Fresenius Medical Care AG & Co. KGaA (FMS) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I'm Stuart your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Call on the Second Quarter 2018. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.

Thank you, Stuart. We would like to welcome all of you to the Fresenius Medical Care earnings call for the second quarter 2018. We really appreciate you joining on such a hot summer day. As always, I'm happy to start out the call by mentioning our cautionary language that is in our Safe Harbor statement, as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents, as well as to our SEC filings. In the previous quarter it turned out to be a good approach to limit the number of questions to two. If there are further questions, we are happy to go a second round. I hope this works for everyone. With us today is Rice Powell, our CEO and Chairman of the Management Board. Rice will give you a business update, go through some of the highlights of the quarter of course also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours.

Thank you, Dominik. Good morning. Good afternoon to everyone. We appreciate you're joining with us today. Let's go to Slide 4 and I'll begin my prepared remarks, if you will. We're on track to achieve our 2018 targets. Q2 is a good quarter and is an improvement from Q1 and we continue to see progress quarter-to-quarter and we will continue that through the back half of the year. As you can see on Slide 4, we had 3% growth for all of our three key measures that we share with you our clinics, patients and treatments and our quality remains on a consistently high level. And if you turn to Slide 5, you can see that we're performing at a very high level in our clinics. You see the number of key indicators that we measure ourselves against and you can see it spread out across the regions. I'm not going to make more commentary on that, if you have any questions I'm happy to take those during this Q&A. Now turning to Slide 6. What are the highlights for Q2? Not a highlight, but a fact. The results continue to be impacted by strong currency headwinds. We've had solid organic growth across the board. Congratulations to the North American products business, they continue to have a very strong performance and each of the regions performed well, in their product franchises and they made progress in their service franchises as well. Care Coordination margin improvement and revenue decline came in as expected. In the quarter, our margin for Care Coordination is 6.7% and we'll have some more color to give you on that during the Q&A and during Mike's presentation. Calcimimetics; they continue to evolve. As you remember, we're moving from Part D in David to Part B in Barry. Pharmacy to the clinics. We believe that we're probably two quarters in to two to four quarter process in order to get this sorted out with great clarity in detail. Let's keep in mind that this is a medical decision, it's an algorithm based on focusing to the highest outcomes for our patients and this is a titration, our step up situation where we start with low doses and move up overtime in a very safe and effective way as determined by our patients physicians. We had a very efficient divestment of Sound. I know that a number of you have some questions on the gain and Mike will be happy to take you through those detail, but we're glad to have this accomplished and behind us. In the ESRD Prospective Payment System draft rule for 2019 came out on July 11 about 10 days later than we thought it would, but that's okay. It came out with a proposed increase of 1.7%. I personally felt, we'd lot more favorable discussion about that, little disappointed that we didn't talk more about it, since it was such an overhang going into it, but we'll take it and we'll see where we end up in the early days of November as we move to the final draft. Now turning to Slide 7. I won't cover this slide. What Mike and I wanted to do was to give you a reconciliation document that you could look at, as we go through today's call. This originally was in I think Slide 30. It was in the backup so we wanted to move it forward. So you have it, hopefully you can look at it as you need to. I will make my commentary on Slide 8, if you will. For the second quarter, our net income growth came as we expected. Yes you will notice that there are three views or looks on revenue. Three on EBIT and three on net income. We are consistent, if nothing else. I will speak to the comparable basis. So you can see constant currency growth on the revenue on a comparable basis at 5%. We're looking at EBIT on a comparable basis at 4% constant currency and then when you look at net income on the comparable basis line, we're up 22%. Now little more commentary here. Obviously the very large gain that you see has got the sound divestment in there. We back that out and that gives us the 22% and then we've also taken out the tax savings effect if you will and you're looking at net income adjusted at 6% in the quarter. Looking at H1 which we're not really going to talk about, but we are 7%, so just wanted to give you that color as to how the net income has unfolded over the course of Q2. Now if we turn to Slide 9, looking at the organic growth across the regions, everybody had a hand in progressing over Q1 into Q2. You can see the numbers I'm not going to read them to you, other than to say Latin America has done a very nice job at 10%, constant currency and you can see the contributions from the other folks. And I will say it just to give you a reminder North America growth is impacted by the currency headwinds and obviously the lower expectations that we had for Care Coordination revenue. If we turn to Slide 10 looking at or our organic growth as I'm not likely to want to do is take you through each of these numbers. We've laid them out for you as you can see, I would just simply say for North America. I think it's important to note, that if you look at the dialysis care revenue that's buried in some of the other schedules we have for you, that's up 4% on a constant currency basis, then if we exclude IFRS 15 and the VA, you see 7% constant currency basis in our core business and I think that is worth noting. I also think it's important that we just take a look and see how well Care Coordination in Asia Pacific is doing about 20% of that is acquisition, the other 12 is organic and we're happy with both those numbers. And with that I think will move on and I'm sure we'll have some question-and-answer dialog on some of the other pieces on this particular slide. Now turning to products. Solid growth continues. Let's go back and just let me make the comment that Mike and I guided you to 6% growth in the dialysis products for 2018 and we look to be right on schedule here. As you can see 6% constant currency growth. Again North America at 10% is doing quite well. EMEA, Asia Pacific are doing well. Latin America is down at 2% constant currency, but let's give them some credit. In Q1, 2018 they were 25% constant currency growth and exiting Q4, 2017 they were 15%. So I think we'll give them a little bit of slow down here in Q2, see what the remaining quarters bring us. I won't go through the details on the product mix, if you will across the regions if you have questions on that. Feel free to ask me and I'm happy to give you some more color, if you like. Slide 12, in conclusion. We've solid underlying business growth. Yes we're going to have to accelerate our growth in the second half. We forecasted and we expect that to happen. I would say the products franchise is moving solidly to delivering on what we have said they would and the services businesses are accelerating around the globe, so we feel good about what we have to do. We'll be busy. We have work to do, but it would not be the first time that the second half of a year has been very busy for us. We still believe the next stage closing is on track for the second half of this year. You've seen from our press release that we extended the merger agreement out 90 days, we moved it from August 7 to November 5 and we believe that's a viable timeframe for us to see a closure of this business. We continue to work with SEC. I'm sure you'll have some Q&A on this and we're happy to speak to it there. So I would leave you with the fact that we're on track to deliver on our revenue and net income growth targets and with this, I'll turn it over to Mike.

Thanks Rice and hi, everybody. So continuing on Chart 14 and again using the format that we started last quarter, just to give you a sense of revenue growth and this would be on a comparable basis, year-over-year. I'll talk about that further, but you know we made some adjustment to the base period to make this comparable. So you can see we've reflected €131 million as an adjustment to the prior year revenue figures to put last year on a consistent basis with regard to IFRS 15. This gets you to a base of €4,340 million. Very small adjustment in the second quarter related to the translational effects of the VA settlement and we had 5% constant currency business growth in the quarter roughly €200 million, which is consistent with our overall guidance for the year. And then lastly you can see the currency headwinds that we're facing with the €320 million adjustment or about 7% in the quarter. Turning to Chart 15 and now looking at net income growth with the two views that we've been describing at the top of the page. It's the net income as reported on a comparable basis. We guided for the full year at 13% to 15% and when we look at the quarter's performance you can see the business growth of €58 million which gets us to constant currency growth rate in the quarter of 22%, a little bit above what we've guided to for the year. This includes obviously the tax effect associated with US tax reform on 2018 earnings and it reflects the currency developments we've seen in the quarter. In addition you're seeing the net effect associated with the sale of Sound's in the second quarter and closure of that transaction. I'll come back and talk about that in little bit more detail when I talk about North American [ph] margin development. The view on the bottom of the chart considers the 2017 base earnings of the €1,204 million. This was adjusted as you know for matters that we considered last year. The most important effect on a quarter-to-date basis were for the second quarters the VA adjustment that we made in the first half of 2017. Continuing you can see the business growth at €17 million roughly 6% constant currency growth, just a little bit shy of what we've guided to for the year. And you see this coupled with 8% growth excluding special items in Q1. So on a first six months basis, we're still on track with our guidance at 7%. Currency effects of €18 million and the divestiture gain as I mentioned before and as I'll cover in more detail in a few moments. So turning to Chart 16 and looking at the development of our margins on a regional basis. I would just say overall in terms of our global margins what you've seen excluding IFRS 15 and the VA settlement as well as the gain associated with Care Coordination activities. Our margins overall were nearly flat at 13.5% compared to 13.6% in the second quarter of 2017. Now when you move into the regional developments you can see in North America. Operating income was up €316 million to a €1,286 million in the quarter. Obviously this is a consequence of the gain associated with the Sound divestiture which was €833 million. This gain is slightly higher than what we announced back in June. The principal element is driving the change are an increase due to the cumulative foreign currency considerations probably offset by a trueup of the net working capital as of the closing day. Excluding this gain, our margins were 15.2% essentially unchanged from a comparable period last year. Our dialysis business operating margins decreased 110 basis points and excluding the - and considering the implementation of IFRS 15 and the VA agreement the margins decreased by 170 basis points. Lower revenue per treatment from commercial payers. High implicit price concessions which as you know is the new term under IFRS 15 for what you anticipate you collect with regard to your billing arrangements on the services side of the business. The implementation of the PAMA oral-only or the Calcimimetics. A small cost increase in property and other occupancy costs and these were partly offset by lower cost for healthcare supplies. Adjusted for the implementation of the VA agreement and IFRS 15, revenue per treatment increased by $13 from $341 per treatment to $354. Cost per treatment increased by $14 from $272 to $286. As I discussed in our Q1 call, we will see some volatility and the development of Calcimimetics over the year, which I why I guided revenue and cost per treatment in the US net of this effect. I indicated we expected the operating earnings effect of Calcimimetics on a net basis to be around $1 loss for the year. I'm continuing to indicate that as our expectation for 2018. So our guidance still holds. We expect revenue per treatment will be flat to slightly down for the year and cost per treatment will be flat to slightly up excluding Calcimimetics. Talking about the Care Coordination margins for North America. You can see in some of the supplemental material we've provided obviously a substantial increase. This reflects the gain again associated with our Care Coordination activities. Beyond that change, the margin has improved in the second quarter both year-over-year and sequentially. This was driven by the prior effect associated with the valuation of our subsidiary share based compensation. It was driven by our pharmacy services in the current year. The implementation partly offset by the implementation of the Calcimimetics. Lower bad debt and the effective reimbursement for our cardio vascular and endovascular businesses. While we're discussing Care Coordination, I would comment that with the sale of Sound. I would revise the indication that I gave you in February for the year. That Sound in the figures, I indicated our Care Coordination globally the revenues were declined from 4% to 6%. This was being principally driven by the change in Calcimimetics as well as generics at Elmer [ph]. Now that Sound has been divested I would indicate our revenue growth would reflect the decline of 9% to 11%. But then our margin should improve from the 7% to 9% we indicated in February to I would say at this point in time, high single-digit to low teens in terms of margins in Care Coordination globally for the year. Turning to Chart 17 and looking at the profile of our other geographic regions. For EMEA, operating income was down €8 million or about 7% both in current and constant currency. Margins decreased from 17.6% to 16.1%. This was principally driven by lower income from equity method investees, higher personnel costs in certain countries and increase in bad debt partly offset by favorable effect of foreign translation. In Asia Pacific our operating income was unchanged at €78 million, it's up 3% in constant currency. The margins were impacted by the unfavorable effects associated with foreign currency transaction and some increased cost related to our business growth in the region partly offset by translation effects. Care Coordination margins in Asia Pacific improved from 9.1% to 11.8% obviously positively impacted by our continued the continued development of the Cura acquisition that we accomplished last year. Latin America operating income was slightly down from by €1 million, with our margins untainted [ph] at 6.8% and this was essentially a loss of higher bad debt expense which was nearly offset by currency translation impacts. Turning to Chart 18, looking at cash flows. The cash flow in the second quarter was very strong, but compared to cash flows in the prior year it has been effected by payment delays especially by increased accounts receivable related to the additional of Calcimimetics and underlying this we also had a reduction in our DSOs which was larger in the second quarter of 2017 than the comparable period in 2018 for North America, which favors last year's cash flow from operations and we had an increase in DSOs in our international business which created a small headwind in the second quarter of 2018. But the result once again is still very strong cash flows as a percentage of revenues at 15.6% for the quarter. Turning to Chart 19 and touching on our Global Efficiency Program. We indicated that we would update you twice a year on this. We continue to make progress in fiscal 2018. Our goal is to generate, continuous to generate sustained savings of at least €100 million by the end of 2020 with an upside potential of up to €200 million. We have launched the projects in the organization and I'm very proud of how the employees around the world are working together to contribute to the initiatives you see on the page. We're advancing with the program. I had indicated earlier in the year that I anticipated our sustained savings that we generate in fiscal 2018, would like be offset by implementation cost that continues to be the case. I will provide an update in February with regard to progress we're making and particularly of you towards what we would expect in fiscal 2019 in this area. So with that I would turn to Page 20 which is the basis for our targets with regard to the continuation of fiscal 2018. And very similar to the chart that Rice showed that did not discuss in detail at the beginning which related to the second quarter, this shows you the impact for each of the things we guided to, both revenues and net income on a comparable basis as well as revenues and net income on an adjusted basis. So you see for 2017, we continue to carry the impact of IFRS 15 on last year's numbers that figure is unchanged, but we've now added the fact that with the sale of Sound in June we've adjusted the base period to make it comparable to our expectations for the full year taking out about €559 million of Sound's revenues for the back half of 2017 and on that basis, we're continuing to confirm our guidance in the range of 5% to 7% constant currency for the year. With regard to net income, you see a similar adjustment to the base period for Sound of €38 million to come up with a new baseline for net income on a comparable basis of €1,242 million and we're confirming our expected growth of 13% to 15% constant currency and then net income as adjusted you see, the impacts associated all of the elements from the prior year including tax reform to get to an operational level of earnings guidance of growth of 7% to 9% which we are also confirming for the fiscal year. So turning to Page 21, now more or less explain detail of the basis for the numbers that we're confirming on the page. For convenience what you see now on the right hand side of the page, is the new adjusted base for fiscal 2017. We're continuing to indicate that our targets for 2020 are unchanged, but as is explained in the footnote, we recognize that we have yet to close the next stage transaction. We have now developed - Sound and we also have the longer term impacts associated with the tax reform in the US, that will influence these numbers as we move forward. I would add just a couple of more detailed updates with regard to our guidance, that came up in our Q&A in February call. I had guided to interest for the year, in the range of €320 million to €340 million. I would just slightly adjust that guidance impart as a consequence of the proceeds we've received on the Sound transaction and I would revise that guidance to €310 million to €330 million, so a $10 million [ph] change off the top and the bottom of the range. And I would just indicate, we had a favorable effect associated with the Sound transaction from a tax rate perspective, so the underlying tax rate I would indicate is, our range is unchanged 23% to 25% but I would tell you we're probably leaning more towards the low end of that range as we come into the back half of the year. So with that I would open it up - I'll turn it back to Dominik and we can open it up for questions.

Mike, thank you for the presentation. I hope you have pre-answered already a couple of these questions and with that. I'm happy to open the Q&A for more insights now and so Stuart, can you open the Q&A, please.

[Operator Instructions] the first question is from Tom Jones from Berenberg. Please go ahead, sir.

I do indeed have just two questions, one for Mike and one for Rice. Firstly for Mike, I was just wondering if you could just try and tease out little bit more for us what the underlying IX [ph] Calcimimetics revenue per treatment growth was in Q2 and remind sort of was in Q1. I'm just trying to get a sense of what you need to do in H2 to get to kind of flat to slightly down revenue per treatment on an underlying basis for the full year and perhaps what the key swing factors in H2 might be in that regard. And then question for Rice, on the Medicare rate proposal, the rate obviously looked reasonable this period much better than it had in recent years, but my questions was more on the potential methodology for drug add-ons going forward, whether you got any comments in terms of methodology that CMS seems to be proposing that. It seems to be aimed at the HIF inhibitors specifically. So on that topic, kind of wondered what your general thoughts around the HIF inhibitor space are at the moment and how you might see those getting folded in your business, if and when they become available.

Sure, Tom I'll grab the first one. No I was very transparent in the first quarter so I'll do the same this quarter. So when you look at the influence of Calcimimetics in Q2 and these are rounded numbers because obviously if I said I've got about $1 friction that can get lost in the rounding. But in the quarter Calcimimetics was worth about $16 for both revenue and cost per treatment rounded. And that would give you roughly $13 revenue and cost per treatment for the half year. And just to remind you, Q1 was about $11 per treatment. So we saw a bit of an uptick in the second quarter, but we still because of the volatility I'm more focused on the earnings estimate and that's why I guided for both revenues and costs excluding costs. I think that's helpful.

Sure.

Tom, its Rice. Relative to the potential methodologies. I guess I'd have two comments, one is I think everybody is rushing the HIF's along at warp speed. I just don't think we're going to be looking at them getting approved as early as some other people do and having said that, it doesn't mean we shouldn't be thinking about the methodology and how that's going to work. I would tell you that, this Calcimimetics to Dapa [ph] thing that we went through was not well work out if you will, when it first came out. We felt like there was lot of information that could have been more forthcoming, so we've kind of layered that end of discussions we've had with certain pieces of CMS. So we're still kind of working on that, but we would like to have a little smoother process that we had going around on this first one. So let me stay tuned on that and we can chat about it, probably next year or whenever you like.

Fair enough.

The next question is from the line of Veronika Dubajova from Goldman Sachs. Please go ahead ma'am.

I'll keep it two. My first one is, Mike just curious about the margin for Europe as you think about the second half. Clearly there's some one-time impact around Vifor JV but I'd like to understand some of the investments that you're making into the business and what they might mean for margin. So if you can give us some color on that, that would be helpful. My second question is actually for Rice, if you can give us an update on where you are with ESCOs and related to that, I'm going to throw in just the two legislatives Acts in US which is the Patients Act and maybe the MS Peak ascension [ph]. What your expectations for timing on both of those, that would be great?

Veronika, I think if I look at this big picture. I don't see - I think we're going to continue to invest in the business in the back half with regard to the markets that we're continuing to expand to on the Vifor - Fresenius Medical Care joint venture. So I would say, I'd expect margins to continue, there's - the cost associated with the Vifor developments is really the ramp related to the Veltassa developments in EMEA [ph] that's helpful.

So Veronika, ESCOs so we're sitting in a place today where we're roughly at about 41,000 patients in the ESCOs which we've been there for most of the quarter. We could see that going up a little bit potentially, but I think the better part of your question and answer is, we don't really see this going up expontentially if you will at any significant degree until we get release from CMS or CMMI that they're going to allow us to add more locations beyond the 24 we had today or they could do, what they did this year, which is to say, keep your 24 locations but we'll let you open up each of those locations or select locations of the 24 to grow. So we're going to have to kind of see where that goes, we're prepared and ready to continue growing, but we're going to have some understanding and some cooperation from CMMI on how they want to approach that. Now looking at the Patients Act, is the last time I think talked with you we got I believe I want to say something like 156 members of the house that have signed onto the Bill from the senate side I think we're nine or 10 senators have signed on. But I think realistically from a timing standpoint obviously this is reached opinion with mid-term elections coming on, the first over the Supreme Court. I think we've really got to find the vehicle to attach this Bill to, that could yet happen this year, but if not I would think it would be very likely we could see that coming in the beginning of 2019, but at this point I just don't see a standalone Patients Act getting done by itself as you well know that rarely ever happens. It's going to ride on another Bill and I just don't know how much focus we're going to get out of the senate at this particular point in time, with everything that we've got going on. We'll have to see where it goes. And on the MSP extension, so MSP extension is in the house Bill paying for the opioid [ph] crisis as you know. The senate has not put a bill together yet, we hear that's going to be worked on in the remainder of the year, we don't know what they're going to do about MSP in their specific Bill. But my guess would be, once they get their Bill done and then go to committee members of both houses come together, will have a better idea of where this may go, but at this point don't know how to take the handicap that since we haven't seen it, the senate take up a Bill that would have the opioid [ph] situation in there and we don't really know what they would when MSP just yet. We're obviously proud. We'd like to see that, that we're going to have to see what those two bodies do over the course of the remainder of the year.

Okay, sounds fair. Thank you both very much.

Next question is from the line of Patrick Wood of Bank of America. Please go ahead sir.

I just have a couple, if I can. The first would be on the capitated rates MA. I mean I know it's a tiny market at the moment, but I'm just thinking long-term going forward. I've seen some rumblings from insurers, but if you will I'm sure they do, would that be increased unfairly the capitation rate that they're given by CMS. I'm just wondering how you expect that MA rate to have rolled as that pool of MA dialysis patients potentially grows over the coming years, that would be the first one. And the second one is a little bit more short-term, just wondering you guys were obviously very confident about this in terms of the investment. Should we be thinking about incremental investment within California given that Bill is on the ballot and if you have any update also on the side of that on SB 1156, that would be helpful. Just getting color on those two that would be great.

Okay, Patrick what I would say on the capitated rates with the Medicare Advantage there's probably never a time that I see the insurers are happy when it comes to things like these, but when we look out into the future. I think there is going to be a lot of time and room for discussion on how we structure this. I don't think there is a well-established play book at this particular moment in time as to where this is going to go, but as you all know as we come into January 2020. One with Cures Act what's going to happen there, this is all going kind of come together, so we need to be very focused and active next year in 2019 trying to work through these things and see where they're going to go, but I don't know that I can really give you a good handicap or direction as to where it would go at this point in time. Looking at California, so what I would tell you at this point and I've said this before we've budgeted money to defend ourselves and to try to defend our patients if you will. We have not put any of that in our guidance, we feel like we can manage the situation but should it come to a place that we think we have to ramp up our spin such it would actually impact our guidance, we would obviously can't tell you that, but we're not there at this point in time. When you look at the Senate Bill 156. We're obviously trying to educate people about this, we're trying to get them to understand both in the general, public if you will and then really in the legislative halls that this is a real discrimination against patients that need premium assistance. It is too close to call just as the ballot initiative today is too close to call, we're watching and working daily. This is an industry wide set of activities that are going on, but I don't know that I can really handicap it for you right now. I think it's going to take some more time to see where we are, but rest assured we are active and busy each and every day with these two topics.

Smashing. Thank you for the color guys.

Next question is from the line of Lisa Clive from Bernstein. Please go ahead ma'am.

Two questions. First question or rather a clarification on the bundled rate rebase. So just to be clear the 2019 CMS rate proposal that was published earlier also included a rewaiting of the dialysis market basket to reflect a more updated clinic cost structure. This does effectively factor in much lower equal pricing now that you've had Mircera in the market. Correct, I'm just trying to understand because I think there's lingering concerns that CMS could have scope for another clawback and so I'm trying to understand if that risk has been largely mitigated as lower drug cost haven't been factored in now, but it was offset largely by higher wages and whether that's just the right way of looking at it. And then the second, is that the presentation mentioned lower reimbursement for cardiovascular and endovascular services. is this a new round of cuts newer in the process of transitioning the ambulatory surgery centers, how is that going and is that sort of incremental headwind to some of your Care Coordination activities?

So Lisa how about I take one and Mike, if you would take two. We think you're looking at this the right way, we do think that there's been some benefit of data if you will based on where we are and RESA [ph] usage and how that's worked through our system. So we think you are looking at the way we do similarly and as you know, as I made rounds earlier this year and I've talked to people and they ask me about the clawback and when it come, I pushed it out a couple years and I typically said, more is got to happen, i.e. Retocris [ph] got to come, some other things need to come. If we're really going to affect this to a point that there needs to be a big rebase and I think people are heartening back to 2013. Well as for next year and the way we look at that Lisa, I would agree with the way you're approaching that.

And Lisa on your second question, there is - we're not seeing any significant change over the reimbursement rates. It's more associated with the ASE [ph] conversions and the timing associated with getting the approvals from the state inspectors on those and the rates we're seeing in the national - the NCP side of the business, if that's helpful.

I'm just - follow-up on the NCP rates, is this temporary issue or are you just seeing lower rates going forward?

I think the rates are if I think in terms of fiscal 2018, we may see a little bit more as we finish up this year and then that should stabilize in 2019.

Yes, we're fairly active talking about rates with folks, but you don't move that both very quickly but we do have ability to get in and complaint if you will and try to understand why they think it should be the way it is, but I think Mike's right. We're not going to change that trajectory probably in the next five months or what's left in this year.

Okay, thank you very much.

The next question is from the line of Ed Ridley-Day from Redburn. Please go ahead sir.

First with clarification on your guidance for Care Coordination revenue, now that Sound has been divested. Just to confirm the 9% to 11% decline that is effectively and still including the big performance in the first half not a pro forma guidance. Secondly on the margin in Europe which we already made some comments on. Can you give more color on the staffing pressures where the staffing pressures are coming? And the balance of the pressure there between the investment you've just got and your increased staffing pressure. Thank you.

Okay, I'm going to jump ahead of Mike. He's got to look something up real quick, Ed. Yes, so what the European margin pressure from a staffing standpoint really comes from two countries Romania and Hungary. In the case of Romania, that was a decision we as a company made that there should be some adjustment in nursing compensation if you will. In the case of Hungary that was more dictated by the government which we don't really get to opt out of, as you can imagine but those were the primary drivers in Eastern Europe [indiscernible].

Yes and Ed just coming back to on the first question. I just wanted to clarify because when you said pro forma the 9% to 11% is the full year guidance associated with Care Coordination excluding Sound, but we made the same adjustment in terms of our margin expectations that we did for the revenues and the earnings. We adjusted the base period, the second half of last year for the Sound effect.

Okay, just [indiscernible]. Okay, thank you.

The next question is from the line of Gunnar Romer from Deutsche Bank. Please go ahead.

Gunnar Romer, Deutsche Bank. Thanks for taking my questions. The first one would be in cost per treatment quite a nice development quarter-over-quarter. I think down $7 if you exclude the Calcimimetics step up. I'm just wondering where they had some comments here on what's been driving and that decline. And then secondly on corporate cost, you keep on trailing significantly below what you indicated at the start of the year. Just curious whether you're still in the position to confirm that guidance and what should drive the increase in the back half of the year. Thanks.

Thanks Gunnar. On cost per treatment I think and I may have commented I'd say at $60,000 [ph] fee that's reduced medical supply cost that are offsetting some of our property increase and alike and I'd say balanced labor cost. So no extra ordinary developments on the labor cost side is driving that. On corporate cost, we're just thinking yes I think we'll just confirm our indication on corporate cost for the year.

Next question is from the line of Tom Jones from Berenberg. Please go ahead sir.

Thanks for taking me again. I've had a couple of some more general follow-up questions on your Asia Pac business actually. The first was just the difference in the organic and the constant currency revenue growth rate in Q2, there was only 5 percentage point difference. Just wondered, what you divested, but more specifically why and whether that represents a change of strategy perhaps in Asia Pac or it's just a bit of portfolio trend. And then some [indiscernible] you really mentioned investments in growth in China, but you didn't say much more. I was just wondering if you could expand on what you're doing in that particular market at the moment.

Sure. So let me take two Tom and we'll come back up to one and then I'll let Mike handle that. So in China I'd say there's two places where we're seeing investment one is we're putting production capability in for PD. We have been servicing the PD market in Asia Pacific out of EMEA and obviously that gives us some transaction concern. So to put it in country, we think it makes sense so there's some investment that will come into there and as you all know when you put production capacity in a factory you got to have volume and you got to give really get ramping in order to get your most ideal cost and so we try to give you a heads-up, that will some impact as we go through the next quarters. And then we've also put more people on the ground in China relative to helping us with our sales and business development and things of that nature. So it's just really us putting more resource into that particular country as we continue to go through the remainder of this year going in the next year. and as I've talked before back on the production side of this, we don't know when we don't think it's a matter of if, we think it's when we might be looking at an amount of content and our products must be local in China, so we think we need to get ahead of that, as we done in other regions over the years.

So Tom on your first question, just to help me out. Were you talking revenue or EBIT?

It was on the revenue number.

On the revenue number, and organic versus constant currency?

Yes, it was 0.2% constant currency in the dialysis Care business this is, in Asia Pac and 4.8% on an organic basis.

Yes, okay fine. Yes what's driving that is we did have some consolidation activity in some divestitures in India which we anticipate that business is going to continue to grow for us. So it's a little bit of a timing issue with regard to the second quarter.

Yes, I think our peak we were at 51 or 52 clinics and we're down around 40 now because they were in some locations, didn't make sense and were kind of rebounce in the portfolio but that number will come back, but that's Mike, spot on.

Okay, so no significant changes strategy, just a bit of portfolio juggling, you said.

That's right.

Perfect.

People in the ground no better than Mike and I, so we're listening to them.

And if I can just roughly slip one more cheeky question in. on PD products, you haven't launched much in terms of new meaningful upgrades since the [indiscernible]. And for memory you had a JV with I think it was a Swiss, sort of design house and then if my memory goes back even further you were working on some sorbent dialysis stuff, is there anything you can add obviously without giving away too much competitively about your product pipeline in the PD space?

Sure and you're correct, your memory serves you well and the Liberty cycle has really been focused in North America, we have a Salencia [ph] cycler little bit different, it's in the rest of the world that's only one you missed. Yes the JV with Debiotech is still underway it's been a little harder than we thought it would be for some of the clinical things that we're being asked to provide, but we're continue to work on that and it's coming, it will be there and then on the sorbent side of this. We have good confidence in our cartridge. It's working really well. We're less happy with what we see on the hardware side, but we're working on that. We've got some plans. I don't think [indiscernible] probably much more than that. But we've got some new members that are coming into the family here down the road that they've got some great ideas about where they might can help us, so I'll leave at that.

I think no one else getting more on that.

Good, so we have no further question. I'll hand it over to Stuart and we say thank you for participating in the call and have a great summer.

Thanks everybody. [Indiscernible] sales be safe. See you in the fall.

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