of the regions ended very well with respect to growth. We now have 2580 clinics that we either manage for and we operate and we’re very close to treating 200,000 patients in our clinics, I think 199,000. So we’re off to again a very good start in services business both internationally and in North America.

Turning now to page seven, I’d like to talk a little about quality. I think anyone who is listing our calls over the years know that we have a very strong and absolute commitment of quality in both products and services and I’m proud of the fact that we continue to provide in both EMEA and in North America over 95% of the time we provide the treatment that physicians prescribe and really that’s quite accomplishment we continued now for number of years.

I’d like to point our one other point on this chart. You’ll see there’s an improvement in each of the areas that I’d like to highlight, the nutritional improvement that we seen in North America as measured here by the albumin greater than 3.5 grams per deciliter. Essentially, I think I mention last year that we got the approval from the government OIG to provide supplements on a selected basis and that program now has been underway for almost the year and it has basically contributed significantly to the improvement in nutrition on our patients in North America. Now again were not where we are in EMEA that we’re getting close and that program is an excellent program.

Now what has happened is we saw about a 60 basis point improvement in mortality in North America again this year and so we’re down in the 14% mortality rate, which is really excellent. In international area, with the strong growth and basically introducing our systems, we saw 270 basis points improvement in mortality. This also reflects in terms of hospitalization days, we’re now, I think very soluble under 10 days per year, per patient in North America and we’re in the eight ranges in the international. Again that is a very significant savings to our payers around the world and I think it’s well appreciated. So we’re very proud of the programs that we have in our clinics that are focused on quality.

However, I’d like to turn to page eight and talk about a couple of innovative programs that we’re basically conducting at our expense around the world with respect to improving the outcome even further and the one that is in the US that I’ve talked about a number of times, but it continued to do very well is the Clinic Nocturnal program and basically we’re extending the amount of dialysis from about 12 hours to closer to 20 hours; and what we’re seeing there is a continued improvement in the nutritional status and if you look here, we have over 93% of our patients actually now achieving the 3.5. In fact, next quarter I’ve to put a new target, I think we’ll use what is the percent of patients about 4.0, which is generally what you and I are running out with at this point in time.

So you can see a very significant improvement there. We’re reducing phosphorus, because for dialyzing longer that the patients are eating about 25% more, because their nutritional status improve, very pleased with that program, we will continue to expand it and it’s doing quite well.

Our Online Haemodiafiltration we’re up almost 14,000 patients in Europe and again it’s doing very well. You can see the nutritional status is again at 87%. Again, I think this program is leading the way we have over 50% of our patients that have a nutritional status above 4 [dialyzer].

So we’re on the right track, we are very pleased with these programs. We’ll continue to report on and I think we published just recently some information on the Nocturnal program in the US and there was a significant reduction in mortality. We’ve been operating long enough now that I think we had two year mortality and we saw a 20% to 30% reduction in mortality. So again, I think all of this is moving in a right direction and we were very pleased to be essentially conducting these programs in North America and in Europe.

Moving now to slide 10, let’s talk about the reimbursement in the US; again as you know last year, we were stepping up as we move through the year. We said, as we enter 2010, we would target an increase in reimbursement or the average of 2010 compared to the average of 2009 between 2% and 4%. We’re right on that path and I think we had about a 3% increase in reimbursement from the average of 2,900 to the first quarter. We’re 5% over last year that this quarter significant growth; and the good news about that is 74%, 75% basically contracting rates and 5% utilization.

So we’re on target for the year. We saw a slight dip of, it looks like $2 on this graph, but it’s really rounding here at the $1 plus a dime or something that’s really hard to measure that close. So again we feel like we’re basically right on the path what we said we’re beyond. So we’re pleased with that for the first quarter and essentially it continues the path that we were on last year.

Turning now to page nine, I’ll get into a little more of the performance here on a global basis, in terms of the financial metrics and as I mentioned in our organic growth, clearly it was at high order market 9% in the services area; the US touched and exceeded 4%, same market growth this year which was really a significant achievement and essentially I think at this point in time the growth rates are pretty much on target and we’re quite pleased with them.

Now, what are the point of things I’d like to point out here is that you see a 1% constant currency growth in the rate in international and again that’s tempered a little bit, because last year at first quarter the Portugal bundling basically kicked in and so we got a major ramp up in terms of revenue per treatment. So again we’re targeting to see a 2% to 4% increase in both international and our North American. I think we’ll clearly beyond that path for the year.

We’re basically producing or putting in effect somewhere between 80 to 100 de novos we’re pretty much on target for that and what I mention that we’ve come back pretty close in the US to our benchmark in terms of clinics that our rating certification work I think at the end of first quarter we had 44 and generally we’re in the low 40. So that problem has been addressed by the government to some degree and we’re pleased that we had co-operations on both sides there.

Moving now to slide number 11, I wanted to just comment I think everybody is totally familiar with the Health Care and Education Reconciliation Act that was passed in March, so I don’t need to comment too much on that, but I think there is really an opportunity here for the ESRD community to apply for essentially some of the highlights that are being will be offered through the innovation department and clearly I think this is a totally industry objective we’re all working together to try to see this happen, because I think from the demo projects that have been conducted in the US and this is my favorite slide that I showed for the last two years basically we have seen a significant improvement in the outcomes for these patients by focusing on essentially nutritional supplements, individual care and hydration management and the good news also is that we actually reduce the cost by about 12% by coordinating this activity.

So we hope that we as an industry get a shot of this, we will probably one of the first successful programs that I guess in this area, accountable care models so we hope that we’re able to demonstrate our response to the new legislation.

Moving now to page 12, let’s talk a little bit about the products. I want to mention first of all what we call here is total revenue in the past I usually just talk about external revenue, but I wanted to tell you as couple of things we’re doing last couple of quarters, essentially our total revenue which includes our internal revenues that we sell ourselves and also to the external work was 7% and we also have a basically external revenue of 5%.

Let me focus it first on international and I’ll come back to North America. The leader with respect to machine sales clearly is Asia-Pacific and Europe, we’ve seen a significant increase in our machine sales in the first quarter, a strong PD demand in international and we also saw a strong dialyzers demand in international. So the international, basically product sales for quite strong 10%, and constant currency 16%, and actual currency and so we’re essentially growing market share quite pleased there.

Looking at North America you’ll see the 1% and say what’s this all about, basically what we’ve done in North America, as we’ve had an internal focus on two products, one is Liberty Cycler and the other one is Venofer, and the reason that we’ve been doing this is that until we really have at least 90% of our new patients coming on one of our products or have a 90% conversion internally, we really don’t I have absolute confidence that we’ve get everything worked out and these are great products.

I’m proud to say that, both of those have achieved that in first quarter and so the focused as you look the first quarter has been internally if you look at the actual internal sales or the total sales of Liberty Cycler and PD improved by 13% you won’t see that the external and if you look at the Pharma is by 17% we’ve had a major acceptance of the benefit within our system.

Externally, we had the total disposables grew at about 4% in the Pharma externally grew about 4% again in both the market. So we are very, very comfortable that the Liberty Cycler has launched, it’s an excellent product, we got great acceptance of that, and we’re also very pleased with acceptance of the benefit products, our safety profile continues to be excellent with respect to adverse events and we’re looking forward to working on protocols as we move into the bundle with the Venofer product.

So in summary, this has been an interesting quarter, I think a very successful quarter. We’ve continued to advance our strategic programs as well as you’ll hear from Mike we’ve done a fine job on number of other financial things. So in summary, proud of the fact that we continue to have excellent quality, products and services, we continue with our pilots they look quite good, Michael talk about the underlying performance, Michael talk about the cash flow, the R&D we were pleased with the liberty status, if I got a main status the key machine and we’re starting to bring some of the so products that will hopefully bring the market during 2010.

In summary, I’d like to reiterate our guidance for the year and at this point, I think I would like to turn it over to Mike, he will then cover, essentially the financials in more detail. Mike, it’s yours.

Mike Brosnan

Thank you, Ben. I’d like to extend miles well to the call today, our employees, our management, our supervisory board and interested investors. I will start on slide 15 and walk you through in a little bit more detail of the operating results for the first quarter of 2010.

As Ben has already commented, our revenues were $2.9 billion, up 13% in terms of actual currencies. We had about a 6% depreciation of the dollar in the quarter-over-quarter. So the constant currency growth is still double-digit at 10% and the organic growth as Ben has commented was 8%.

All of this result in very strong top line performance for the company for the first quarter of this year. The top line performance translated to additional operating income of $423 million or 7% growth year-over-year. The operating margins did decline, when you look at quarter-over-quarter and I’ll talk about that in more detail in my next slide, but operating margins for the first quarter were 14.7% compared to 15.5% last year.

Two comments I’ll make, the first is that you recall in the year end analyst discussion, and then I guided you with regard to our performance in 2010 that we did have a devaluation of the currency in Venezuelan Bolivar and that would take place with regard to its onetime effect in the first quarter of 2010. So consistent with that guidance, we’re seeing that effect in the first quarter.

A net accounts in the quarter were about 50 basis points and what you will also seen in the year-over-year is that we did have some adjustments to our inventory carrying values in the prior year and the combined effect of those two items account for about a 130 basis points swing between 2009 and 2010.

Interest expense continues to operate very favorably for us, $67 million of interest expense in the quarter improvement of $7 million on a year-over-year basis that is the consequent really two driving factors. One is a decline in LIBOR rates, the short term made the govern pushing of our debt obligations and reduction in our overall debt that’s about two-third associated with rate reductions than one-third associated with production in our carrying value of debt on our financial statements.

Income before tax is about 11% to $356 million and income tax expense is 35.8%, up from 34.3% in the first quarter of 2009. Here again, when I provided you guidance at the end of the year, I indicated that guidance incorporated the devaluation of Bolivar and I provided guidance on the effected tax rate for 2010 as between 34.5% and 35.5% for the full fiscal year.

So that guidance contemplated the effects of the devaluation in the first quarter and the performance that you are seeing here is consistent with what I anticipate our performance will be on effected tax rate over the course of 2010 within the 34.5% to 35.5% range. All of this resulted in net income of $211 million or 7% growth on a year-over-year basis.

Turning to slide 16, you can see the operating margin development for North America, international and total company. Commenting briefly on each element of the slide, in North America, we did have 30 basis point improvement in the year-over-year results that was largely driven by the continued improvement in our revenue rate per treatment, which Ben has already commented on, mitigated slightly by the increase cost associated with Pharma because as Ben commented a portion of that revenue rate increase relates to increase utilization, as well as our personnel cost increases on a year-over-year basis.

I would comment that relative to the guidance we provided year end, we indicated that operating expenses would be roughly 2% to 3% higher on the average operating cost for 2009 and what I’m seeing here in our first quarter performance is consistent with that guidance as well.

In the international segment, the margins on the surface are dropping from 18.7% to 16.4%. You can see the highlighted block on top of the 16.4% in the Q1, 2010 performance bringing you up to 18%. That is in effect what are operating margin performance would have been in international taking out the effect of the devaluation of the Bolivar in Venezuelan.

The large portion of that adjustment in the first quarter is a one-time cost associated with the adjustment of the balance sheet. Looking at the change on a year-over-year basis in the international the effect of adjustments we made an inventory would account for the overall swing, and if you adjusted the prior year for that your margin in international would actually improved from 16.5% to 18% on a year-over-year basis.

Looking at the effect this as on total company results, there is a swing in margins of about 130 basis points up 50 basis points is attributable to the devaluation in Venezuelan in the first quarter, which would bring you from 14.7% to 15.2% as you on the chart in front of you and the adjustments to the inventory carrying values in 2009 accounted for about 80 basis points. So, there’s a 130 basis points improvement in the overall operating margins after considering those two affects.

Turing to slide 17, I’ll talk a little bit about the days sales outstanding and then move into cash flow from operations. Days sales outstanding again a very strong performance you’ll recall that we had a substantial reduction in DSO in the calendar year of 2009 and we have held our DSO for the first quarter of 2010 at 72 days for the company on a worldwide basis. North America is at 52 days, which we believe is the lowest in the industry and continues to reflect very strong collections’ experience in United States and international is up slightly from year-end, but at 111 days we believe is a very strong performance in economic markets we’re facing around the world.

Turning to slide 18, you can see our cash flow performance for the quarter. Again this continues to be very strong and I did guide at the end of the year that the 12% performance we had as a percent of revenues on operating cash flows was very strong and then I felt in terms of guidance going forward that I would return to cash flow from operations greater than 10% on an ongoing basis and I will repeat that guidance here in the first quarter of the 12% revenues that you see the $349 million for the first quarter of 2010 about 40 basis points of that is attributable $40 million of that is attributable for earnings affects; and the rest is attributable to improvement in our inventory days we will improve roughly two days in terms of our corporate inventory in fiscal 2010 over ’09 and the balance of timing issues associated with the cash taxes paid in 2010 were less than 2009 and other changes in the liabilities on the balance sheet.

CapEx is about $12 million less than last year and I think as we indicated, our guidance is $550 to $650 million in CapEx for fiscal 2010. Q1 represents something substantially lower than that run rate. Well I would expect that our CapEx would increase in the next three quarters filling out full fiscal year. Acquisitions at $82 million, is pretty much on track with the $400 million of acquisition spending. I indicated we would have.

Moving to slide 19, I will take a minute on this slide just to talk about what I anticipate our refinancing activities would be in the back half of 2010. You continued to see a strong performance in terms our leverage ratios, our EBITDA continues to improve and as I commented earlier, our overall debt has come down about $270 million to $5.3 billion at the end of first quarter. Obviously this was driven by our strong cash flow performance at the tail end of 2009, and the continued performance that we see in the first quarter of 2010. The leverage ratio has dropped from 2.46 times to 2.3 times EBITDA.

With regard to expectation for this year, our credit agreement does mature in the first quarter of 2011 that was a $4 billion credit agreement that we executed in connection with the acquisition of RCG in 2006. The revolver in term loan A portion of that credit agreement come due Q1 2011. Term loan B portion amortize is down in 2012 and matures in 2013.

We anticipate in the back half of this year a combination of extending our credit agreements and if necessary, possibly a transaction in the capital market of bond offering to address the maturities that we have in the first quarter of 2011. We’re confident having spoken to our banks as well as having executed a very successful Euro bond offering in January of this year for 250 million euros at a 5.5% coupon that we will have no difficulty addressing our financing needs had a plan that opportunistic for the company in the back half of 2010.

You will notice on the balance sheet and in some of those statistical data that you proceed that because the credit agreement matures in less than 12 months, $1.4 billion has moved from long-term debt in the current liabilities on the balance sheet as of the end of March.

Lastly on page 20, we are reaffirming our guidance for the year greater than $12 billion in revenue, $950 million to $980 million of net income. Our leverage ratio of less than 2.5 times; and capital expenditures in acquisition of roughly $1 billion, I also provided you supplemental information at year-end indicating that our guidance included our margins were flat in 2009 at 15.6% on reaffirming that guidance despite the one-time effect that you see associated with Venezuela in the first quarter that those margin down slightly and interest rate was also indicated a range of 5.5% to 6% in the year-end meeting and I’m reaffirming that guidance as well.

Thank you very much, and with that I’ll turn back to Oliver Maier with regard to the Q-and-A.

Oliver Maier

Great, thank you Mike, thank you, Ben for the update and the presentation and the details. Marian, I think we can now open up the phone lines for the questions.

Question-and-Answer Session


Thank you. (Operator Instructions) The first question from Lisa Clive from Sanford Bernstein; please go ahead.

Lisa Clive – Sanford Bernstein

Ben a few questions, first looking at your revenue procurement development in the US and I understand the decline is less than it looks at first glance, but could you just discuss some of the reasons so that whether it’s mainly drug utilization or whether there’s been any shift in payment rates from private payers.

Second on bundled pricing and preparing for that, could you discuss the timing of spending on that will cost the front loaded. Should we expect that over the next six months, or will at also run into 2011? Then lastly, could you discuss your negotiation with private payers? I understand you do want to try and get us many of them on a bundled basis, and maybe just a bit on timing and your progress there?

Ben Lipps

Lisa, this is Ben. I’ll take part of that basically, the question you had about commercial mix. We’ve essentially continued to see that increase over the last 12 months and we’ve continued with that for the quarter-over-quarter although we don’t look at it that closely quarter-over-quarter, but we’re still doing very well in that area. As far as -- dollar change difference is so many little things, I’ll let Mike do that in a minute.

The second thing I want to talk about was the private payers, we don't comment on the percentage of private payers that are bundled, of course as I think both ourselves and some of the other providers have indicated that was the desire on the part of the payers and we’ve certainly commented that. So we probably won’t comment on how much, but it's clearly significant and it will probably grows a bundle comes in.

Now as far as the playing out the cost and the timing, I think everybody in the industry is saying two to four quarters, but we don't really know what we’re dealing with yet. So we can’t give you a firm number on that. We’re all sitting here with punches of plans in mind, but it makes those sense to start execute until we see the final rate come out and that we expect that towards the end of June.

So at this point, I think we’re all implemented over some time period, but exactly what it will flush, we won’t know that could we see the final rate and we’ll certainly comment on that on our second quarter call. At this point, Mike, do you want to comment on what ends up to a dollar or how you look at that, I don't think we --

Mike Brosnan

I’m happy to make that comment and Lisa, what I would say is that the guidance we provided at year end was 2% to 4% increase of the average revenue per treatment for 2009 that the midpoint of that range would put us for 2010, more or less flat we have the fourth quarter of 2009.

So I think we're on track. I think we’re continuing to see the positive signs that we look for both year-over-year and sequentially with regard to pair mix in particular and commercial rate improvement. The only comment I’d make in terms of the dollar in change is that such a small number when you’re dealing with year end versus Q1 and all the true-ups that take place at the conclusion of the fiscal year that we think our performance is on track with our guidance.


Next question comes from Kevin Ellich from RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Ben, I just wanted to go back to slide eight. The slide that shows your strategic initiatives or Nocturnal clinic balances and online HDF, the outcomes was fantastic. Just wondering what the likelihood that any of these alternative treatment options could be more traction and eventually become the standard or covered?

Ben Lipps

Let's take the Clinic Nocturnal. Basically, we see opportunities to go to about 15% in terms of if you just look at the capacity and that probably will cover a significant portion of population. The online HDF basically be the time, there’s in the four hour range and so it essentially can actually replace dialysis. It could be a 101 replacement and of course that could be a long term, some combination of those two in the US. So I think that these are not something we’re doing just research, we feel that application over the next five years to actually change the therapy.

Kevin Ellich - RBC Capital Markets

Then we’ve see a little M&A activity in the US, I think DC. I was referring by a small private balances change. Just wondering if that consolidation as the many leverage with you, how do you view that and I guess what is your outlook on the acquisition market in the US now?

Ben Lipps

I think as mentioned last call, we’re really pleased with the essentially market situation in the US. There’s the number of independent providers that were very interested and helping them when the bundle comes along and so we’re not at this point in any major acquisition program in the US and I don't think we will be, but at the same time, I think if there are some consolidation among the SDOs as they recall or they call themselves, I don't think that really impacts the market.

I believe that basically most of my customers as we understand the bundle, we and I think DaVita will work with them to be in the ACO program or basically whatever we can do with the innovation department. So I think in some ways it really as a decision they’re making for their own financial reasons, but it doesn't change the market.

Kevin Ellich - RBC Capital Markets

Then just wondering if you have any updated thoughts on bundling, Ben your competitor DaVita on their call can sounded a little bit more positive on what to you expect in the final bundling? I was just wondering, what you’re feeling and also the timing?

Ben Lipps

I think I can tell you what the consensus at least I’m hearing on the timing, but I certainly can’t tell you what’s in it. I think everybody is actually speculated this thing pretty widely. It’s our view that people are focusing; CMS is focusing at the end of June or at least this quarter and so, I know that all of the industry and everyone has conveyed what the CMS in terms of the worries that we have and they’ve been very receptive in terms of meeting with it so. I think media’s optimism is warranted, but I don’t think either one of us who really know what’s the bundle is going to be until they finally put up the rig. So at this point, we’re optimistic, but because of the discussion, but at this point, I don’t know anything more than I did six months ago.

Kevin Ellich - RBC Capital Markets

Last question, EPO utilization, I’m wondering, if you guys could gives us that and then you made a comment about increased utilization of Pharma, was there anything unusual there, can you get more color as to what the increased utilization was?

Ben Lipps

Yes, if you look at year-over-year, I mentioned that it’s really been pretty flat for the last three quarters, two quarters, but essentially, what we’ve seen over the year is that we’ve seen an increase in EPO. We’ve seen an increase in iron, and a little bit of vitamin B. So it’s pretty much the same three drugs that we dealt with. We pretty well leveled off I think on the EPO and essentially we’ve also seen an increase in essentially the Medicare payment, and if you look at it, it’s potentially those with EPO being the least of the amount. Those really iron and vitamin B.


Next question comes from Ilan Chaitowitz from Redburn Partners.

Ilan Chaitowitz - Redburn Partners

This is Ilan from Redburn in London. First, I was mentioning happy birthday to Oliver; and then just the three questions. Firstly, with regard to interestingly slide on page 11, what does that actually means in terms of the 12% cost reductions, would that mean from how many EBIT per patients perspective in terms of those that are enrolled in the accountable came out of, just a bit of clarity on that one.

Secondly, with regard to the corporate cost, if you could talked about a little bit with regard to Q1, those grew substantially higher than the revenues, and I was wondering what we should think about for the full-year. With regard to the US acquisitions, you mentioned that 2010 and 2011 could see your acquisition plans pick up a bit. Are you seeing a big wall of cash with regard to interest in the sector now, or is it just pieced of million times of the acquisitions that have been announced so far this year?

Ben Lipps

Well, let me take the last one. I don’t know that I can speak for the acquires that have acquired in the US I think there is a desire to get to a certain size in preparation for the bundle. So I think that consolidation was primarily that any acquisitions, I think we did about 30 million in the quarter, Mike in the US and those were usually small acquisitions it really fit into a our networks or our physician networks; and that’s essentially what we have planned for the year.

So I don’t see that we’ll participate in much more than that. We do have a number of international opportunities, which we obviously are looking at and so, we still think we’ll spend the $400 million this year. Corporate cost, I’ll leave to Mike and as part of the EBIT, we saved you about 12% of this cost in our demo, but again it was a demo and it cost us probably closer to 7% to 8% of revenue to do that essentially to save the 12%. So by March, you’re looking somewhere in the 5% EBIT margin that this was really we’re looking at, this is the pilot for CMS and yes it would be attractive possibly if it rolled out across a broader base, but the pilot will probably be essentially neutral, but it won’t be a major generator of income, but we think it’s the right direction for the industry to go.


Next question come from Martin Wales from UBS.

Martin Wales - UBS

Two questions, first could you just elaborate on hospitalization days gone up internationally, you talked about expansion, and you’d say a bit more. Secondly, I think successfully rolled out better there in 90% that your internal operations, you talk a bit about the funds externally and also I note from your 20-F. You talk about actually payments to originator on the basis of on the annual estimated use, sales of license, could you have to keep any price rises and in a sense how that agreement works in the lot of the 20-F commentary.

Ben Lipps

Martin, this is Ben. As I mentioned, as you looking into the future, if we’re going to do any optimization of anemia management, I will feel you need to have a proven safe to iron drug and so that’s the case then it would be acceptable for us to have at least the physicians with clinic expected at the 90% level that we’re proud that we got there.

Now as far as the contract is basically has some revenue over 10 year commitments to it and essentially we’re on track for those and so that -- you think of another distributor or a distributor plus we have the right manufacture, if we need to put a various cost issues that they develop in future.

So form that standpoint, I hope that answers your question on the iron. As for as the acquisitions you never telegraphed in ahead of time, but I was only trying to telegraph that we’re not in the U.S, we’re certainly not -- we’re looking at small acquisitions in the US. Internationally, it basically just depends on the opportunity and the pricing and last year pricing wasn’t attractive and if it becomes attractive this year will be active. We didn’t answer the question on corporate cost. I’d like to turn that to Mike.

Mike Brosnan

Ben, it’s too quick for me. So I wanted to answer your question with regard to the corporate cost increase and in the statistical structure looking at the corporate cost to $34 million includes the R&D spending that we’re directing on a global basis and that represented even though R&D costs in total did not change year-over-year, they’re relatively flat at the $23 million were that’s being spend did shift slightly.

So $6 million of that roughly $10 million change relates to an increase in corporate R&D spend with the regions reducing there slightly. So that R&D spending was lap year. The balance is relatively small changes probably the biggest effect, which is be the affective foreign change for cost including Europe converted to dollars. With respect to the hospitalization data, would you repeat that questions.

Martin Wales - UBS

You made a brief comment that the hospitalization days gone up internationally and you tried to the expansion to the reason and not talked about eight days being --?

Ben Lipps

What I said the hospitalization days internationally is in the target range of the 8% to 9%. My comment was on the mortality increase or decrease, we saw 270 basis point decrease in mortality in the international, which is really quite significant large in the reason that happens is as we have been expanding and picking up clinics that basically, I’d say they have different procedures and we do in terms of quality. We get a very similarly an improvement in the quality and the mortality that’s the point I was making was 270 basis point improvement in mortality is really driven by us improving the clinics that we purchased.

Martin Wales - UBS

I’m sorry if you just comeback briefly to my first quarter, or my question on Venofer, my question is assuming that you put the price for Venofer or you get key -- extra because 20-F quite the payments still on the originated based upon annul estimated units of sale high volume?


Next question comes from Julie Simmonds from Piper Jaffray.

Julie Simmonds - Piper Jaffray

I just wanted a little bit one clinic (Inaudible) as to what the plans are to role that pilot out into more of your clinics and how complicated that is a pressure?

Ben Lipps

We are up over 200 clinics and we will be expanding it this year, again, I am not sure exactly what the plans are, but it’s been growing at about 20% to 30% year. We have a lot of interest on the part of patients. It certainly is a rounding issue in terms of physicians rounding it on that particular shift and so we are working on some idea there to make it really easier for the physicians also. But when they see the outcomes that their patients have, they’ve been very supporting. So, I think the most you would have envisioned though would be about a 15% because that’s about all the clinic utilization of that we have available in that night shift. But we’ll continue and then once we see the bundle and what’s included in terms of quality activities or the quality metrics then we’ll make more decision how quickly you’ll remove it forward.


Next question comes from Tom Jones from Berenberg Bank.

Tom Jones - Berenberg Bank

I’ve got a couple of questions if I may. First just to clarify something, on your slide like the classical term bundling you included the compensate rate cost in Part B in your bundle, but you’ve missed out for Part D drugs cost, is that just a graphical misrepresentation or do you know something about Part D drugs in the bundle that we’ve done?

Ben Lipps

Trying to be neutral. Again at this point in time the thinking is that it will go in at later point when everybody understands the economics, but that was just basically the way the slides looked two years ago and I kept it the same way. No messages one way the other.

Tom Jones - Berenberg Bank

The more important questions, I was wondering, you got a plenty of price and volume detail in relations to service businesses, but wonder if you might be able to do the same on the product side internationally and in the US. The second question, your competitor from California may move now to Denver, may quite a bit of that discussion about those exposure to the VA and some potential rate changes there, I just wondered if you can make a few qualitative if not quantitative comments in that regards.

And then lastly just a very general question, your operating level, your debt leverage is getting down now to level, which don’t look a little bit inefficient, I was just wondering, how quality programs have, but just wondering how much lower yield you comfortably let that go before you start to think about doing everything to keep the debt-to-EBITDA in that sort of 2.5 to 3 times range, well, there might be?

Ben Lipps

Okay, that one I’d give to Mike, let me try to knock off the others too, like you say, it’s not a bigger problem we have. The prices, I am not sure if I can answer that intelligently for you because remember we have a whole family products and when we bring out a new product we try to get an improvement in price because clearly it’s got improved features. So, generally in this industry it’s one because of the cost cutting changes now one that we would every year increase prices.

So, it’s really driven by new product introduction. So, I think net-net we policy see on average very little price increase in any of our products in the dialysis products area. So, you can really care on much there. We do make up in manufacturing volume or manufacturing efficiencies where it comes from.

As far as the VA, I got to give you my perspective on it, and it’s probably not totally satisfying, but over the years we’ve looked at the VA as another commercial customer okay and really in many ways they are so you negotiate with the commercial customer and you get a balance between quality and price and so I see most of the discussion around going to Medicare rates that’s pretty difficult considering the Medicare want to bundle and so on so fourth.

So the way we look at it is that we have as we look at our guidance, I think Mike and I had talked with guys the 2% to 4% increase year-over-year in terms of our revenue per treatment. We just say that okay what ever happens we commit to that and we’re essentially just another commercial entities that will blend in with the other commercial entities some ups and down, but that’s all, that’s where we are handling at this point time. I don’t know any other way that Tom just thinks about it okay.

Tom Jones - Berenberg Bank

Okay, I’ll get some (Inaudible) and on the leverage question?

Ben Lipps

On the leverage I appreciate it’s a nice problem to have the cash flows are good, the debt is coming down, an anticipation that I indicated in the year-end call that we do not have as corporate objective to become investment grade and we doubled our guidance from our historical spend in terms of acquisitions. So I think that we have a lot of refinancing plans for the back half of the year and as I indicated, we’re very confident that will go off while as they, but in the interim it make some sense for us to or probably keep our cash balances a little bit higher than we historically have and, for the right opportunity, we’re having very strong balance sheet.

Tom Jones - Berenberg Bank

Do you think I mean, over the last sort of 12 to 24 months, specifically you’ve been quite thinking about what you buy. Do you think that going forward you might just sort of maybe low at threshold a little bit, or just maybe buy some slightly less profitable growth? Even if it is still generating positive return on capital for the spread on your cost of capital, do you think you’ll be willing to see that spread now are slightly, or you will sort of revaluing for historically or is that not some you think about.

Mike Brosnan

One of things I’ve commented on in the past is that, relative to the $400 million we on spending that we thought that would be roughly 50/50 US and international. So I wouldn’t say that will be less picky, but I would say we feel we have a lots of opportunities on a global basis to buy interesting properties at the right multiples. So if we think it what we want we may shift a little bit in terms of the mix of acquisition spend relative to the US market versus some of the other markets we’ve indicated, we’re interested in Eastern Europe and Asia.


Your next question comes from Andreas Dirnagl from Stephens.

Andreas Dirnagl - Stephens

Tom took most of my questions I’m just left the pass the couple of the answers you’ve already given. Ben in response to the question on the commercial mix, you said that you’re still seeing improvement there, when you say that, are you speaking about the revenue impact, or volume or both?

Ben Lipps

I’m really looking at the patients or treatments, okay, mix of treatment this is the way we monitor that.

Andreas Dirnagl - Stephens

Then just to be clear with the response to Tom’s question, I gather you’re saying in effect what everyone seems to be hearing which is that your current expectation would be that the Part D the oral drugs are probably going to be postponed from at least the initial bundle, correct?

Mike Brosnan

Andreas, this is Mike Brosnan. I just wanted to supplement, Ben’s comment a little bit. I can imagine where the questions coming from, not, exactly. When we referred a mix, we’re indicating that a larger percentage of our patients are coming from commercial, but we talk to it in the context of rate volume because, those patients are paying higher rates, so it’s both volume and rate.

Andreas Dirnagl - Stephens

Then just on the oral drugs?

Ben Lipps

I think, again I listen to the same discussion that you probably listen to him, and it seems like, if the payment was appropriate then clearly it would go in, we probably could do the things with it. However, establishing, what is the appropriate payment may take a pilot and so that’s why I’m saying that I’m hearing more discussion it will go in the later date than I’m hearing that will go in now, but really that’s nothing more than discussion, I really don’t know and we’re prepared whatever is the light approach that CMS takes, we will essentially work with them and accommodate whatever reports they take. I could nothing to say, they whatever go in the bundle, it just a matter of timing.


We will now take a follow-up question from Kevin Ellich from RBC Capital Markets. Please go ahead, your line is now open.

It seems he has stepped away from the telephone. That concludes today’s question-and-answer session. I’d like to hand the call back over to your host for any additional or closing remarks.

Ben Lipps

Okay. Thank you very much for your interest in joining us today. We look forward to seeing you on one of the road shows. Thanks.

Oliver Maier

Thank you very much everybody.


Thank you. That will conclude today’s conference call. Thanks for participation ladies and gentlemen, you man now disconnect.

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