Fresenius Medical Care AG & Co. KGaA (FMS) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I am Hailey, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Release on the Fourth Quarter and Full Year 2019 Results. 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.

Thank you, Hailey. We would like to welcome all of you to the Fresenius Medical Care earnings call for the fourth quarter and full year 2019. We appreciate you joining today. We did surprise you with an early publication yesterday evening, which was solely triggered by a technical issue. I do apologize for keeping you at the offices late last night.Now it is my very big pleasure, as always, 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 have distributed yesterday. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings.With us today is, of course, Rice Powell, our CEO and Chairman of the Management Board. Rice will give you some more color around the strategy and the recent business developments and goes through some of the major topics of the quarter. With us today, for the very first time is Helen Giza, our new 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. Hello everyone. It’s great to have you with us today. I'd like to especially welcome Helen, she's been with us since November 1st. And she keeps coming back every day. So it's a good thing. Helen will give you a financial update and she's going to present on how we are approaching simplification of our disclosures and our outlook for 2020. And I'll share with you my prepared remarks from the overall business and the development in Q4 and full year 2019. And let's start my prepared remarks on Slide 3. First and foremost, I want to point out to you that we delivered on our guidance for 2019. Yes, we had significant headwinds that were impossible to anticipate at the time that we gave you guidance. But the negative effects of the ESCO is a great example of something that really did come out of the blue for us that we've dealt with.We did compensate all of this year where we were focused on investments in home dialysis and our growth markets. We stuck to the plan to invest in '19 in order to reap the benefits in the future years. And we'll talk some more about that. We had a very strong performance in our underlying business throughout the year, as well as our costs and efficiency initiatives ran quite well over the course of 2019.In the fourth quarter, we delivered 5% adjusted revenue growth. We have solid contributions from all of the regions in the growth category if you will. And is as is our custom, we are proposing the 23rd consecutive dividend increase. We will propose that for the annual meeting in May of this year. And we are confirming our guidance for the financial year 2020. More to come on that in Helen's piece of the presentation.Moving to Slide 4, I won't spend a lot of time on this you see the growth categories across clinics, patients, and treatments. We continue to expand our infrastructure and education efforts to increase the number of treatments that we performed in the home setting. You'll see some more on that later. And as always, we operate at the highest level of quality that we possibly can. And I'll touch on that in the slide here in just a moment.Moving to Slide 5, we just want to come back and ground you that the organic growth drivers in this business remain intact. We expect 6% growth rates to continue over the next years and we still believe in 2025 we will be just of 5 million patients on dialysis. And you can see the breakout of the regions as we usually show you. I will not read those to you off of the charts.Moving to Slide 6, a little more information on home. Beyond these developing economies that we've been focused on, as we say at our home initiative that we started back in 2016. We are making great progress. At the end of 2019, Home Dialysis accounted for 13% of all treatments in the U.S. This corresponds to an increase of 100 bps compared to 2018. The number of home treatments grew by 17% year on year. And by 2022, we aim for more than 15% of all dialysis treatments in the U.S. in a home setting. And we believe we're well on track to achieve this target.As we announced in 2018, the investments in our home training facilities, educational staff and materials in addition with the scale off for the distribution infrastructure that supports both home products and services. It was a clear focus of our 2019 capital allocation. And we aim to increase awareness for early recognition of chronic kidney disease in order to try to have a smoother transition for our patients into dialysis as we possibly can.Turning to Slide 8 and looking at our quality indicators. As you look at these, there's consistency in all of the regions from quarter to quarter. I do want to point out I was asked earlier today about this. Why would you see hospital days at 10.3 in the U.S. versus 4.3 in Latin America or 2.3 in Asia-Pacific. And as we talked about this over days, and days past, we have very good complete consistent data in North America and EMEA, and we're very comfortable with those days. We do know in Latin America, as well as in the Asia-Pacific region not all patients have a chance to be hospitalized is not as well established a system, if you will. So there are some gaps in the data. But nonetheless, we give you what we have, in order to give you some sense of what the trends look like. I think the key thing here is we are making progress in the hospitalization days and trying to reduce them as we go through time.Now turning to Slide 9. In the introduction, I mentioned that we delivered on a full year 2019 guidance. I think two developments I'd like to make note worthy. Revenue growth and our guidance definition reached 5%, which is exactly in the midpoint of the guidance that we've given you. And in the Q2 and Q3 earnings call, we guided to you that the adjusted net income would come into the low end of our guidance, and as we had predicted it in fact did.Turning to Slide 10. Looking at the fourth quarter story, it was a good story for us. The growth trends are continuing if you look at revenue and net income and Q4 contributed to our overall achievement for the full year. Our growth story continued with organic growth of 5% resulting in a 4% increase in adjusted revenues at constant currency and adjusted net income was stable on a constant currency basis as well.Turning to Slide 11. And beginning we look at the regional discussion. Each region contributed to the strong organic growth of 5% in the fourth quarter. The highest contributions in absolute terms came from North America with a solid 3% revenue growth at constant currency and from Asia-Pacific with a strong 7%.I'd like to take a moment, going to go off script for just a moment and make a comment about the coronavirus situation in China. We are totally focused on making sure that we can continue to treat our patients in China as well as support our employees through what is a very, very difficult time. We are unable at this point today to try to give you any kind of quantification of what this event or these events may mean for us economically at this point in time.As we have a better idea we'll communicate that, but it would be pure speculation for us at this point to try to give you any sense of that will refrain from it. But have you know that we continue to be focused on those things that we can do to help our patients our employees in this difficult time.We saw solid growth in Europe, Middle East and Africa, and a very strong increase in Latin America, which as usual Latin America somewhat driven and has a tailwind from the high inflation adjusters that we see in many of those markets from time-to-time. Looking on Slide 12, and focusing on the fourth quarter and healthcare services. In the U.S., the same market growth again, performed nicely, we're at 3.4%.As you know that in the backup in the detail, but I think it's worth noting that I don't like to round down I like to just tell you the way it is or 3.4% in the quarter. As you know, the development in the region was somewhat negatively impacted by the increased adjustment for accounts receivables and a legal dispute. Helen will walk you through that in some detail if you have questions on it. So there's some new difficult is here. But nonetheless, we're still proud of 3.4%. EMEA services saw organic growth of 5% in the quarter, and the Asia Pacific growth was supported by Dallas's care and their care coordination business.Now turning to Slide 13, and two products for the quarter. Our continued growth in the products business for the fourth quarter. North America had an excellent performance of 16%. The core product business delivered 4% organic growth and when you consider that they were working off of a high base from the prior year. We also had some negative impact from IFRS 16. It's phenomenal what they were able to get accomplished. And obviously, the NxStage acquisition has been the help for us in the home hemo dialysis product sector as well.EMEA grew 2% on a reported basis as well as on an organic basis. So they continue to do well. Asia Pacific delivered 6% growth. And as we said, Latin America 15% on an organic basis, and obviously there is an inflation adjustment having an impact there.Moving to Slide 14. I've already mentioned this, we will propose a new record dividend of €1.20 at the AGM in May. It's our 23rd consecutive dividend. And if you look at a growth CAGR over the last five years, we're right at 10.7% and 10.8% in that return. We will deliver the dividend continuity despite our investment year in 2019 and also to create additional shareholder value. As you well know, we launched the share buyback program in 2019. Up until June of 2020, we will repurchase shares and the total amount of about €1 billion. Between March and December 2019, 8.9 million shares have been bought back at a total purchase price of approximately €600.Moving to Slide 15, global sustainability. We've met with a number of investors over the past 12 to 18 months where we had very lengthy discussions about environmental, social and governance activities. This topic comes up quite a bit. For that reason, I want to spend a minute update you on the implementation of Fresenius Medical Care's global sustainability program. We have set up a very comprehensive global sustainability initiative that reports directly to me. In the first phase, we will be focusing on developing for the identified eight materiality areas, management concepts and policies, as well as setting up the required reporting infrastructure to collect comparable and consistent data throughout our global organization, reminding you that we have 42 factories around the world. We sell products in 150 countries provide service in 50 markets. And yes, we operate 4000 clinics approximately around the world.So we have a lot of data at our fingertips, but we have to get at it in a consistent, readable, actionable way. And that's what this structure will bring us as we go forward. Once we've completed the activity, then we'll be able to assess and set targets for the key performance indicators that will take us into the next phase of our program on environmental and social governance.Turning to Slide 16, which is my last slide. After an investment year in 2019, we plan to deliver profit growth in 2020. With our profitable investments in the expansion of home dialysis, the optimization of our clinic network in the United States, and the further expansion of our footprint in developing economies we believe that we've laid the foundation for further sustainable profitable growth on a global basis.We continue to look forward to more clarification on the details of the President's Executive Order for the U.S. We want to ensure that we can capture benefits from that executive order for our patients and for our shareholders.The same is true for the Medicare Advantage opportunity which will come in 2021. Many of you will have questions about this we will try to answer what we can and will also give you a calendar of events that I think will explain to you our thinking as we go through the course of the year into next year.And at this point, it's my pleasure to turn the reins over to Helen.

Thank you, Rice. Good morning or afternoon ladies and gentlemen. It's my pleasure to be here today, having been appointed in November of 2019. This is my first earnings call with all of you and I look forward to many, many more to come. Let me start my first presentation as a new CFO with some color on my priorities, focus and approach to simplification.Slide 18 outlines my key priorities. One of the first priorities is to simplify our guidance going forward. There's a vast level of financial detail that we provide and that has created the impression that the business has many moving parts, which is not the case. Therefore, I would like to simplify the message moving forward. I know that reducing the level of complexity goes hand in hand with less data points. But that is management's job to make educated estimates and provide guidance to you.Another priority for me is that we deliver on our savings targets for our global efficiency programs. We plan to achieve €150 million to €200 million sustained savings by the end of 2020. We achieved savings around 40% in the first two program years, and we expect the remaining 60% of savings potential to be realized in 2020, which marks the third and final year of our program.As Rice mentioned, with regards to our share buyback program. We are on track at the end of last week, we had bought back a volume of close to 9 million shares for a total amount of €608 million. Naturally, capital allocation is a key focus for me. Balancing the triangle between investing and future growth, deleveraging and direct return to shareholders is critically important. We have and we'll continue to work hard to deliver high quality products and services around the globe. And at the same time, we will further optimize our working capital and enhanced cash flow from operations.Let's move with very high level statements to a very detailed look at our regional performance in Q4 on Slide 19. Start with North America, Rice has already outlined the revenue perspective and I will focus on the earning side. I won't walk you through all the drivers on the side, but I will highlight a couple. On the positive side we had a tailwind from customer metrics also in Q4, which most likely doesn't surprise anyone and care coordination was not impacted by an ESCO write back, like in the previous two quarters. And we had a positive contribution from a divestiture care coordination activities.On the negative side, after reviewing the adjustments made in Q3, we have taken a further provision for accounts receivable and legal dispute. Based on this approach, I do not expect this topic to reoccur. Additionally, we have seen the expected ramp up of our spend of our cost optimization program in North America, which negatively impacted the margin on a reported basis.I move on to Slide 20 to have a look at the other 3 regions. Based on solid top-line results, we felt in all of our regions we achieved a margin improvement in Q4 in EMEA and Latin America. Due to investments and current in future growth in our services business in Asia Pacific, such as starting up new clinics, we saw a decline in the margin in this quarter. Let me sum up the regional developments to you on Slide 21.As announced in 2018 and mentioned by Rice earlier 2019 was an investment year. The investment year was complemented by our cost optimization program, which had the main portion of spend in Q4. Therefore, our operating income remained basically stable on a reported basis at €616 million. If we look at the adjusted basis, which also excludes the cost optimization program the effects of the NxStage acquisition and the IFRS 16 implementation, our operating profit was up by 3% and stable at constant currency at €655 million.I've outlined some of the positive and negative contributors to this development already on the regional side and in the interest of time I won't repeat those. So let's move on to Slide 22, the operating cash flow increase in Q4 as well as for the full year is driven the implementation of IFRS 16 leading to a reclassification of the repayment portion when to financing activities. Operating cash flow was negatively impacted by settlement payments of pension plans in the United States.On a quarterly comparison you see that we have improved from 16.2% to 16.8% of revenue. CapEx increased slightly by $36 million reflecting a higher spend on our clinical network. Free cash flow was $434 million is substantially better than last year. And lastly when you look at the leverage ratio on the bottom left on the page, excluding IFRS 16 leverage is at 2.5 times up from 1.8 times at the end of 2018, this was mainly due to the NxStage acquisition and including the IFRS 16 impact was 3.2 times net debt to EBITDA.We turn to page 23, in the material we published last night, you've already saw that we confirmed our targets for 2020. As per the guidance that was issued in February 2019. It's important to outline that this is true for the definition we had a slide back in February of last year. Our target is to achieve mid-to high-single digit growth both in terms of revenue and net income at constant currency. We've received a lot of pushbacks due to the complexity of this definition applied to our target setting and the corresponding reporting.What you see on this slide is the previously communicated basis for 2020 and the effect we excluded in order to make the business performance comparable. Following the request from simplification from many of you we have decided to cleanup and reduce the complexity of how we report going forward.For our new reporting approach, from now on, we will include the effects of NxStage operations and the effects from IFRS 16. We have intensively communicated in the past year the order of magnitude of each of the impacts on 2020. This now results in less moving parts to track the year as we move forward.As we move to slide 24, to be fully transparent, you see here a reconciliation from our previously communicated target basis to our simplified approach of including the negative effect from IFRS 16 and NxStage operations. Turning to slide 25, here you can see the simplified targets on a constant currency basis. The only exclusion that we reserve to make is with special items. They're are unusual in nature and not foreseeable in size or impact today.Some have asked if we shouldn't narrow the range or upgrade guidance given that some of the headwinds that we faced last year should not that reoccur this year. Please be aware that there are also sizable headwinds that we need to take into account such as significantly lower operating income contribution from customer metrics and lowest saving rates in now ESCO just to name two.We also need to take into account that we handle around 50 countries in services and around 150 in products. Therefore there may be some more moving parts and varying healthcare systems to be taken into account than for other players in the healthcare or med tech sector. For those reasons, I prefer we stick to our guidance at this point in time.And with that, I'll turn it back to Dominik.

Thank you, Helen. Thank you, Rice for the presentation. It is our custom to limit the number of questions to two in order to give everyone the chance to ask questions. Please note 2AB3 we are a bit limited in time today, but if there's time left and there are further questions, we are more than happy to go a second round. I hope this works for everyone.I'm happy to turn it over to Q&A. Haley, could you please open the line?

Thank you. Ladies and gentlemen, at this time we'll begin the question and answer session. [Operator Instructions]. And the first question comes from the line of Veronika Dubajova of Goldman Sachs.

I'll limit myself to two. My first question is on the guidance and is it fairly wide range Helen as you remarked. It'd be great to hear from both you and Rice of how you feel at this stage, your degree of confidence at the high versus the low end of the guidance? Is it high both ends at higher one of the parts, if you can just help us think through wearing within that guidance range, you feel most comfortable and confident that would be helpful?And then my second question is on Medicare Advantage. And I'm be curious to get your thoughts on the data that CMS before so a couple of weeks ago, which was showing me penetration was going up to 33% in 2021 and then up to 42% in the medium-term. Based on your sense for the market and the patience, is that seem reasonable to you. And how are you thinking about that opportunity, as you move towards 2021? And more importantly, the summer enrollment period? Thank you.

I think we'll have Helen take your first question and since you've asked me to take your scond one, I'll gladly do that. But Helen go ahead.

Thanks, Veronika. We feel very comfortable with our guidance of mid to high-single-digit, we don't feel that way need to narrow that guidance or peg ourselves at one end of that at this time? So we feel that's appropriate guidance for us at this time of the year.

And on your second question Veronika relative to the Medicare advantage. I am aware, I did see the correspondence on the high percentages that I think are they are 33% and 21% and 42%, I think it is in 22%. What we're looking at this is we will get our best idea of what's going to happen here in the fourth quarter enrollment period. And so I think it's very likely that we'll be sitting in this room this time next year, having been able to tally fourth quarter enrollment. And give you a sense of what we're seeing.We certainly expect that there'll be growth there's no question there. But right now with the curve speculation try to understand and we think we have to let the enrollment in the fourth quarter open enrollment inform us of what we're seeing and where we're going to go from there. But we will continue to stay close to CMS and talk with them as we move through time. But the ball will really get rolling in the open enrollment period in fourth quarter.

Thank you for that Rice. I guess DaVita has made maybe somewhat cautious statements on how quickly they think NA will be taken up in the ESRD patient population. Do you share those views? Or are you thinking about it slightly differently?

I guess there'll never be a call that we don't.

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

Hi, thanks a lot for taking my question. So the first one is also Medicare Advantage. So with which becomes more present. Could you describe your combination of health insurance about higher respective reimbursement in the future. I mean, just in general open to accept some higher rates in the context as you can treat those patients more holistic, which again, eventually reduce hospitalization rates.My second question is on dialysis productive growth rates for next year. Could you give us an ication whether you expect some uptake of underlying product growth rates following the generalization of the NxStage acquisition? Whereas the significant share of process you consume for yourself. So I expect to still pick up the momentum of this underlying group of NxStage? Or do you basically absorb or grow from NxStage to fuel your own home strategy and dialysis service?I don't hear anything.

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

Good afternoon. Can you hear me okay? This is problems on the line. I can't hear anything. All have had the same problem I think. Hello operator. Anybody? Hello?

Ladies and gentlemen we apologize for the pause in the presentation. Please remain online.[Technical Difficulty]We will now resume with the Q&A. The next question comes from Tom Jones with Berenberg. Please go ahead.

Thanks for taking my questions. I'm happy to drop out if Oliver wants to follow up, but maybe I'll ask two questions first, and he can come back to because I think he got cut off as well. One question for you on home dialysis. We tend to think of this is as U.S. opportunity. But I was just wondering now, one year on how you're thinking about the international opportunity in home dialysis.And may be a question for Helen. It would be helpful for you to kind of drill down to the extent that you're willing to on the North American EBIT margin, although the EBIT performance in North America. I mean, if you take the revenue adjustment and one off gains from the care coordination side of the equation. It was an exceptionally strong Q4 performance. So it would be intriguing to know kind of what shifted between Q3 and Q4 to drive such a solid performance in Q4, and how much of that was kind of one off and how much of that might well carry on into 2020?

Sure Tom. Let me apologize. We were getting music on our side of the equation, it is actually pretty nice music, but we couldn't hear anything else. So I'm beginning to worry about the coincidence of last night what happened and tonight, so we'll have to figure this out, but home dialysis internationally. So I think there's going to be growth there, I think it is clearly going to come in a little bit different way. And what I mean by that Tom is we know now in some of the emerging markets in Asia Pacific.They are starting what they call PD first therapy, meaning that if you're going to go on dialysis, Malaysia, Thailand, couple of places like that, they're going to put you on PD, because they don't have an infrastructure to build their own set of clinics, they're not willing to let us come in as a private company and do it. And so there's going to be growth, because that's the only mechanism they're going to allow is putting people on PD.Now we'll share in that, because obviously we have PD products et cetera. But it's a little disheartening only from the sense that therapy is not going to be great for everybody. We have done the integration in Europe of NxStage working through the distributor network they had and getting our people here on board with that. I would say the one thing that you have to understand is that we've done quite well with home hemodialysis in EMEA using current equipment that we have. They were able to adapt one of the in-center machines and it works quite well.So I think we're going to see international growth. I think Asia will go quicker. As a developing market, as I said. I'll remind you that we have a very high percent of patients treated at home in Hong Kong, which people don't generally recognize about 40% are treated at home. Australia's been in the 25%, 30% range for quite a while. But I think there's such a large concentration of patients in the U.S., it will lead the charge, if you will and probably be the most visible, particularly given the executive order and what we see the U.S. government wanting to try to do.

That makes sense. And on the North American business?

So on a reported basis, as you likely point out. We did have a negative effect for the revenue recognition adjustments for the accounts receivable in legal disputes. We also were impacted by the cost optimization costs from some higher personnel expenses as well as the effective on a reported basis NxStage of course. But on the positive side, we really are seeing as we've already alluded to some really strong underlying business performance. We got the favorable impact from higher customer metrics the world as well as some benefit from a margin from prior year effect. But we feel really pretty good about the underlying business here in North America.

Tom, I would add that we continue to see good progress in the commercial mix, you look at our same market growth. It was strong. So I would say many of the things that we told you we had to work on and we wouldn't work on going back '18. The benefits are there and we're feeling good about that.

Good. That's very clear. I'll jump back in the queue.

You bet.

The question comes from the line of Oliver Metzger of Commerzbank. Please go ahead.

Hi, thanks for taking my questions. Not sure what happens but I'll ask them again. It's about the first on Medicare Advantage. Now visibility becomes more present. So could you describe your conversations of paid insurances about respective compensation structure future. Are they open to accept in general a higher reimbursement rate in the context of you can treat patients more holistic, which at the end might lead us to lower hospitalization rates. So how are these discussions.My second question is on dialysis productive growth rates for next year. NxStage will annualize basically you absorb some meaningful share of growth from NxStage. So the number you've indicated over recent quarters to which extent this will add to product growth rates to yourself basically everything growth to boost your own home dialysis services business.

Okay, Oliver, let me take your first question. And I'll let, Helen take your second question. And I'll chime in if necessary. So what I would say is we had and we're having conversations with the providers in the Medicare Advantage world. I think they understand what we're capable of doing and trying to deliver lower hospital days and driving better outcomes we understand they want at a rate that works for them.So I would tell you, I think that the discussion that negotiation will be what it's always been. Who gives me the highest level of care, the fewest hospital days to better control my patients, and we want to do it at a fair rate. So I would say there's not been a big change in the dynamics of this conversation as we go through when we look at Medicare Advantage come January 1 of 2021. I think we'll have the same dynamics we had. We're very comfortable with our capability and what we offer people. And we'll see how that how that plays out.

Yeah, hi, Oliver. On NxStage, we were reminded this morning that today marks the one year anniversary of closing NxStage. So what do you think about '19 over '20 you have 10.5 months in '19 versus 12 months and next -- and 12 months in 2020. Excuse me. We will not be reporting NxStage separate moving forward that obviously now is part of our North America business. And it's included in our guidance of mid to high single digits.

Okay. Thank you very much.

The next question comes from the line of Sebastian Walker of UBS. Please go ahead.

Hi. Thanks for taking question. I'm going to try my luck with three quick ones. So first, just calcimimetics, I was wondering whether you could quantify the operating income impact in 2019 and what you'd expect to 2020. And the second one is how should we think about care coordination of profitability and growth for 2020. And then the last one is just on home penetration. The 15% plus target in 2022 doesn't seem particularly aggressive. Do you think that you could achieve a materially higher penetration rate? Thanks.

Sebastian. Hi, it's I'm okay that you asked three because couple of them are going to be quick answers. On the calcimimetics, we're not going to give you that detail. It's unfortunate that one of our competitors did, but that doesn't mean we have to. So we're going to pass on that one respectively.When you look at care coordination growth, I think what I would characterize this with is we are seeing what we had hoped to see. Meaning that we're seeing improvement in the vascular access care reimbursement rates. We've seen the conversion of the Slide 11 facility to the ASC, where there's better opportunity to perform more procedures that's working as well, in a retail pharmacy continues to work well. I think those are probably some of the key things Helen, anything else you want to add?

No.

And then on the home penetration? I'll let you talk to the guys that are running the whole program. They may take exception with how easy you think this 15% is, I'm just joking. Look, we set up the 15% goal back in 2017. So could we overachieve that yes, we probably can? Are we going to be at 40%, I don't think so? So here's the way we look at it, we're going to push to the 15. And if we think we're going to get by that will communicate that with you. Unless you know where we are. It is clearly our goal to do more than 15% at home. So stay tuned on that one. And let's get to the 15 first, and then we'll go to the next iteration from there.

And just a follow-up within care coordination. I guess could you make comments on how you discussions around ESCOs are going whether we should expect any further write downs? Yes, just anything that would be helpful.

So I think two things. No, we don't expect further write downs at this point. And I know, I've been pretty vociferous about my unhappiness with some of the things in the ESCO program. The new CMMI head, Brad Smith has been on board now for about three to four weeks. We will be seeing, if we can get in to see him in the next couple of weeks and have a chat with him and see kind of where they are with some of the commentary that we've been giving them. And some of the questions we've been asking in all fairness. We have to let him get his feet on the ground and get started. But we're going to continue to push on that until they tell me I can't come back. And they haven't done that yet. So we're just keep working the issue.

The next question comes from Michael Jungling of Morgan Stanley.

I have two questions. Firstly, on the 2020 guidance, more question for Helen, does the guidance include any sort of unusual items or unusual gains, for instance, last year, I think we had Xenios in there that stood out in the end that it was sort of planned as part of the guidance. So is there anything in there that you can guide to that is perhaps quite large single in nature?And then question number two, the at home dialysis and when you think we'll get some indication how CMS will want to provide an incremental incentive or the structure of home dialysis to be able to deliver on the presidential order for greater home dialysis? Thank you.

I'll take the first one. Our 2020 guidance does not include any unusual or large items, as you saw from our simplified guidance moving forward, it does exclude special items. So nothing of one-time or big that's planned in 2020.

Michael, on the executive order, kind of stage my answer this way. We're still in discussions as an industry with CMS and the government about the commentary that we laid into them relative to the structure, the architecture of what they want to try to do particularly in the mandatory model. I think we're going to have to get out of that discussion with them where they're going to go when is this going to happen? And then we can start trying to figure out well is there going to be incremental reimbursement? What's going to potentially come for that? I think it's we got to do the first part before we even get to the second part. But I will say that we have actively as an industry had dialogue, there's been back and forth. We just have not received anything that said, Okay, here's the next iteration of plan if you will, or pilot, whatever you want to call it. So we're going to kind of stay tuned on that a little bit.

Okay, thank you. And maybe a quick question on NxStage. Where do you see probability for NxStage in 2020? I recognize you don't want to disclose separately, but we had a material loss on EBIT in '19. Shall we expect a lower loss next year even a profit in NxStage? Just directionally please.

We don't get that guidance separately, moving forward, Michael. When we publish the guidance for NxStage, and we did the acquisition that we said it would return to profitability by the end of year three. Bear in mind that this is now just the end of year one.

Yeah, I would say with what we laid out for you at that particular point in time. And, Michael we announced that beyond '17 we all think well gee aren't you at year three, and the reality is actually no, we're just now at year one at this point the anniversary day.

Next question is from James Vane-Tempest of Jeffries. Please go ahead.

Yes, hi. Thanks for taking my questions. Two if I can, please. In 2022, I mean if you're looking for around 15% plus in home care. If there was 100 basis points improvements in that last year. And this is an increasing focus for you. What do you think would need to happen to get there a year early. I mean, it's a limiting factor on developing home care develops here for equipment or staffing, education, payers or just something else. If you give us a sense in terms of what could potentially cause that to accelerate. I recognize you're going to throw sort of less when you get to the 15%. Just wanted to understand the levers there.And then relating about to the organic growth drivers of 6% patient growth or just under 5 million patients in 2025. How do you also think about balancing the need for kind of new clinics versus this ample opportunity from a CapEx perspective? Thank you.

James, hi, it's Rice. So here's what I would say. Looking at how we've approached and been able to achieve the growth we've seen today. The biggest piece of that comes down to our staffing and having the people on board to train and educate the patients that want to go home and they're coming into the system to go through the training. In terms of equipment, we're able to scale that up. Obviously, we can't just scale ad infinitum. But at this point, I think to try to move it up a year, if you will. I think we could manage things that need to be done in that case. But remember no matter how much I want, or how much [indiscernible] who runs North America one, it really does come down to that conversation between patient and physician. And are they willing to go into the training? Do they want to do the training? And then it sort of starts there or and we go from that standpoint.But I would say we made the infrastructure investments in '19. We think we are good for the moment. But if we were going to try to really jump another income, like, we'd have to go back and just simply look at what's it going to take to be able to do that.6% organic growth '20, or 5 million patients in 2025. What's your trade off on clinics versus home? I think as we've always said that we are at a very high utilization rate in our clinics. We have modeled, that what do our clinic de novo activities need to look like if we go out over the next couple of years, and we're going to have a need for clinics all the way out into the 2030s before we would begin to see where do we go from there. I think what you're going to find is we will always be in a mode and there'll be clinics that will get closed over time, because they're in the wrong area.Maybe they don't fit the profile, where we need to be. But I think we will have less de novo clinics being built. But I think we'll manage the portfolio in a way that we can close out clinics, we can transfer patients. And it should give you some sense of comfort that the cost optimization program did exactly that over the course of 2019. So I think we can manage that. It's in our control if you will as to how we pick and choose to go forward. And we have planned in most of those details is we were contemplating the acquisition.

The next question is from Patrick Wood of Bank of America.

I have two questions please. The first would be on the wage inflation side. I'm hearing that the market is reasonably tight for a lot of starts in the U.S. Just curious as to kind of what you guys are seeing, do you feel is about the same will get worse or better, just a little bit of color on the cost based on our side will be quite helpful?And on the second side and maybe there's spread out of it now. But it used to be the case that some of the commercial insurance contracts would sort of bunch up and come up for renewal at a relatively similar time. I'm just curious next year, do we have any of the larger contracts up for renewal or is it more the year after? I'm just where are we up to on that side of things? Thank you.

Patrick, it's Rice. So on wage inflation. There's no question, we're at the lowest unemployment rate in the U.S., they've seen in the last 30, 40 years. Now as you relate that back to nurses and what are we seeing? It is somewhat of a tight market. We made a shift in our thinking last year, meaning that we were more geared in '18 and part of '19 to hiring new nurses inexperienced, if you will. And we found through looking at that very closely that you end up having them cost you more money than the experienced nurses, because of the training time they need.And so we've kind of gone the other way now where we're happy to pay for experienced nurses, they don't have the out of clinic training time, things of that nature. But you got to manage that turnover in a very, very effective way. So we need lower attrition, and that's what we're trying to work toward. We have budgeted still around that 3% inflation. We've always tried to manage that at 2.5. I think the clinic operators will tell you it may be a little bit higher on average to do that. But there is no question. There's a tight market there.Now looking at commercial contract renewals, I would tell you we probably got one large coming due in this year in 2020. I don't think, there's more than that the regionals will still be as they always are in the fourth quarter, if I'm wrong on that we will communicate with you, but I think I'm pretty well, I think I'm correct. We got one big one coming soon.

The next question is from Ed Ridley-Day of Redburn.

A couple of follow-up questions. First of all, calcimimetics. I appreciate you may not want to be bothered most of the winter. But could we at least say that the trend that they have spoken to is something that you would be aligned with. And then Helen on receivables accounting. Thank you for the clarity that you've given on that. And indeed, the overall clarity that you wish to bring to guidance will be welcomed. However, on the receivables it clearly, first of all, insurance will continue through few claims. So I just want to make sure that what exactly have you changed internally to make sure in terms of accounting that you will not need to make further adjustments such as you have the last two quarters going forward?

So it's Rice. Okay, so you wore me down? Here's what I would say. Yes, we are in agreement with DaVita that calcimimetics are a headwind for this year. There's no question that will be the case. And we highlighted that to you in the third quarter that it would be a headwind and it certainly is. We have dealt with that, it's one of the negatives that we have dealt with in the guidance that Helen has given you for 2020. And again you know the moving parts it's how many patients are on [indiscernible] how many patients are on the other generics, et cetera. I don't think we need to run through all of those dynamics other than to say yes, it's a headwind we tried to deal with it as best we know how. And I'll turn it over to Helen for some more receivable discussion?

Yeah, thanks Ed. Maybe I can give you, add some more color to what's changed between Q3 and Q4. As you as you're aware, we did take an adjustment on revenue recognition for accounts receivable in legal disputes in Q3. And as we went into Q4, we became aware of some recoupment from previously paid services with the same payer that way the legal disputes would. So Q3 was more on the open AR. And what we taken in Q4 is a look back on closed AR but things that are now being recouped. We needed to take a look at the statute of limitations associated with this payer so that we could take the right reserve on a backward look regardless of whether the claim had been paid or not. So since Q3, we are, you asked what are we doing to make this not happen? Since Q3, we're recognizing revenue on a much lower level moving forward. But obviously since this is in litigation, we do we feel our arguments are strong to achieve a favorable outcome. However, resolution might take multiyears. So we feel that we've taken the appropriate response -- appropriate accruals both forward looking and backward. It's now in litigation. So I can't comment too much more on that. And we'll see what the outcome will be in the future.

Thank you. That's, that's very helpful. And just squeeze in a final question. On ESCOs absolutely appreciate that you don't expect any kind of reversals but speaking to the channel our understanding is that given obviously, Medicare, recalcitrance/intransigence probably around break even on where we are now. Do you expect that in 2021 or do you think potentially given the lack of movement there, that it could be a headwind to profitability for the care coordination business this year.

Well, I think Ed, what we'd say is we are still waiting on third quarter reports for year three, those haven't come through yet. Now, I actually take that as a little bit of a positive that they are listening to me complain, and we're going back and forth on it. But I think we kind of need that to have a little bit better sense. I really don't want to speculate or layout future thoughts on that when we haven't gotten the report. So stay tuned on that we're going to be sitting here in May doing our Q1. And so we'll see where we are, we can talk then, how about that.

Next question comes from Christoph Gretler of Credit Suisse. Please go ahead.

Yes Rice hi, Helen. Welcome in. First of all, just wanted to ask I think it was a great idea, it's actually released earnings yesterday evening. So we can over could properly prepare, because today was a very heavy results. So I appreciate that actually that mistake in a real bit respect to the questions. I just wanted to quickly check in or whether you could provide some guidance on how we should expect the phasing of your earnings growth now, as the year progresses now. And then maybe also some housekeeping questions, if you could provide some guidance on in our tax rate financials and corporate costs, in particular that seem to be jumping around? That would be great.

So Christoph relative to phasing our earnings, we really don't lay through that kind of information. Obviously, we plan and we look at that. But I don't think it's in our best interest to kind of lay that level of detail out for you. We've never done that. I think historically that generally first quarter is a little weaker for us. And it sort of builds as you go through the year. But we really haven't tried to do quarter-to-quarter phasing and communicate that or first half versus back half. So I think I'll leave it at that. And then on the tax rate, you are way outside my comfort zone. That over to Helen, if she has a comment on that.

Hi, Chris. I'm happy to take the housekeeping questions. So on tax, we're guiding 24% to 26% consistent with last year, but not on an adjusted basis. So I think that's important to understand that it's now 24 to 26. On you asked about corporate costs, so guidance is 450 million to 470 million, and then on financing costs our guidance is 400 million to 420 million.

The next question comes from the line of David Adlington of JP Morgan.

So maybe two, maybe three questions. So just on the headwinds, these points towards was in last year into calcimimetics and ESCO clearly managed to offset those. I just wondered what levers you pulled in order to offset those headwinds?Secondly, I mean, just on the ESCO, if you don't reach those satisfactory conclusion, with your discussions with CMS. Just wondering what happens to the user base goes into the what happens as we go into next year. And what do you call that program?And then thirdly, just bigger picture is, as you've come in, got your feet on desk. Just wonder what your biggest surprises both on the upside and the downside have been? Thank you.

David, it's Rice, I'll take one and two and let Helen say, number three. So, the headwinds, how do we deal with them? I would say this is clearly as I can. Our team is doing a great job and the fundamentals in the business, particularly in North America. From where they've been what they're doing today, they've improved greatly things that we told you, we had to work on and fix we have done. And I'm very proud of that. When I look at where Asia Pacific is driving the growth curve, it's trying to take advantage of their opportunities. And Europe, Middle East and Africa really dug down and they've done a good job.So I would tell you, we dealt with headwinds through operational efficiency. And people really being able to dig in and do the things that they needed to do region-to-region to improve, because they're not all exactly the same type of thing that they need to do. Relative to ESCOs and if that doesn't turn out favorably for us. I think, I said this to you in the third quarter, we're very unlikely to want to participate in any further voluntary models, if we just can't get some level of transparency and satisfaction there. And I still think that's the discussion I will have if it comes to that.Now, specifically you asked what happens to the ESCOs or where we go. And that's a conversation that we will need to have with the government. I think if you go through and get into the details of the executive order, particularly the voluntary models. They were trying to figure out, is there a follow on for the U.S. where do you go. So we'll continue to have those discussions and work on that. And we'll see where it goes. We will certainly not abandon those patients. So we'll continue to treat them. It's a matter of where they fit and what part of our business if you will portfolio or the end, it's value based care. I believe in it. We want to keep them there. So let's hope on the positive side that we come to a conclusion it's going to work for us in that respect. And Helen.

Yeah, Thanks, Rice. David, I think for me it's definitely one of focus for us to 2020 we have some strong momentum. We know all about pluses and minuses and headwinds and tailwinds that we're trying to manage. And I think it's very competent in the underlying business trends. So I think for me, it's one of focus delivering on our plans, continuing to have strong communication and collaboration with all of our business units, and having the visibility and transparency into that, and staying close to it and kind of staying close to our main key KPIs. And, reacting early once we see how things continue to progress as we go through the quarters. But I think this is really a year where we deliver on what we say we're going to do.

Next question comes from the line of Falko Friedrichs of Deutsche Bank. Please go ahead.

Thank you. Two questions, please, for me. Firstly, can you give an update on the current patient mix in terms of any potential changes and if you're happy with where it currently is? And secondly, on China. Can you give an update on your expansion activities and whether they are progressing in line with your thinking.

Yes Falko. So on patient mix help me a little bit here. Are you U.S. focused? Exactly. Can you give me just a little more clarity so I can direct my answer the right way?

Yes, in the U.S., please.

Okay. So what I would tell you is we are seeing improvement in our commercial mix. It's within the range of movement in a bips or basis point movements that we would expect. We are making some progress there and we feel good about that. Then beyond that, the our Medicare Advantage book of business is stable. Obviously, it will change as we go into next year, but right now where it's stable, and then we're managing our Medicare book. So we're comfortable with where we are, I think we've fixed the processes that we needed to fix, particularly in the commercial book to make sure we're getting our fair share of opportunity.So I think we feel good about that. And we monitor that each and every month. And we look at it in close detail. As far as the expansion in China, what I would say is we are still in process in our factory work. Generally our factories particularly if it's where we're making dialyzers and certain types of products, you don't just expand them overnight. And we're still in that process. We tend to bring these things up. Sometimes what I call sectionally there are pieces, we have to do infrastructure first before we get to the finish lines in the equipment, things of that nature.And then we are continuing in our acquisition of small hospitals to be able to go into a region get to understand the dynamic in the region, the number of dialysis patients and treat them in the hospital. And then at some point moved to freestanding clinics and where they are today at about 11, I believe freestanding clinics. So I think we're on track there. So obviously we've got a headwind here to deal with with coronavirus. And we're doing that the most important thing for us in return in regards to that is healthy patients, healthy employees, making sure we're taking care of them and getting everybody back to work when the government's going to allow that travel to happen, and then to move about the country freely.

We unfortunately have been running out of time, but everyone has a chance to ask at least one question. So unfortunately, I apologize. There's no time for the second round. But before we close this, let me make a short advertisement and mention that we will have our Capital Market Day on 8th of October this year in Frankfurt, and it will be great to see many of you joining us in autumn. And with this, we actually have to close the call and say thank you for participating in the call and have a great time.

Take care of everybody. Everybody be safe.

Thanks everyone. Bye-bye.

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