Fresenius Medical Care AG & Co. KGaA (FMS) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Fresenius Medical Care's Earnings Call for the Second Quarter and First Half of 2013. [Operator Instructions] I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Great. Thank you very much, Brook. I would like to welcome all of you to the Fresenius Medical Care's Earnings Call for the Second Quarter of 2013. Also, a very warm welcome to the ones joining us on the web today. We very much appreciate your interest. As always, I would like to start our call by mentioning the cautionary language that is in our Safe Harbor statement of our presentation and the material we distributed today. For further details concerning risks and uncertainties, please refer to our filings, including our SEC filings. We also provided you with some adjusted numbers in Q2, only in the context of a year-over-year growth rate comparison, to show a like-for-like operational basis comparison. With us today are Rice Powell, our CEO and Chairman of the Management Board; and Mike Brosnan, our CFO. So that is it from my end. Rice, the floor is yours.

Thank you, Oliver. Good morning, good afternoon to everyone. Thank you for your participation today. Let me take a moment to thank our employees and management board members from around the world for the hard work that they put into this second quarter of 2013. If you would turn to Slide 4, I'll begin my prepared remarks. Second quarter. I have a mixed view of our results. I think we see some strong progress in our revenue efforts. We see top line growth trends that are improving even though in the face of the first-time sequestration impact in North America but also, we have more to do in our efforts to become more efficient and to take cost out of the system. If you look at our net revenue for the second quarter of 2013 at $3,613,000,000, you see the growth at 5%, we're quite proud of that. Looking at EBIT and net income, you see, respectively, 8% and 9% down. With net income coming in at $263 million, we obviously have more work to do there. As Oliver said earlier, we try to give you an adjusted look at net income in order to put it in some perspective for you. Excluding sequestration and adjusting for the special items of last year that had to do with Liberty, we would be up by 2% on this type of comparative. Progress being made in the second quarter comes from organic growth in North America. It improved to over 5% sequentially. The payor mix in North America has again improved slightly but improved, nonetheless, on a sequential basis. Europe, Middle East and Africa had positive growth performance trends in products and services, looking on a sequential view. Turning to Slide 5. Looking at our revenue from a regional perspective. You can see, again, at $3.6 billion in the quarter, 6% in constant currency, North America is still at roughly 66% of that revenue. Europe, Middle East and Africa at 21%, and you can see Asia Pacific and Latin America, respectively, at 7% and 6%. We're happy with the organic growth in North America at 5%. You see 5% organic growth as well in the International businesses, 6% in constant currency. And you can see that Latin America continues at a torrid pace of 18% growth in constant currency. Slide 6, considering the scope and size of our franchise. At the close of business, January 30 of this year, we had 3,212 clinics, a 3% increase in our facilities, a 5% increase in the number of treatments delivered globally, just shy of 20 million treatments, 19.7 million to be exact. Looking at our patient base, 264,000 patients, again, a 3% increase. So from a franchise standpoint, 3% growth in clinics, 5% growth in treatments, 3% growth in patients. And looking up at the top of the page, you can see that we had 35 de novos at this point in time versus 36 acquired clinics, and you see the breakdown among the regions. Turning to Slide 7, and looking at organic revenue growth. On this particular slide, we will give you the second quarter view, as well as the first half, or H1, as we refer to it, for this year. Second quarter, $2,743,000,000 in revenues, 6% growth in constant currency. Good growth in constant currency both in North America at 6%, as well as International at 7%. And you can see organic growth and same market growth for both regions at 4% for same market, 5% for organic growth. Looking at the first half of this year, $5,422,000,000 in revenue, constant currency growth of 7%. And a very strong 8% constant currency growth in North America and 6% in International. And again, looking at same market growth, it comes in at 4% across the regions. Looking at Slide 8 with our quality outcomes. We see consistency in our clinical quality over the second quarter versus the first quarter of last year. Let's take a moment and highlight just several key areas. Hemoglobin, between 10 and 12 grams per deciliter, which is really the U.S. reporting convention, you can see in the first quarter at 73, consistently stable at 73 in the second quarter. Dropping down a line and looking at the 10 to 13 grams per deciliter, which is the international focus, you can see the Q1 at 79 -- I'm sorry, 78 in EMEA and 78 in the second quarter as well in EMEA. So stability there. And a little improvement in Asia Pacific, second quarter of '13 at 65 and 64 in the first quarter. My last comment on our clinical quality page is our hospitalization days, you see a slight improvement at 9.6 days in the second quarter for the U.S. versus 9.7 in Q1. And then, we go the other way ever so slightly in EMEA at 9.3 hospitalization days per patient for the second quarter versus 9.2 in the first quarter of the year, and you see Asia had a small tick up as well. Slide 9, good news for us, exciting news. We're pleased with what we're seeing in our products business globally. All around the world, we see progress. Looking at that second quarter of this year, again, external revenue only, $870 million in the quarter, you're looking at 6% growth or 5% constant currency growth for the total business rolled together and then, you see the U.S. or North America at 6% on a constant-currency basis in the second quarter and International at 5%. Looking at the half-year convention, first half of the year at $1,654,000,000, you see nice constant currency growth at 4%. 4% for the International area and then, looking at North America at 2%. Not on the slide but worth mentioning, as I always do, looking at our growth in hemo disposables, bloodlines, dialyzers concentrate, rinsing solutions, et cetera. In the second quarter for the International businesses, growth at 7%. In North America, an exciting 12.7% growth in hemodialysis disposables in the second quarter. Looking at that from a half-year basis, International comes in at 7.2% growth and North America comes in at 8% growth, again, on hemo disposables for the first 6 months of the year. Good performance, solid performance that we expect to continue. Moving to my last slide, topics of interest for us to discuss today. I really have 2 things I'd like to comment on. Our legislative focus, as well as our global efficiency program. First, under legislative focus, sequestration. Don't have much to say other than we believe it's here to stay. Mike's going to give you some more feedback on that. You know it's reflected in our guidance that we don't believe that the sequestration or the cuts will be reversed. So we've tried to deal with them in a proactive manner. Secondly, let me now touch on a topic that is of interest to all of us. I'm sure by now you have all seen the CMS proposal and have a lot of questions, just as we at FMC do. I'm not going to be able to answer all of your questions today at this particular time. We are in the middle of a process and I do not want to speculate about possible outcomes and your guess is probably as good as my guess at this particular point in time. Like many of you, we were surprised by the harshness of the rule. We think it goes far too deep. We think by cutting reimbursement well below the cost of care, it presents a significant threat to a very vulnerable patient population. We are working hard to change the proposal, and we're meeting with Congress and the administration to help them understand the consequences of this proposed rule should it stay as offered. We have been in Washington several days in each of the last several weeks and we've met with dozens of lawmakers and staff to express our concerns and educate them about the issue. Our senior leadership, including myself, Ron Kuerbitz, members of our government relations team that are based in Washington, D.C. will continue to meet with legislators, staff, anyone that we can throughout the fall in order to affect the change. We are compiling our formal response to the rule, including all the data and the analytics necessary to show CMS where we think they can make improvements. This formal response is due August 30. A very large part of our formal response is the horrific impact that this proposal is going to have on access to care in the United States, not only for FMC but for every provider. This is a very dangerous situation. We think there's a better way of doing this. We should look at total cost of care within the bundle. If, as it has been throughout these past 4 decades, the federal government believe that it makes sense to use the private marketplace to care for beneficiaries on dialysis, then, the federal government should at least cover the cost of care and consider all of the inputs to the bundle, and not carve out just select items in the bundle that drastically justify reducing the rates. If we're in the bundle, let's stay in the bundle and look at it as such. In addition, we think that a transition period does not make sense. Phasing in a bad number over time doesn't create a good result. It just makes a bad result last longer. The key is getting the number right. Getting a number that creates a sustainable system by protecting patients, providing rational access to care and providing value to the American taxpayers. This is our singular focus for the next few months. My very personal message to our employees is stay focused. While we try to work through this very difficult situation, keep doing what you do best, which is take care of patients. This is not a situation that I take lightly. And quite frankly, I never ever expected to be in a position like this, with cuts of this proposed magnitude. We will do everything humanly possible to change it, but we will be failing in our duty to you as our investors to not begin planning and considering the worst-case scenario. Looking at our global efficiency program, what have we done and where are we? We have completed our scope of possibilities or another way to view this is, we've completed the what. What is it that we're going to improve? What are we going to do? And now we are diligently working through the how, the when, the where, et cetera. We will be thorough and thoughtful and changing activities are coming down the road. I anticipate that there'll be questions asked today regarding our efficiency program, questions of a quantitative nature. Please consider, while we may not be able to answer all of your questions today, I'd like to leave you with 3 key points. The activities that we are implementing affect our employees in a number of ways. It affects their daily work, how do they do their work, where they do their work, things of that nature. Our employees need to understand these potential impacts, first and foremost, before I publicly discuss them in an earnings call. I realize that may seem illogical to you, but with 90,000 employees that look for us for guidance and trust, we need to have these conversations, and we will, we're beginning the process now, before we can have them in a public forum. Our efficiency program is being considered along a risk curve. Don't become efficient enough and we leave dollars on the table. We push too hard and there's the potential to damage the company structurally. Overreach and you don't create value, you destroy value. Looking at the timing of our plan and having kicked this off at the beginning of the year and trying to implement this program on the eve of such a Draconian proposed reimbursement cut, affecting your largest region, it has the possibility to radically increase the slope of the risk curve. We are trying daily to triangulate these points to work them into our plan of action, but it would be irresponsible for us to have you believe that we can walk down a major path of efficiency in all areas of the company globally and not have some coordination, some consideration of what was a shock to us as it was to you, July 1, when the proposed reimbursement cut came in, in such a Draconian manner. Please just consider that these are things that we are working through. We may not be in a position today as we try to answer your questions, to answer everything, but we will get there. With that, Mike, I think I'd like to turn it over to you, please.

Thank you, Rice. And good morning and good afternoon to everyone. I'm going to review the numbers starting on Page 12, which is the second quarter profit and loss statement. And despite our revenue growth, our operating earnings were down 8% or roughly $45 million from $589 million to $544 million. And if you look at this very broadly, you can break that down into 2 overall effects. First, 6% of the decline or $32 million is due to the effects in both periods for transactions recorded related to the acquisition of Liberty of approximately $13 million or 40 basis points. And we've also considered the impact of sequestration in the presentation, which is approximately $19 million or 40 basis points in this year's grouping. The second is, and the remaining decline of $13 million or 2% is operational. This change was driven by an increase in global corporate spending of $10 million, a decline in North America's operating earnings after considering the effects I just mentioned of $5 million and improvement in International, which is up $2 million year-over-year. So let me walk through a little bit more of the detail. If I look at margins in North America, they were off 260 basis points. And if we consider the special effects that I just mentioned, that would account for about 140 basis points. So operationally, we're down 120 basis points year-over-year. Obviously, this is driven by lower revenue rate, with about 1% increase in revenue per treatment year-over-year and higher operating costs. Again, looking at this from a rate per treatment perspective, the revenue per treatment is $351 in the U.S., down from $350, excuse me, up from -- $355, up from $351 or roughly a $4 per treatment increase year-over-year, roughly 1%, as I mentioned. This increase was driven by continued growth on our expanded service offerings, as well as the Medicare market basket increase. Hardly offsetting these increases, we had the impact of sequestration, which is approximately $3 per treatment and an unfavorable payor mix year-over-year. You may recall that we reported in Q3 last year, a drop in our commercial treatments from the second quarter. So as Rice has indicated in his remarks, looking at this on a sequential quarter basis, we've seen commercial mix improve since the fourth quarter of 2012. In addition, we had a number of pricing effects related to the new contracts we signed last year, and we talked about last year and the attachment of our patients to those contracts. We expect to continue to see these pricing effects through the end of the year as these new agreements annualize and we complete our patient assignments. On a sequential quarter basis, we expect to see continued improvement in the rate per treatment driven by our expanded services and the improvement in the overall payor mix. Continuing to the cost side in the U.S., let me first talk about the sequential development of the cost per treatment because I think that's actually the best comparison for fiscal 2013. From the first quarter to the second quarter, we saw a $3 reduction in the cost per treatment from $294 to $291. Due to the increased number of dialysis days in the second quarter, the passing of the first quarter impact of a legal settlement from the Fresenius case, which we described last quarter. And then, going beyond that, the seasonal benefit in which certain payroll and payroll-related taxes are satisfied in the first quarter was largely offset by an increase in pharmaceutical costs. This is, in part, driven by the price increase we received on Epogen from Amgen this year. We expect the U.S. cost per treatment will be -- when you look at this on a full year basis for 2013, you're looking at $294 in the first quarter, $291 in the second. I would say, the half-year result, on average, is a reasonable estimate of what we'd expect for the full year. We're going to work towards improving that, as we always do, and make efforts to try to mitigate the cost increase on Epogen. But when you look at the average cost per treatment in 2012, rather than focusing on just the quarter, we had more volatility in our cost per treatment in fiscal 2012 when the average for the year was $283 per treatment. So roughly, we're looking at something on the order of $9 or $10 per treatment increase fiscal '13 over fiscal '12 on the cost per treatment side in the U.S. Let's see. Last, we're seeing an increase in corporate spending in North America. In the first quarter, we mentioned that we had some legal costs related to the increase and the preparation for the lawsuits filed related to our NaturaLyte and GranuFlo products. Some of the cost increase in the U.S. is being borne out by the continued legal costs associated with preparing for that matter. And I'll comment on that more in the overall results in our guidance. Turning to margins on the International business. The International margins were down 70 basis points. Most of this decline was the result of foreign exchange with -- having recorded foreign exchange gains in Q2 of 2012 and loss of [indiscernible] translation in fiscal 2013. This accounts -- the net effect of revenue growth and other groupings to the business is an accretion of the margin on the International side of 10 basis points. On a sequential quarter basis, the margins were down about 80 basis points and this is, essentially, FX-related and relates on a full year -- on a half-year basis to the inclusion of Venezuela. Our global corporate costs, which are in the investor news disclosed separately, you can see that those have increased in the quarter by $10 million. Most of this increase is a result of increased legal costs and related consulting expense to the defense of our intellectual property and costs related to reviewing and improving our global compliance program. These costs, when combined with the preparations in North America on the GranuFlo matter, present a significant headwind for the remainder of 2013. Moving to reported earnings, as Rice indicated, they're down 9%. Adjusted for the special items, you do see an increase in operating results of 2% year-over-year. Going to Chart 13, and taking a look at the half year results. Our revenue growth was explained by Rice, and shows a 6% constant currency rate, which we're proud of. Our operating earnings were down 5% or $54 million and this was, again, principally due to 2 effects. First, 2% decline or $25 million is due to the effects in both periods for the transactions I referred to earlier: the Liberty transactions and the impact of sequestration. The remaining decline of $29 million or 3% is operational. This change was driven by an increase in corporate spending of $29 million, an improvement in North America's operating earnings of $9 million after considering the special effects and a decline in International of $9 million. Margins in North America were up 150 basis points, influenced once again, by these special effects. And the remaining decline in margins was, from an operating perspective, is 100 basis points. So roughly, 50 basis points is attributable to sequestration and the Liberty acquisition. Again, looking at this from a rate per treatment perspective, you can see in the half year that our revenue per treatment went up $5 from $352 to $357 or roughly 1.4% to 1.5%. This, again, was attributable to our expanded service offerings and the Medicare market basket increase, partly offset by sequestration and unfavorable payor mix and pharma utilization of the unbundled contracts in revenues. On the cost side, as I've already commented, it's about a $10 increase for the half year from $283 to $293, and I think that's a reasonable representation of our expectation for the fiscal year. In International, margins were down about 100 basis points. Most of this decline for the half year was related to foreign exchange or roughly 70 basis points. The remaining 30 basis points is, essentially, cost increases that were not covered by corresponding reimbursement increases in some of the markets related to the service business. Global corporate costs, as you can see in our investor news, increased $29 million. Again, the result of the programs that I've described. Turning to Chart 14, and starting the discussion of cash flows with DSO. We're holding on to our first quarter levels in both North America and International. There's nothing extraordinary to comment on with regard to DSOs. We think we're in a very good position in terms of collectibility for the services we're providing to our customers on a worldwide basis. Turning to Chart 15 and looking at cash flows. Very strong underlying performance with 15% of revenues, slightly better than last year and slightly better than what we typically report. This was due to managing inventories and other working capital items, partly offset this year by the stable DSO situation, whereas, in 2012, we had a significant improvement in DSOs outstanding that took place in the second quarter. In short, there's nothing of concern, from an operating cash flow perspective, that we need to discuss today. Capital expenditures at $173 million is in line with, typically, slightly less than 5%. And the split between maintenance and expansion is consistent at roughly 60-40, and the split between products and services is also consistent with historical results at roughly 40-60. We spent $13 million on acquisitions in all of our segments and lastly, I'll just comment that we launched our share buyback program in the second quarter. Program's proceeding nicely over the course of the quarter. We anticipate we'll complete the share buyback in the third quarter. And I would say, roughly speaking, today, we're about 80% to 85% through the program as we sit here on this call. Turning to Chart 16, and looking at our leverage. $8 billion in debt outstanding, that's down about $400 million year-over-year and that's an increase of about $300 million for the first quarter, largely due to financing the dividend and the share buyback program in the second quarter. Our leverage is as expected and within guidance, and we've had no material change in our ratings over the quarter. And turning to my last slide, Chart 17. Rice has already indicated that we are confirming our guidance, as was well established in some of the materials that came out after our announcement this morning. We highlighted sequestration last quarter and we indicated that while the government might modify all or a portion of it, that likelihood diminishes as the year progresses. As we've seen no movement in Washington on the sequestration issue with the half-year mark, we have reduced the top end of our guidance range to incorporate, formally, the comments that we made in the first quarter of this year. As a consequence, then, our performance range continues to be greater than $14.6 billion in revenues or a 6% growth rate and net income of $1.1 billion to $1,150,000,000 for the fiscal year. To deliver this operating performance, we expect the second half of the year to be substantially better than the first half of the year. On the top line, we expect North America to continue to grow its expanded services portfolio and to continue to improve payor mix. We also picked up 1 additional day of dialysis days that we lost in the first half, and we expect the product business in the U.S. to post stronger results in the second half of the year. In Europe, currency has had a negative effect on the top line, but we continue to believe this is within our parameters regarding our guidance. Venezuela is behind us in the first half of the year. The products business in Europe is expected to have stronger results due to tenders in several countries and the provider business will have the full-year effect of our start-ups from the first half or the full half effect of our start-ups from H1, plus additional start-ups in the back half of this year. In Asia, we're expecting strong product sales in our key growth markets. In addition, we will have additional cooperative dialysis centers in China, and we will have the benefit of a product acquisition closing in the second half of this year. We do see some cost headwinds on the guidance, as I indicated, in the second half. Particularly in the U.S., we have the issue of the cost increase of pharmaceuticals as a result of the Amgen price increase. And as I also mentioned earlier, we're seeing increased costs related to keeping with cases and the cost of enhancing our global compliance program. We continue to believe we'll deliver the performance indicated for 2013. We currently sit at the low end of that guidance range in terms of earnings. We've also increased our acquisition and investment guidance from $300 million to $500 million. We see opportunities to close deals at that level or magnitude this year. As always, we will continue to be opportunistic should assets come to the market that we find attractive. With that, I'll turn the call back to Oliver Maier. Thank you.

Okay, thank you, Mike. Thank you, Rice, for the latest consolidation. I think, Brook, now we can open up the lines for questions.

[Operator Instructions] The first question today comes from Michael Jungling of Morgan Stanley.

I have 3 questions. Firstly, on the net income guidance, it seems that you need to deliver around sort of $305 million per quarter in the third and the fourth quarter to achieve your guidance. That's about $50 million or so per quarter higher than we've seen in the first half. Can you be a bit more detail as to how you think you'll achieve the extra $50 million per quarter in the second half? Secondly, on net interest, is the quarterly run rate in Q2 of $103 million a good guide for the remainder of the second half? And the third question I have is on OMONTYS. Do you have any more details as the why we had seen some adverse reactions when used in your clinics? Any more details as to that would be very appreciated.

Michael, it's Rice. Nice to hear from you. Why don't we do this? Mike, if you want to take the first and second questions and then, I will come back around on OMONTYS with Michael.

Sure, Michael. In terms of net income, I think I can't challenge your math, that's -- those are roughly the same numbers that I get to. I tried to be fairly detailed in my comments about the guidance, anticipating that a number of you would have questions. So that's why I went into some specificity with regard to both the products and services business by region around the world. So we are expecting a substantially better performance in the back half to support the bottom line forecast. In addition, even though I've indicated it's reasonable in the U.S. to assume, roughly, the numbers that I spoke of in terms of cost per treatment, we will be doing, traditionally, the steps we take outside of the GEP program that Rice has already addressed to try to mitigate some of those costs in the back half to produce the earnings that you get derivatively from taking the first half out of the results. In terms of the quarterly interest rate, I think that's a reasonable run rate for the balance of the year, Michael.

Michael, on OMONTYS, your timing's impeccable. What I can tell you is that Takeda has been working with FDA and they are just almost at the point of getting agreement with FDA on a study that will be done in our clinics. It is a DNA type of study where they're going to be trying to understand what could potentially be within the individual that had the reactions, is there something we can learn and understand there? So it's a fairly scientific approach to what we're trying to do. But they continue to work and be very active in understanding what went wrong. So that is an update for you. And as I say, we'll be participating in that study. And I don't know how long it will take, I'll have to talk to the medical guys and see what they think it will take in terms of timing and evaluation of the data, things of that nature. But you should know that they have not stopped, they are continuing to work in trying to understand how they can make this better understood, if you will.

Great. And maybe a follow-up question for Mike. If I look at your full year guidance then, would you say that you are very confident that you can achieve it, let's say, like an 8 out of 10? Because my math and despite your positive comments, I still sort of get the feeling there may be some downward pressure on your guidance. So some sort of confidence level as to your guidance would be very helpful.

I think that we're -- I'll use your number because there's not much point in creating a debate over the index. I'd say we're confident that we'll achieve the low end of the range. I indicated that we're moving towards that because of some of the cost pressures that we see, as I outlined, but -- so I think we'll be in the range. And right now as we look at what we're dealing with, I'd say, we're on the low end.

The next question comes from Veronika Dubajova of Goldman Sachs.

My first one is about commercial rate and the type of increases that you're seeing year-to-date. And I guess, Rice, I just wonder if you want to comment as you look out on a 2- to 4-year view, I mean, it does seem like the commercial rate increases have decelerated significantly since where we were pre-2008, 2009. I'm just wondering, sort of, as you think about forward, what may be the medium-term expectations on that? My second question is on the International revenue per treatment number, some very good development there at first half. Mike, I don't know if you have any comments on how to think about that on a full-year basis? And the third one, I know you're not going to say much about it at this time, nonetheless, curious, when you look at the CMS proposal for the bundle, I guess, from a methodological perspective, what was the biggest surprise to you? And do you think that CMS might be receptive to hearing some of your thoughts on that?

I think I'll comment on, at least, the first 2. In terms of the 3- to 4-year outlook, I think we're going to hold that for the Capital Markets Day at the end of the year. We're working towards developing a more strategic view, so I think it's best address to that at that point in time. But we've actually, relative to the current year, provided, I think, a fair amount of color starting in mid-2012 and running through in terms of what the near-term expectations are with regard to commercial pricing. In terms of the revenue per treatment for International for the full year, I shied away from giving a forecast at the beginning of the year and I'm probably going to continue to proceed the way we have, rather than give you an estimate. I mean, when you look at the revenue per treatment, particularly in the U.S., you're looking at something on the order of 1% to 1.5% on a year-to-date basis. We do expect to see some improvements because of the strength of the second half performance that I just indicated. On the International side, I probably wouldn't provide a separate level of guidance for that.

And Mike, if I just can jump in quickly there, I mean, are there any particular countries that are driving the strength -- that have driven the strength in the first half of the year on the International side?

No. I think -- I wouldn't say there's any particular shortlist of countries. I think we're getting good performance on a global basis. And then, on your third question in terms of the bundling, I know you gave some...

Sure. Veronika, it's Rice. As best as we can tell, I think what drove this very surprising proposal is the fact that, clearly, they just carved out and looked at some things that they wanted to look at around drug utilization. We argue that, that's not really what a bundle is. You have to look at the inputs, all of the inputs into the process. The mathematics that they used were pulling out select information, taking 2007, projecting it onwards as to what they thought drug pricing would be. And we just think it's flawed in the math. Now we're not arguing we're better mathematicians, but we're arguing that there is a more logical way to do this and these are exactly the things that we'll be putting in our response. And it's what we've been doing as we've had the chance to meet with Congressional members and their staff. We've been really down in the detail, talking about the mathematics of what the government proposed and why, and how that needs to be overcome.

And Rice, if I can follow up on that. I mean, any numbers you can provide us on what your costs per treatment is per Medicare patient? I'll push my luck there and then, I'll jump back into the queue.

Yes, it's probably not going to be helpful for me to go into that level of detail at this point, Veronika.

The next question comes from Lisa Clive of Sanford Bernstein. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Number one, on the rate cut proposal, part of it, arguably, comes from the fact that the fiscal cliff bill was, perhaps, worded fairly badly. It seems like that bill gave a pretty specific instruction to Medicare to look at utilization from 2007 to 2012, adjusting for price changes, figure out how much less money the clinics were spending and simply to reduce the total bundle by that amount. Now that clearly, as you've mentioned, is not looking at the total bundle and is therefore, unfair. But that is what was passed in the bill. So my question is, therefore, will Medicare fall back on the argument that they need another bill passed from Congress in order to be able to fully fix this? Yes, there's probably some math calculations that they got wrong that could be fixed, but in order for $29 to go down to a much more reasonable number, do we need an action in Congress? I think that's my first question and I'll follow up with a few more.

Lisa, it's Rice. Let me take that one. I don't disagree with your point. Go through -- when you look at the Taxpayer Relief Act, you could say that CMS was simply following a bad set of directions as they were written in the bill. We have had that conversation with a number of people. We are offering alternatives to how things could be done beyond just another piece of legislation. Let me stop there because I am learning as time goes on here, I just don't want to be too detailed at the moment on the phone because these are real discussions that are ongoing. So I think you can appreciate we will try to bring, not only at FMC but in the industry, there is so much cooperation among large, small patients, physicians. We are all working to try to offer valuable alternatives. But I don't discount what you're saying that CMS could certainly take the position that we were just following a set of bad directions, so to speak. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: And then, I guess, the follow-up question for that is, if CMS holds firm on the position that they can't do anything without another bill being passed, and because Congress is not always the most efficiently oiled machine, nothing does happen before November 1, what is your sort of fallback plan if a very large rate cut happens? And my understanding is both you and DaVita, as well as a lot of the small independent clinics, lose money at specific locations. Could you just give us an idea on what proportion of your clinics would potentially be vulnerable to having to close down? And as that, obviously, very much a worst-case scenario, but in order for you to maintain provision for as many patients as possible, is that a path you would have to go down?

Yes, so let me say this, Lisa, again, let me try to be helpful without overextending myself because these are delicate discussions. What I would tell you is, we certainly know I'm not willing to offer what, as proposed, this would mean to our franchise. We understand that. That's -- part of the comment in my finishing statement is that we have to look at worst case and know what that means. We will do that, we are doing that now. Let's hope that it doesn't come to this. If it were to come to pass, that there needed to be a bill passed, we will work diligently on that as well. But you should consider that our efforts in Washington, we're going to try to make sure there are several ways to approach this so that we don't have all of our eggs in one basket. But at the same time, given the magnitude of what has been proposed, I would be irresponsible as a CEO and Chairman of the Management Board to not be looking at what does this mean in the particular region if it were to come to pass. But I don't think laying that out or having any more discussion today is probably going to be helpful for us. We are -- literally, we got folks in D.C. as we speak. So let's not, if you will, escalate the situation. Just know that we are resolved that what is here today cannot stand or we will affect access to care. Let me leave it at that. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Okay, great. Fair enough on that. Final question. Integrated care, I assume you submitted some applications. Has the structure of that program changed at all in terms of the potential to allow you to enroll more patients? And when will we hear news on, exactly, how many patients you'll enroll and is that program sort of scheduled to move forward in, I guess, Q4 was the original timeline?

Yes, so what's happened Lisa is, the program has slipped some. I think that CMS has realized with the magnitude of what they proposed, millions of providers that were looking and thinking about the ESCOs, if you will, have bigger fish to fry. Let me give you a couple of bullet points just so you're aware. CMS is looking for applications. What we find now is they've lagged the timeline a little bit longer. They have made several changes to what was initially proposed. In the very beginning, they were looking for 500 patients, NSI. Now they've dropped that to 350 patients in an ESCO, and that's really -- I think stimulates smaller providers to participate. Last week brought 2 things, 2 changes. They eliminated the requirement for a third Medicare provider other than dialysis clinics and nephrologists. Now we like that because we didn't really understand the sense for CMS requiring us to have outside of ESRD people, another person standing there, if you will, the third leg on the stool. Now if we need to do something, bring somebody else in to improve patient care, we'd be willing to do that, but we wanted to do it voluntarily and not have it rammed down our throat, is the way it was laid out in their proposal. The other thing that they've is they've moved the savings that are required. They've moved them out in time, meaning, that in year 1, where there was supposed to be a 1% savings guaranteed, they've listed no savings in year 1. And then, year 2 is now 1%, et cetera, et cetera. So we've seen a little movement in this. I will tell you that we like what we see this far, but unfortunately, there are still parts of the program that really, in our view, don't incentivize physicians and providers to jump into this in a big way. So I think there's more to do there. But we are totally, totally focused at the moment on what we need to do with this proposed rule, if that makes sense to you.

The next question comes from Kevin Ellich of Piper Jaffray.

This is actually Brad in for Kevin. You've mentioned, again, that the payor mix in North America improved again sequentially and that you expect it to continue to improve in the back half of the year. Could you just talk a little bit about what's driving that improvement and how much improvement you're actually seeing?

We may both answer this. I think we typically don't disclose the details in terms of a precise calculation of mix because there is a lot of moving parts in it. But I think, importantly, when we started to see some movement outside of our historical range -- we talked about it in the third quarter last year and we are seeing some very solid increases from the beginning of this year through Q2. So we feel good about the trend. We think we're doing the right things every day, operationally. So as we've said before, this is basic blocking and tackling that you need to get your employees organized, oriented towards the right opportunities and then, succeed in terms of performing these kinds of treatments. So I probably wouldn't want to comment beyond that. I mean, we've gotten into some detail in the past in terms of exactly what we're doing. But do you want to comment on this?

What I would probably say to you is we went back and reengineered the way we bring commercial patients into our clinics. Do we make it easy for them to pick up the phone and call? Some of this sounds very simple, I know. But it was really just a re-look at our process, adjusting how we do things, putting more emphasis in other places. That's what I would say, I don't want to get into too much detail because obviously, we don't want to give secrets also away. But clearly, we were not functioning as well as we could have. We were, perhaps, not listening as intensely as we needed to, and I think we've done a better job. We've made changes fundamentally in how we approach these things and we are seeing that progress. So we feel pretty good about it, but I don't know that I want to give you too much more detail on that.

Okay, great. And then, just one last question. In regards to the global efficiency program, I understand you don't want to provide any quantitative impact but, I guess, in the last call you've mentioned you would maybe expect to see some sort of benefit in the back half of the year. Is that still true or would that be pushed out more until 2014?

Yes, what I would say there is, I don't think I want to get too much into where we end up, what the contribution may or may not be in the back half of this year. But what I think maybe will give you some comfort is we're not going to stay silent on this forever. We do intend that in the future here, we're going to come back and give you more color on it. We obviously want to see where some of these variables that are up in the air at the moment, such as the rebase proposal and things that we're working on and having conversations with people that are going to be impacted when we ask them to begin doing things in a different way. Perhaps, to be more efficient, it's just not the right time right now. So let me leave it at that, but know that we know we've got to give you more guidance on this and we will get there.

The next question comes from Martin Wales of UBS.

I have 3 questions. Firstly, just looking at 2013 in isolation, you gave us guidance for the year in February and we're now halfway through the year, obviously, what surprised you purely on the 2013 numbers in terms of where you are versus where you expected to be when you first gave that guidance, putting aside sequestration, obviously? Second question, you talked about the consequences of the proposed ESRD PPS rule, if it stays -- I know you don't want to talk about Fresenius Medical, but what about the consequences to the industry as a whole, if the rule stays as it is? And finally, I understand from what you're saying you're focused on getting this rule amended and consequently, the Comprehensive ESRD demonstration -- Care demonstration program is being delayed somewhat -- in terms of your discussion, being delayed somewhat. Is there any attempt by either the industry or CMS to link the 2 together in any way in terms of the negotiations?

Yes, it's Rice. Let me do this. Let me take your, if you don't mind, I'll do 3 and 2. Mike, you do 1. We're not trying to link Integrated Care to the proposal. I probably gave you that impression and I shouldn't have. All I'm saying is, from a focus standpoint, we've been just completely focused on our 60-day response window to get into the proposed rule change. And so we haven't done a lot of work on what was a fairly constant set of work and meetings we've been having on Integrated Care. I think other providers have given CMS the same message, that this is such a big shock, what you've proposed for '14. We're going to be totally focused on this. So it's not that they've tried to link it or we're trying to link it, it's just a matter of how you marshal resources and where you have them focused when you get something of this large in nature suggested to you.

It somewhat sounds like we should anticipate further delays beyond the end of August, the CMS seems to be currently talking about the CEC?

Well, here's what I would say. If there are several of us that really want to participate in the CEC, but we are absolutely focused on making sure that we put our best foot forward on the rebase proposal, that could happen. I'm not predicting it, but I'm just saying, I know where my focus is. I know where Ron Kuerbitz and the team in North America's focus is, so I think that's a possibility. We'll have to see how that plays out. I don't know that I can be much more specific than that or practical for that matter. On the proposed rule to the industry, I didn't want to turn this into a big numbers discussion, but I would just say this to you. I think it is the first time in my history in the industry, and I've been around a long time, that I have seen complete, total focus in work together from physicians, patients, providers, large-, small-, medium-sized, tiny, you name it, people understand what the magnitude of this cut means to them individually and to the industry collectively. I'll just give you 2 numbers. If you look at MedPAC's report, they suggest that the big guys, on Medicare, have a 2% to 3% margin and they suggest that the little guys are 0.5% percent to maybe 1%. If you take this cut coming in at 12%, do the math, how do you make that work? And that's where I made my comment, we are below the cost of care. So I think this is equally as problematic for everyone. Everybody will have issues at different rates, if you will. I don't take that as reimbursement rate, people have different issues depending on where they sit in their size and scope. But nonetheless, who loses in this? If it stay this way, it's the patient. That's what we cannot lose sight of.

And I think just to come back to your first question, an interesting one. So I guess, as I've sat here, I'd comment on a few things. One is on -- and perhaps, not surprisingly because we included it in our guidance range in February, we were disappointed that sequestration stayed, that no action was taken, particularly, when you think about everything we've just talked about in terms of being below the cost of care for dialysis patients, that some accommodation could be made in sequestration. So relative to our guidance, I think that was a disappointment. I think we're very pleased, as Rice just mentioned, that we're seeing very good organization, good level of effectiveness in the U.S. with regard to addressing the payor mix issue that we've talked about. I think we're also very pleased to see the strength of the product business is in the U.S. When I look at other parts of the world, we see very good growth in Latin America, that was -- we expected positive results, but I think that's pleasant in terms of what we were thinking at the time we gave our guidance in February. We're also pleased to see that we continued to get good traction in terms of expanded services because that is the stepping stone to the Integrated Care, which we have made clear over many years, we very much want to do in the U.S. And then lastly, on the disappointing side, I mentioned running costs associated with some of these key legal matters and we were off a bit in terms of what our expectations were for the year. So that was a disappointment in terms of just the spending level.

So on the balance, if we dug out your spreadsheet from February with the sequestration scenario, it would probably be not far away from where you are now in H1?

Without sequestration, I think we gave you the numbers to do the math on that. We'd be about $20 million better at...

Sorry, that's not my question. If we looked at your forecast, including sequestration, your internal forecast in February, and we had a chance to look at that now, would it be pretty close to where you actually came out in the first half?

I think that's fair, plus, minus.

It'd be close.

Yes, close.

The next question comes from Ed Ridley-Day of Bank of America.

Firstly, on your very strong and encouraging product growth, particularly, on the disposables, Rice, if could talk to that. Because although top has ended very strong, is that really an underlying growth that is sustainable into the second half? It seems much faster than the rate we're used to in the market. And if you could talk a bit about -- to that and also, if you could give us an update on your renal products growth as well?

Okay, hang on one second, I just got to flip a page here. Let me start, though, with the 12%. No, it is a big number and let me be very honest with you that we picked up some significant business as a result of one of our competitors having some issues, and we believe that we will keep this business of the -- the level of their issues are significant. And so it was what I call one of those bluebirds that you're ready to go, you have capacity, you're ready to close and we were able to do that. Now in terms of the product business in the U.S. in the second quarter, the growth rate was 7.3%.

Yes, sorry, and that was for all the products or including also, just separately, the drugs?

That excludes the drugs. Again, the way we look at that is -- when you say renal products, I go back to just thinking about the stuff I used to sell when I carried bags of dialyzers machines and things for me to sell back in that day. But if you look at it from a total renal products standpoint, it's right at 6%. We're just a little bit above 6%. So all in, as you referred to it as renal products, we're just a hedge over 6% in the U.S. for the quarter.

Okay. And in terms of just, a follow-up on my first question in terms of the disposals and actually the machines, I mean, given the uncertainty around U.S. reimbursement and the instruction of sequestration, I mean, you're not seeing any of the -- your smaller customers maybe putting off new CapEx?

We've seen some of that, absolutely. I think I mentioned, in the first quarter, we were down I think almost 2% in our machine sales and that was right in the independent, the very small independents. We've seen some pickup of that in the second quarter. That's the trend. But it would not surprise me that as we look at Q3 and Q4, I think it's going to be lumpy. They -- a very consistent growth in the medium-sized, large, even some of the smallest, but when you get down into what I call -- or what I'd like to call mom-and-pops, but when you get into the very small independent clinics here, you expect 2 things [ph] . We know they'd turn off at any point in time, that is not necessarily the largest bulk of our business, if you will.

And just a quick follow-up. On the litigation, the GranuFlo litigation, can you confirm the number of cases now filed in the MDL? And also, could you update us on the timeline of that trial?

Yes, as we talked in the last quarter, Ed, I'm not going to give you the number, okay? Because we know it's just probably not beneficial to give you that, but we have the number. It seems to have peaked, let me say that. And we still think we are on a path where we won't see this in the court system, the multi-district litigation in Boston for a while. We are still preparing discovery, deposition, all of those things are still going on, but we are a ways away from actually being in a courtroom with the trial at this point.

The next question comes from Tom Jones of Berenberg Bank.

I had 2 questions, really. One was just to kind of circle back to Lisa's questions and maybe ask in a slightly different way and perhaps, put all the questions together, but how would you summarize the kind of tone within Congress that you're getting at the moment? Are you being handed out the door as yet another whining corporate complaining about the government cut or are you generally getting a fairly receptive ear from legislators in Washington? Maybe I'll just leave that question at that, just at that point. And the second question was you mentioned several times your expanded services portfolio as being a positive factor for you. Maybe just give us a little bit more detail and color on that, the magnitude, the scope of what's going on there and perhaps, how big that could get for you in the out-years?

Yes, Tom, this is Rice. Let me take your first one. I like the way you repackaged that. But here's what I would say, we haven't been shown the door. Keep in mind that the dialysis industry hasn't gone into the bundle and over the last 25 years, seeing the kind of mortality improvements that we've seen in this patient base, and you know the history, we worked for years without increases and we always found a way to improve quality and to do better for the patients. People do listen when we come in. Everybody in Washington, I guess short of CMS, is stunned by the severity of the proposed cut. We had very good dialogue, we talked to people. I didn't get a door slammed in my face. I think we made the points we needed to make. I think having the small providers there, I know they were there when I was there, saw them at different times. Having physicians in and having patients in, it's made a difference. It's the most coordinated I've ever seen it. But I've not heard or spoken to anybody where we've not been able to get in and have an audience and lay out the facts as we see them and answer questions. The one thing that continues to impress me when you get into health staff for senators and congressmen, is they're very bright people. They ask good questions, and I'm happy to be challenged because that makes the process better. But I'm uncomfortable, Tom. I don't know where there is going to go, it's too big, but I'm totally pleased and comfortable with how hard work we're going at it. It's a consolidated, consistent effort in the industry, and we are getting the access that we need. I will stop there.

That's helpful. And the expanded services portfolio?

Well, we've talked a little bit about this last time I think last quarter, maybe even with Lisa. And what I had given her in terms of where I felt these businesses could go over the next year or 2, we were looking at the vascular access business and -- okay. Mike just gave me a piece of paper, but what we were looking at was we believe we could be somewhere in the $200 million, if we really knocked the door off, $250 million, $300 million over a 2-year window, recognizing we were about $170 million the year before. And then, the pharmacy business, that has grown tremendously. We're looking, I think, it's somewhere in the $300 million range with that one over the next couple of years and we were at probably $70 million or so last year, I think. So just to give you some sense of the scope -- and here's the way I look at it, you got 2 businesses, kind of, have come from a standing start with a nice acquisition there as well with American Access Care. Very quickly, this could be $0.5 billion, $0.75 billion for us, as we grow out over the next year or 2 if we continue to see the kind of growth and penetration that we're looking for.

Perfect. Just one, maybe, quick follow up question. Just a couple of quick words on Injectafer, and how that kind of sits in things at the moment?

Yes, so for us with Injectafer, we as FMC, will not be selling that product in the U.S. It's not really a stage 5 product, so that's a product that will still sit in the loophole of the American Regent book of business. Although, as a JV partner, we'll see benefit from that and we'll enjoy having ownership in the JV. But we looked at that product some time ago and we saw the strength of Venofer. And the fact that Venofer patients are in 3 times a week, they get their dose, Injectafer alone were acting. It really did -- to our mind, didn't seem to have a very great fit right at that time for us in stage 5. But we'll enjoy success in the JV, but we'll stay focused on Venofer and the other things that our sales people are doing in stage 5 with that approved.

The next question comes from Holger Blum of Deutsche Bank.

If I can just follow-on on Venofer, I think, with some pressure last year, could you see how the volume and trends have developed year-to-date? Second question would be, again, on the guidance topic where you re-confirmed the net income guidance, I just wanted you to come back to a statement in the full year fiscal when you guided for this year, you will have the $2.3 billion to $2.5 billion EBIT target mentioned for this year. Do you stick to that one as well and although, again, would that work on an organic basis?

Holger, let me ask Mike if he'll take your second question. Your first question on Venofer, I got to rattle some paper to check something. I don't know it off the top of my head. So Mike, if you're okay with that, I'll come back around...

Yes, no, I'm fine. Although, it will be a quick answer, Rice. Yes, in terms of the guidance -- and thanks for pointing it out, Holger, because I didn't get into the detail of after-tax and operating earnings. We've reduced the after-tax by $50 million and in the detail of our disclosures, we reduced the operating range. It was $2.3 billion to $2.5 billion, that's now $2.3 billion to $2.4 billion. And on the second part, to your second question, we do believe that we can achieve the after-tax earnings organically.

Meaning?

Meaning, I think what you're really getting at is not so much acquisition-related but more related to, kind of, large, special onetime effects. So we're not anticipating any large, special onetime effects to achieve the guidance range.

I'm going to come back to you, on volume. I'm not dodging, I just don't have them in front of me, and I don't want to take a guess. But I can get it for you and we'll come back to you, on that, okay? If that's all right?

The next question comes from Alex Kleban of Barclays.

Just 2 questions. So you mentioned it a bit earlier, but in terms of the activity you're seeing from individual patients, patient groups and doctors, how large is the share of voice from that part of the debate versus the industry? So are we talking about just a few selected people or are we talking about kind of en masse patients just coming in and talking up, speaking up at Washington? And then, secondly, just on the $9 to $10 cost per treatment increase, could you confirm how much of that is from Amgen and what that might look like heading into 2014?

So I'll take the first one and Mike, if you want to take number two? I don't know how to portion it out from a percentage basis, Alex, but here's what I would say. We've had a number of patients send letters in to their congressmen and their senators. We actually have a number of patients, these are FMC patients, that will be out in the various congressional regions in August. As you know, there'll be a recess here of Congress in about 1.5 week, and then, they will be at home. So we've got people mobilized to be there, as in, providing buses and taking people to where they need to go. So I would say this is extremely active, and patients are doing this not only as individuals but through patient associations. There've been letters written. There've been meetings on The Hill, things of that nature. So I would say, in the foreseeable past, we've not seen this level of activity. It is much more ramped, if you will, than I've ever seen it before.

Okay. And then on Amgen?

Yes, I think, maybe the best way to think of it, because there's a number of moving parts, but if you just look at what we anticipate the cost will be this year and spread it over the full year's treatments, even though the increase isn't effective January 1, it's about $1 in terms of what we anticipate for treatments this year.

The last question today comes from Lisa Clive of Sanford Bernstein. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Tom asked a few of my questions already, but I'll just ask one further question on the ancillary businesses. You gave us update last quarter that I think you have increased Fresenius Rx enrollment from 20,000 patients at the end of 2012 to about 30,000 patients at the time of the last conference call. Could you maybe give us an update on where that is today? And then second question, I guess, 2 parts. First is you increased your target acquisition spend for the year, is that going to be mainly x U.S. markets or do you see some opportunities in the U.S.? And particularly, if you could just talk about where you think the most interesting opportunities are in the medium-term for growth of your International services business. And then lastly, also on International growth, you had mentioned some slowdown in the U.K. and Spain a few quarters ago, have you seen the end of that? And in general, could you just give us some commentary on the pace of privatization of dialysis services in Western Europe?

Sure. Lisa, let me take your first one. On the pharmacy, yes, we have said -- I think it was at the end of first quarter, we were around 30,000 patients. Today, we're in the mid- to high 30,000s, not quite at 40,000. I think we're probably somewhere in that 36,000 to 37,000 range. And then, the estimate, as we've given you back in February, is that we were hoping we'd be very pleased if we were somewhere in the 45,000 to 55,000 range. Didn't know that we could get to 60,000 patients. I think we're looking more realistically at the high 40,000s, maybe 50,000 would be my best guidance for you on the pharmacy. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: So that would be by when? By the end of this year or?

Yes, by the end of the calendar year '13. And then, I'll let Mike talk about the acquisition target increase and then, we can come back around and I can talk to you about U.K. and Spain and go from there.

Okay. Yes, Lisa, I don't think our view has changed about the opportunities around the world. We continue to see opportunities in many, many markets, including the U.S. So I think when you look at that $500 million, we'll continue to close deals in the European theater, Latin America, Asia and the U.S. In the U.S., obviously, it will be more on the expanded services side of the business in terms of opportunities there. And there'll also be opportunities both in terms of services, as well as products opportunities on the acquisition.

Yes, Lisa, I would just add, we've got a product acquisition that we're looking at in Asia Pacific that should close yet this year. I think Mike mentioned that. Nothing huge, but things that we like and that we think makes sense. So we're trying to be as opportunistic as we can. And then, U.K. and Spain, what I would tell you, if you remember when we talked about Spain, we had some tenders that we had not been able to get into there. You lose some, you win some. Well, lately, we're winning more than we're losing, so we're feeling better about that, particularly, on the product side and even, we're seeing some nice progression on our service side. So I think we've seen a nice turnaround there. The U.K. I'm not sure has changed so much. I don't think the dynamics there, where we're seeing more hospital-based provision of service versus being done in stand-alone clinics, if you will, we're not sure that, that has changed appreciably since the last time that we spoke.

There are no further questions at this time. I'll turn the conference back over to Mr. Maier for any closing comments.

Great. Thank you so much. We really appreciate you guys joining for the second quarter call, and looking forward talking to you next time. Thank you so much.

Ladies and gentlemen, that now concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.