Fresenius Medical Care AG & Co. KGaA (FMS) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Call on the Second Quarter 2020 Results. [Operator Instructions]. I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.

Thank you, Emma. We would like to welcome all of you to the Fresenius Medicare earnings call for the second quarter of 2020. We appreciate you joining today despite the markets being a bit in turmoil today. 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 we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. We will be hosting a virtual Capital Market Day on October 8 and hope all of you sign up for it. In preparation for this event, we will pause all nonmandatory capital market communication until our CMD. Therefore, please use the opportunity today to ask your questions. [Operator Instructions]. It would be great if we could make this work again this time. 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 business development and go through some of the major topics of the quarter. And of course, also with us is Helen Giza, 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. Hello, everyone. It's great to have you with us today. I do very much appreciate your interest in Fresenius Medical Care. I also hope that you and your families are all very safe and very healthy. Please allow me to recognize the tireless efforts of our employees, both in and outside our clinics, and the dedication that is required to ensure that our patients receive their lifesaving dialysis treatments in a safe, clean environment with the high quality that they have come to expect from Fresenius Medical Care. I cannot thank our employees enough. But for them, where would we be? As Dominik said, he is joining -- leading today from Bad Homburg, Helen is in Chicago, and I am in Boston. And it does appear that this virtual world that we're living in is becoming somewhat of a new normal. Let's hope that fades quickly. Turning to Slide 4, please. Our strong performance in the second quarter and the first half of this year proves that our core value proposition and the resilience of our business model is well-founded. We are grounded in our vertical integration strategy, and we will continue to do so. Our solid revenue growth did continue in the quarter. We had no support from exchange rates, and yet we achieved a 5% top line growth, and we'll share some of the details with you in due course of the presentation. Our net income was significantly up on a group level due to a great underlying business performance in our diversified global footprint. We had to manage quite different challenges caused by COVID-19 and our regional organizations. The approaches by the various governments and the impacts on our business are varied from region to region. We saw an exceptionally positive cash flow. Helen will give you more background on this in her prepared remarks. From what we know today about the pandemic and that we're able to mitigate the net impacts of the pandemic on our business for these first 6 months of the year, we confirm our targets for 2020, also including the anticipated effects of COVID-19. A topic most of you have interest in is the proposed ESRD prospective payment system draft guidance. The rate from CMS has an increase of 1.8% for 2021. We are confident that CMS is taking a steady approach with regard to Medicare reimbursement, and this is broadly in line with the expectations that we had for this draft proposal. Calcimimetics will be included in the bundle next year and now we must wait until the fall to see what the final rule for 2021 will bring us. We do expect, as usual, there'll be some small changes relative to adjusted inflations of that basket and things of that nature, ASP will have some impact. And we will see that most probably in the very first days of November. Moving to Slide 5. I'd like to first give you a brief update on the impact of COVID-19 on the business. As mentioned, we saw the pandemic continuing to spread globally. The wide-ranging measures that we took at a very early stage to ensure the continuity and quality of care for our patients continues to bode well for Fresenius Medical Care. We were able to maintain operations in our more than 4,000 dialysis clinics worldwide without significant interruption and to minimize the impact on our staff and patients. This was made possible, thanks to the use of telehealth solutions, which were used where necessary in order to replace in-person experiences with the virtual experience. The pandemic has affected our business in several different ways. The COVID-19 pandemic affected people with advanced kidney disease. The severity of this illness generated an increase in hospitalizations and slightly higher mortality for those that were infected with the virus. In addition, the pandemic caused an interruption in our routine medical visits and necessary hospitalizations for many patients with advanced CKD moving into end-stage renal disease and treatment. These 2 factors have impacted the year-on-year growth for the second quarter. In the Asia Pacific region, postponement of elective procedures due to the pandemic, impacted the Care Coordination business in Australia. Our Cura clinics are one of the examples where we saw a sizable impact on the business with little to no help from the local governments. On the other hand, we saw that the pandemic increases the interest and awareness for home dialysis, and we'll talk more about our strategic approach to home and what we're seeing through the second quarter. Turning to Slide 6. We did continue to grow robustly in the quarter. In the first half, we provided more than 26.5 million treatments to approximately 348,000 patients and more than 4,000 clinics worldwide. The rather low growth of our clinical infrastructure is the result of a strong focus on home as well as the effect of closed and sold clinics in Asia Pacific, which we discussed in the previous quarter, Q1. Moving to Slide 7. Quality patient care is the most important factor in our business, and it is a top priority of our sustainability agenda for 2020 -- in 2020 and beyond. We are committed to provide the best possible outcomes for our patients on a worldwide basis. I'd like to focus on one of the KPIs that is the number of days patients have spent in the hospital. You see some improvement as we go across these numbers. We'll have to see what the future quarters bring, but we are happy and pleased that we are able to make some contribution through fewer hospital days relative to cost to health care systems around the world. Turning to Slide 8. We did see solid revenue growth and exceptionally strong income growth in the second quarter. Revenue grew by 5% with solid organic growth of 4.4%. We delivered both in the services business and the products business. Our operational strength continued despite the impact of COVID-19. Operating income increased by 26% and net income by 38%. Based on a strong underlying business performance, the increase was largely due to the recovery of COVID-19-related negative effects that we experienced in the first quarter, and our ongoing cost saving measures contributed to our ability to overcome this. Helen has more detail for you in her prepared remarks. Turning to Slide 9. Even during the pandemic, we achieved an overall organic growth of more than 4%. We had strong contributions from North America at 4% and EMEA at 7%. In the Asia Pacific region, we saw muted development due to the mentioned negative impact of COVID-19 in the Care Coordination business in Australia. Now turning to Slide 10 and looking at the services business. We delivered robust growth in our Health Care Services business despite COVID-19, and this is because of our global footprint and our early implementation of pandemic procedures. Overall, the increase in revenue was supported by solid organic growth. We saw a higher number of COVID treatments that were provided in hospitals, some delays in referrals and a slightly higher mortality rate. This had an impact on the development for the same market treatment growth, which was at 2%, a bit lower than first quarter. In North America, growth in both Dialysis Services and Care Coordination contributed to 6% revenue increase. We had a significant step-up in the Care Coordination business that we'll talk about later in the day. In EMEA, we realized a solid organic and same market growth resulting in 4% constant currency growth. The postponement of elective procedures due to the pandemic resulted in a negative organic growth rate in Care Coordination in Asia Pacific. The effect of closed and sold clinics technically was more pronounced and impacted the organic growth in Dialysis Care. If you'll turn to Slide 11, it's my final slide. The products business continued to deliver very solid reported growth. The overall revenue increase amounted to 6%. It was mainly driven by higher sales of acute products in North America and in Europe, Middle East and Africa as well as higher sales of our in-center disposables. This was partially offset by lower sales of in-center machines in Asia Pacific and North America. Revenue from Non-Dialysis Products increased significantly year-on-year, mainly due to higher sales of our Novalung machine, which can be used to treat COVID-19 patients while they are in the intensive care unit. This is the conclusion of my prepared remarks, and it's my pleasure to turn it over to Helen.

Thank you, Rice. Hi, everyone, and a warm welcome from Chicago. I hope you're all doing well and staying safe and healthy in these unprecedented times. Rice has already outlined the solid revenue development. I will focus my comments on giving you more flavor on the earnings side. I know we said it already, but I want to reinforce that we delivered a very positive earnings development from our underlying business in combination with our ongoing cost saving measures. Some other factors, like phasing or recovery, helped the second quarter to be exceptional. Before I spend time on the second quarter, considering the interest in the COVID-19-related impacts on our business, today, I'm going to start with a consolidated H1 view of our operating income development. I think this gives a clearer picture of the full impact and will avoid misinterpretation or the wrong conclusions being drawn. We have explained in our Q1 earnings call that we experienced a negative COVID-19 impact of around €40 million net income, resulting from increased direct costs and negative net valuation effects, and that we expected some of this to reverse when we applied the CARES Act funding in Q2. There is no question that all of our regions are incurring increased costs and negative impact due to COVID-19, which continued in Q2, also amplified by the impact of -- on our Care Coordination business in Asia Pacific that Rice already mentioned. The direct eligible expenses in the U.S. are mitigated by the CARES Act funding, including the temporary sequestration relief. Due to the quicker-than-expected recovery of global economic conditions in Q2, we have seen the impact on net valuation effects also improved in the second quarter. This, along with our ongoing cost saving measures, has helped us mitigate on a group level, the full impact of COVID-19-related direct and indirect impact in the first 6 months. So how does that translate into the numbers? In the bar chart on the left, you see the regional contributions and corresponding margins. The group operating income before corporate costs and cost allocation improved by €193 million and reached €1,410 million. After corporate costs and cost allocations, this results in a group margin increase of 90 basis points. This increase was driven by the operational underlying performance supported by lower costs for pharmaceuticals, improved commercial mix as well as our ongoing cost saving measures. Now we can turn to a more detailed look at performance in the second quarter. The group operating income before corporate costs and cost allocation improved by €161 million to €761 million. After corporate costs and cost allocation, this results in a 240 basis points improvement to the group margin. As discussed, the sizable negative impact from COVID-19 in our first quarter results reversed in Q2, making it a positive driver in Q2 but neutral in half 1, mainly due to the timing of CARES Act funding for direct eligible expenses and the net valuation effect. Ongoing cost saving measures helped mitigate the continued impact of indirect costs and the unfavorable impact in Asia Pacific in our Cura clinics in Australia where we saw a much lower level of elective procedures and surgeries as a consequence of the pandemic. Let's turn our attention to developments on a regional level. In North America, we realized growth on the top and bottom line despite the COVID-19 impact. The margin increase in our dialysis business was 4.2 percentage points. The main drivers of growth in our dialysis business on top of the COVID-19-related recovery and valuation effects are due to lower costs for renal pharmaceuticals and further improvements in the payer mix. The increase in margin in our Care Coordination activities were mainly due to the write-down of our ESCO savings in the second quarter last year as well as a positive effect from our vascular access business. We saw improved operating costs and higher volumes of the procedures provided in our vascular network. In the EMEA region, the largest driver of margin decrease was due to the impairment for a license that our joint venture with Vifor Pharma holds. You might have seen the respective press release by the joint venture regarding the unfavorable clinical trial of the drug CCX140 from ChemoCentryx. Strong performance in our product business helped us to partially offset the resulting margin impact, and active expense management helped mitigate the negative COVID-19 impact on our performance in EMEA. The margin in Asia Pacific was affected by the already discussed impact in our Cura clinics in Australia. The dialysis business performance was robust but not able to rebalance the Care Coordination business. Latin America continues to be a challenging economic environment for us, exacerbated by COVID-19 as it relates to negative impact from country-specific risk rates. This did result in a trigger for impairment testing in Q2. And while it did not result in an impairment charge in Q2, any further adverse developments in future periods would likely result in an impairment charge, which would be treated as a special item. Again, this quarter, significantly unfavorable foreign currency translation effects had a negative impact on our operational performance. I will now move on to our cash flow slide. Our cash flow focus and deleverage targets continue to be a key priority for me. We saw a significant increase in our operating cash flow in the quarter. While the advanced payments we received under the U.S. Federal Advance Payments program under the CARES Act helped trigger that improvement, the underlying business performance and working capital added to the improvement in the quarter. Even excluding the COVID-19-related cash inflows, operating cash flow is €1,176 million. This represents an underlying improvement of more than 38%. The mentioned advanced payments will be repaid and will have a negative effect on the cash flow development and net leverage ratio in the second half of the year. CapEx amounted to €216 million, clearly below last year's level due to some delays in our planned investments. As a result of the strong operating cash flow, free cash flow improved significantly year-over-year to more than €2.1 billion. And lastly, when you look at the leverage ratios on the bottom left of the page, including IFRS 16, the leverage ratio sequentially improved from 3.3x net debt-to-EBITDA to a ratio of 2.8x. As I move to my last slide, here, you can see our targets for 2020 remain unchanged and are confirmed. As previously guided, our 2020 target excludes special items. And from today's perspective, we are not aware of any special item. From what we know today, the net impact of COVID-19 on our earnings is not so significant and can be absorbed in our guidance range. We will continue to review the development of the impact of the pandemic, in particular, in respect to a potential second surge at the back end of the year and corresponding relief from governments. In closing and to echo Rice's opening comments, I would personally like to thank everyone at FMC for their tireless efforts and commitment to the work they do every single day, ensuring our patients receive their lifesaving dialysis treatments during these exceptionally difficult times. With that, I close my prepared remarks and turn it back to Dominik in Bad Homburg.

Thank you, Helen. Thank you, Rice, for your presentation and the remarks. I will now hand it over to Emma for opening the Q&A, please.

[Operator Instructions]. The first question comes from the line of Patrick Wood with Bank of America.

Perfect. So two questions, please. The first one would be -- and you gave a few comments on this, but I'd love a little bit of extra detail. The guidance that you guys have out there obviously implies substantial less growth in the second half of the year. What's sort of embedded within that in thoughts on incremental CARES money or costs or effects in the prior year base that we are kind of unaware of? Just kind of understand some of the moving parts of why you would see a -- I mean, obviously, you had a very big H1, but a somewhat flattish H2. So that's the first question. And then the second question, I appreciate it's difficult for you guys to comment on in general. But just curious for your ideas around the outlook for network adequacy and MA pricing in 2021. Just any commentary on that would be great.

Hey Patrick, it's Rice. Helen, why don't you take number one on guidance, and I'll take number two on Medicare Advantage, please.

Thanks, Rice. So Patrick, here's how we're thinking about this. Obviously, there's some known impacts in half 2, and there's unknown impacts. As we think about our outlook, we know that we still have CARES money still to allocate against those direct expenses that are eligible for the relief. And don't forget, the money that we are using for the CARES Act reimbursement is all the direct measures in keeping with what the government wants and is expecting us to do, and we track that penny by penny in our -- by tax ID number and within our attestations. So what we know is based on our view of the pandemic at this time that there will be ongoing costs for PPE. There will be some element of critical care pay where we pulse our needs and our spend in that current hotspots that we are seeing in the United States. We also know that we've got the benefit of the sequestration release in the back half of the year. What we don't know, and a lot of this is going to depend on what a second surge should look like, particularly in Q4 is, are we going to be back in a complete lockdown? Are we going to have further need for emergency pay, childcare stipends and so on? And we also don't know at this stage whether there would be care to reimbursement coming out of the kind of the government discussions that are happening real time. So there's also in the back half of the year, and obviously, you can expect the kind of the ballot initiatives to ramp up in our phasing. So right now, based on what we know, we feel that we can manage everything in our guidance, and we don't think it would be prudent to change that guidance until we have a clearer view potentially of what Q4 would look like. I think we're going to know a lot more by the end of Q3. But based on what we know, not what we don't know, we feel very confident with what we can absorb in our current guidance range.

Patrick, it's Rice. I'll take your Medicare Advantage question. Let me just add one point because this is happening in real time to what I think is a great answer Helen gave you. We are seeing large metropolitan school systems now in the U.S. come out and say that school will be virtual. Children will not be going to school. So we are already anticipating that childcare credit -- eldercare credits are going to be necessary. L.A.; San Diego; Dallas; Houston; Chicago; I think Miami, they've already made those decisions. I'm sure there'll be others. So we see the fourth quarter potentially looking just as intense as second quarter did. If you remember, it was mid-March when the entire school system in the U.S. shut down. So these are some of the things that we are wrestling with and trying to make sure that we can handle in the best way possible as it relates to guidance. On the Medicare Advantage, we are pretty relaxed about where we are and what we see today. Keeping in mind that no matter how they try to draw these network adequacy lines, there are requirements that they do need to meet. And in those markets where we want to be and we are very well entrenched, it's going to be sort of hard to kind of work around us or behind us or whatever adjective you'd like to use. So we are pretty comfortable that we're going to be able to do our business the way that we think it makes the most sense. And as we've said, I can't prognosticate as to what volume growth will be or anything of that nature at this point in time. I can say that in Q2, Medicare Advantage was still the fastest-growing book of business that we had. The other point I would like to make is, I know everyone assumes that the relationships between us and payers must be terrible, and I keep telling you they're not. And they really aren't. And a great example of that is we believe Humana is one of the plans -- it's at the forefront of innovation, and we have extended our contract with them. We are working on a value-based relationship in order to improve quality of care for our members. So there are members that are going to be living with ESRD. And you can't really come to that kind of an extension in that agreement, on what the future state through value-based care can be if you don't have a good relationship and a good history. So again, I say we are comfortable with where we sit and how we think this will unfold over time. But as most things in life, we'll have to wait and let it come to us and see how it looks in the future. But we are not doing so in a nervous or worried fashion.

The next question comes from the line of Tom Jones with Berenberg.

Rice, I had two questions. Firstly, one maybe for Rice on home dialysis. I noticed in the press release, you're expecting a fairly significant increase in the number of transitional care units that you operate. Could you just give us a kind of rough time line on when you expect to have those up and running and operating? And is that just the start of a longer-term program or is that where you think you'll kind of meet your ultimate needs in terms of home dialysis training? And then a question for Helen. The reevaluations that you alluded to that went -- I guess, were down in -- well, were negative in Q1 and positive in Q2. Could you just give us a little bit more color on those and what they pertain to? And perhaps some indication of what the negative impact in Q1 was and the positive impact in Q2? Just so we can get a sense of what the underlying EBIT progression might have been closer to in those two quarters?

Tom, it's Rice. Let me take number one. So here's what we think. On the transitional care units, we had 65 going into the year. And now we're going to expand that an additional 100. I think that will take us over the course of the year to get there, and we may even not get to full 100 depending on what goes on with COVID and other things that get in the way. And as you can imagine, COVID takes precedence pretty much every day of the week as we work through this, I think second surge, if you want to call it. Some believe it never left. But it's something that we think the transitional care units will make a big difference and not only just getting people home, but it also helps people that are coming off of a transplant, unfortunately. And they have to make that decision of in-center or home. So it really does allow people to go through any one of those avenues of care transition that they need. We believe this is a better way to interface and work with our patients as they're going through these types of transitions. So figure, 165 max, if we get everything done this year and an incremental 100. And maybe we don't make all of that, we'll finish it up in 2021. I know your follow-on question, Tom, will be, well, is it going to be another 100 next year, another 100? We're not planning for that. I mean this is something that we can flex as we need to. But our planning and the thinking that we've had would suggest this is the right number for the foreseeable future, but we can flex it up or down if we felt we needed to.

Sure. And maybe just a quick follow-up, if I can, not upset Dominik. But we talked a lot about home HD in the U.S. Maybe just a couple of quick comments about what's going on in your non-U.S. businesses.

Yes. So if you look in Asia Pacific, home in Asia is generally PD. And we are seeing -- we're seeing growth there. We've got some -- we're finishing up work in the factory, we're expanding capacity. But you generally see -- in China, you see a lot of home, I think in Malaysia and Thailand as well. Strangely enough, I think everybody knows that Australia, forever, has been a home hemo market, and we're seeing a fair amount of home hemo in Hong Kong, just given the density of population, and people not wanting to move around as much, they've gravitated to home hemo. In Europe, we finished up the integration with NxStage. So we're up and running with that. So that gives a new product line, if you will, for home, whereas we've had a home product line in Europe, Fresenius product for a number of years. So there's more work to do there. I will tell you very candidly that there are certain markets in Europe that aren't big home prescribers, Germany being one, and it's really a physician preference. But we'll keep working at that. We'll keep seeing it move forward. And just remember, there are other markets in Asia Pacific that have what they call PD First, which means if a patient is going to go on dialysis, they try very hard to put them on PD before they consider trying to put them in a hospital-based clinic, if you will, for in-center treatment.

And the reevaluations?

Yes. So as we think about those reevaluations, they really fall into 2 buckets. There's our investments and the investment in Humacyte particularly, which is -- that valuation is driven by a function of discount rates and risk premiums. When we saw the economic stock market decline in Q1, we took a big impact on that. And then that has bounced back completely in Q2. The other type of reevaluation that goes on in there are the investments in our captive. And again, a significant impact by the stock market in Q1 that has bounced back in Q2. So on a Q1 to Q2 impact, it's neutral, and it's about €40 million of EBIT for both positive and negative between the quarters. I think when I spoke at Q1, that we said we expected about 2/3 of the impact to come back. We didn't know how much of the investment piece would come back and I'm really happy to report that it has seen a complete bounce back. Obviously, we continue to watch that and the external factors as we go through the rest of the year, depending on volatility. But hope that helps.

Okay. It does very much. But it does sound like given the market volatility we're enduring at the moment, that there's going to be some swings in this number pretty much on a constant basis. Is that fair?

I think that's fair. I wish I had a crystal ball on what it could look like.

Don't we all?

Exactly. Particularly today, right? But no, I think...

Today is not healthy.

Yes. So half 1, it's looking solid. But obviously, we continue to look at all those impacts. It's obviously what caused the Latin America impairment trigger as well because of the change in the economic situation in Latin America where a lot of those sovereign rates change, too. So obviously, every quarter -- well, every day, it feels like we continue to watch that. But yes, neutral in the half 1, which is great news.

The next question comes from the line of Veronika Dubajova with Goldman Sachs.

I have two questions, please. First one is just on the slowdown in same market treatment growth in the U.S. It'd be great to understand from -- to the extent that you can comment on July, especially the referral piece of it, whether you are seeing a rebound or is this something that you worry about a little bit more beyond Q2? So Rice, if you can share your expectations on that, that would be very helpful. And then my second question relates to kind of the broader political environment in the U.S. Obviously, we're heading into elections in the second half of the year. So it'd be great to understand how you are thinking about the risks under a Democratic administration, in particular, as it relates to expansion of Medicare?

Veronika, I'll take both of those. So what we have -- what we know because we have data would suggest to us that we are seeing referrals in the month of July from a week-to-week basis come back. So I think that we will probably rightsize that, if you will, over the next couple of months. I think what we have to look at is just simply, we did have a little bit of higher rate in mortality and we had a number of missed treatments, if you will, because patients either were in the ICU or they skipped some treatment, which is not unheard of in the U.S., although we fight hard to not let that happen. So I think we'll have to work through that. Obviously, some people went into the hospital. Unfortunately, they did not come out. So we'll have a little bit of time to work through that. I can't really prognosticate when we think that's going to exactly turn the corner. But top of mind for me is to look at what are referrals looking like, and that has begun to recover pretty nicely. So we are encouraged by what we're seeing from our critical parameters that we measure on a week-to-week basis. Politically, great thing about an election is you don't know what's going to happen until you have it. So we'll have to wait and see where that comes. But I would say a couple of things. Look, I don't have a whole lot of worry on Medicare from 65 to 60. I mean if that were to happen, there's a part of that population -- as you well know, people have the ability to get on at any age if they've got in-stage renal disease. So that's not going to be a huge change for us. I would also tell you that as we engage politically with both sides of the House and understanding what people's platform is going to be, that is not the #1 priority that we -- that I personally think the Biden campaign is going to be looking at. So we are fairly relaxed by that. I think a bigger concern and just thinking our way through, it would be tax reform. But in a situation like we are in today, and I think the pandemic is here to stay, Veronika, through Q1, maybe even longer, and when more CARES money gets appropriated because I believe it will, yes, they're back and forth and arguing, but what else is new, that's the way D.C. works, but I don't think they're going to leave the American public stranded. I think something will get done. We've appropriated billions, trillions of dollars to handle this. I think hopping into tax reform and putting that on the back of corporations when we really haven't recovered, you see kind of where we are today with GDP in the U.S. I don't think anybody that's been as involved in government as long as Joe Biden is going to sign up for that and just plunge us down deeper into a dark hole because companies do make this country work. There are a lot of individuals that do as well. But if we just have to carry that on our backs, I think it's going to be a very tough sell. So I think we just have to wait and see what's going to happen.

The next question is from the line of Oliver Metzger with Commerzbank.

One question on Dialysis Products in EMEA. So there was a massive acceleration of organic growth, not only compared to Q1, but also compared to basically last year. So can you give us a little more color on this acceleration? In my view, it cannot be a pure catch-up effect. So what has changed for Dialysis Product? Second question is on home dialysis. So you mentioned this 41% increase in HHD. So that's clearly above the previously communicated run rate. Would you describe this incremental push as demand driven as patients increase in demand for home? Or as more supply driven as you have now NxStage fully on track and that really contributes to a strong acceleration?

Oliver, I'll take those. So when you look at the products business in EMEA, I think the Dialysis Product side of that has been running well. I think it's going great. It's not as supercharged as you might look at those overall numbers. I think what you have to take into consideration is we are still seeing through Q2. We're seeing the acute side. The ICU business is still running very hot. If you just imagine, April, May and June, even though, particularly in that region, in Europe, if you will, they were coming out of the COVID situation, there were still hospitals that needed more equipment, they wanted more equipment because, again, none of us really know when that second surge hits that continent. And then the Dialysis Products, we're still working very well in Eastern Europe and the Middle East and some of the African countries. So I think it's a combination of both. I think that the Dialysis Product growth should continue. I think we may see some trailing off of acute product. I think people will have built inventory in EMEA. And so that may not continue as hot as it is unless we find there are new spots that pop up with a second surge of COVID and they are in need of more acute product. We'll have to see. On home dialysis, I think what's driving home hemo is simply what I would call the process of people looking at going on to dialysis, looking at in-center, considering COVID and infection and all of that and simply wanting to be able to stay home and shelter and do their treatments there. I don't think NxStage being part of the company plays a role in that simply because we had access to NxStage products before we merged with them. If you recall, they were our patients, they would come in, they'd tell us they want to go home, they have the ability to see what kind of technology they want to use. So we're happy NxStage is in the family, but I don't think that's driving the surge. I think the surge is really lifestyle choice, exacerbated and intensified by COVID. And so I think that's the way that we're looking at this at the end of Q2, going into Q3.

The next question comes from the line of James Vane-Tempest with Jefferies.

I have two, if I can, please. Firstly, a couple on the CMS release, talking about continued higher hospitalizations from ESRD patients. Just curious how you sort of think that could impact growth as we get through the rest of the year. And then second question, just on your guidance. With sort of mid to high single digit both at the top and bottom line, I'm just curious if some of the moving pieces. Do you think [indiscernible] are fairly uniform? Or do you think it's more likely going to be perhaps mid top line growth getting some operating leverage or perhaps on some operating deleverage in terms of starting with kind of higher top line growth? I'm just curious if you can help us sort of work through some of the sort of scenarios around that, that would be really helpful.

Sure, James. It's Rice. Why don't I take hospitalization, and Helen, if you would, please, take the guidance? So you kind of have to -- I think you're probably asking particularly about the U.S., James. So here's sort of what we see. We've been very pleased that the pandemic protocols we put in place, having definitive COVID-positive clinics versus COVID negatives and working it that way, we think we have prevented a lot of patients of ours going into the hospital, which was our goal, to not flood the ER with dialysis patients. Now having said that, we still have patients that have gotten sick, and they do have to get hospitalized, but it has not been nearly the magnitude of what we were concerned about when we first got very heavy into COVID in the U.S. in March. So I think there'll be some impact, but I think we'll find -- given the way we're holding and things seem to be fairly stable, I think we'll be able to overcome this over time. If you look in other markets where they had higher hospital rates and a higher mortality rate, in some of the more undeveloped markets, if you will, I think it will take longer for that. The other thing that's hard for everybody when you get into the developing world is really understanding when someone unfortunately passed, was it exactly due to COVID or what was the real cause. It's not always real clear to us what we're dealing with there. But in the very developed markets where we've got good data, we have a better feel for that. Helen, guidance?

Yes. Thanks, Rice. Look, James, as far as guidance is concerned, I think it's how I answered the earlier question. I think the revenue, we'll continue to see the steady growth that we're seeing. I think on an EBIT level, it does get somewhat lumpy with how the costs hit the quarters. But that's why I think we kind of feel comfortable of staying in the range. We obviously continue to benefit from our ongoing cost saving measures. So I think we're just going to see some shifts in gazing. But overall, I think we have a very tight handle on our expense measures. As I mentioned earlier, there will be some ongoing COVID costs that are more in the indirect nature, that are not eligible for any cash funding. Obviously, in rest of world, that's probably more pronounced. But I think, overall, we are very, very focused on trying to offset those unforeseen impacts that we didn't envision at the beginning of the year. But I think feeling very, very comfortable with what we see today on both revenue and net income ranges.

The next question comes from Alex Gibson with Morgan Stanley.

This is Michael Jungling, Morgan Stanley. Can you hear me?

Yes, Michael. We can. We got you.

Great, great. I have two questions, please. Firstly, on Medicare Advantage and then an accounting question. On Medicare Advantage, as we approach the sort of the opportunity for 2021, I'm trying to understand how these deals are starting to progress. And specifically, what I'm interested in, do you feel that most of the patients treated will be for a rate per treatment basis as we have today? Or do you think the relationship will be a bit more complex where you will be trying to benefit mutually from reducing overall cost perhaps because of reduced hospitalization, i.e., more of a cost reduction sharing program, some sort of guidance around that would be useful. And then secondly, an accounting question on minority interest. The €76 million is quite a low relationship to North American EBIT. And I'm curious why it is so low and whether the minority interest holders did not benefit from the CARES Act. Perhaps you can provide some color on why the relationship is quite low this quarter of 12.6%, usually more around 14%.

So I'll take your first question on Medicare Advantage. And Helen, obviously, will take your minority interest question, Michael. So I would say probably the simplest answer is some of both. There are certainly those that we will work with and are working with today in Medicare Advantage that are going to -- kind of have a -- we'll have a traditional relationship on a rate per treatment with the more progressives. Folks in that we've had history with, value-based care, which is the way I describe exactly what you were looking at, cost sharing and what do we do, that's value-based care in my mind. There'll be some of those as well. So I think there'll be a mixture of both, and we'll see how they evolve over time. And minority interest?

Yes. Michael, so I think for this quarter, it's €76 million versus €61 million this quarter last year. Don't forget, we had a big hit last year for the ESCO charge that we took, which was €41 million. Your question about did the minority interest also share in the CARES Act funding. I think you recall from what we said in Q1 that we have to attest to this at a tax ID level. So to the extent that those entity is also -- were incurring COVID-related expenses, excuse me, they would also benefit. So that shouldn't be distorting it. But I think the biggest change is because of the ESCO piece last year.

Okay. And then maybe a follow-up for Rice. If I then look at sort of the end of 2021, do you foresee that the majority of the patients that you will be having under MA will be on a value-based program? I just have the fear that we end up like with ESCO, as a disagreement on what the cost savings were and then we go into this prolonged debate and negotiations, which is not particularly helpful. So hence the question.

Yes. No, it's a fair question. I don't want to speculate because I really don't know what the predominant methodology will be, if you will, rate per treatment or value-based care but let me say this. So we've had a long-running pilot on value-based care. And I made reference to this. We have argued with the government, as you well know, and we have not been overly successful. They hold the ultimate stick. But in a relationship of equals where we're trying to take care of patients, we have not seen that type of issue at all in our reconciliations between ourselves and the other company. And so I am less concerned by far that we're going to be in a snip, back and forth on rates and how we're discussing savings and things like that because we both got mutually beneficial things that we want to get done. I think the government just gets caught up in their political agenda, in their calculations and what they're trying to do. And unfortunately, we knew it when we went into ESCO's, they held the cards as it related to reconciliation. So I think it's a little bit of night and day, Michael, as to how those relationships will progress and evolve.

The next question comes from the line of Christoph Gretler with Crédit Suisse.

I have actually two questions. The first is related to cash flow. I think if I back out what you mentioned, Helen, I get to around €1.2 billion in cash flow for CARES cost contribution and advanced payments. Is it about correct? And can you maybe separate the two items? And also maybe if you have an indication what is left from CARES in terms of cost contribution for the second half, that would be helpful. Then I have a second question.

Yes. Did you want -- yes, okay. Chris, yes, so you're right. Our cash flow does include the €1.2 million of advanced cash flows. And as I mentioned in my prepared remarks, even when you strip that out, well that still shows an improvement in our underlying cash flow of 38%. And that is triggered by some terrific focus on our cash flow. Obviously, we're generating more income, but also, we are seeing some terrific improvements in working capital as well. So yes, I feel we've got some real strong underlying performance there. Probably worth mentioning, the net debt-to-EBITDA ratio of 2.8x obviously benefits from that CARES funding. But even without that, we would be at 3.1, which is still improved from the 3.3 that we saw last quarter. Your second question -- second part of that question was about the CARES funding and I'm just pulling up a number right here. Sorry, bear with me. With what we have incurred, we had advanced payments of around €250 million, and we're about 2/3 through that, through half 1. So -- but that's not to suggest a run rate and far from it, actually. We shouldn't do that. We are pulsing our spend for where it's needed most. As you can imagine, in the early days of lockdown, we did have these extraordinary measures like the emergency pay and childcare, increased cost of PPE and so on. And some of that has obviously helped back down or dial back down as some of those measures have reduced. I think that really, for us, is the big open question for Q4. Are we back seeing something like we saw in the end of Q1, early Q2? Or is it manageable with what we know today? So -- and obviously, just to reinforce, that's the basis of our guidance.

Okay. Appreciate it. And the second question is actually with respect to this Humacyte stake. I think we have this volatility in operating earnings from that for quite a while. I think I remember Q3 last year as well, it was very significant. What's the reason why this is now mark-to-market? I guess you have also some other stake like the Vifor JV, and we never revalue that stake, for example. Could you maybe elaborate on what is the different and the reason for kind of why the mark-to-market is Humacyte stake? It's apparently very volatile so makes our life more difficult.

My life, too. So look, with [indiscernible] particularly one of significance, you make a decision of how you're going to account for it at the very beginning, whether that be because of the kind of the nature of it, the size of it and so on. You make the accounting decision at the start about whether you pull it through P&L or equity. The decision was made last year to put this one through P&L. The volatility is probably more pronounced, I would say, this half 1 because of the discount rate and the kind of the comparable market discount rates and the -- just how you have to look at these investments on a quarterly basis. I think last year, we did see a true-up of the valuation. And obviously, the closer Humacyte get to launch, the kind of the changes will continue to go through the P&L. That's something that we chose to do. And we hope -- it's hard to say how volatile the markets will be, but I think that we're staying close to the development of the Humacyte products and development. Rice, I don't know if there's anything further you would add to Humacyte.

No. I think it's exactly accurate. And yes, it's going to be up and down. But I think over the long term, having it flow through the P&L, giving it the focus and the attention that we think that opportunity scientifically and medically gives us -- it puts a different pace on it when it's impacting your P&L and not just sitting off somewhere else, if you will. And I would say, Chris, on Vifor, gosh, we're 12 years into that relationship. And we've had the first really a bit of bad news, came from the CCX140 Phase II trial where the data just did not show efficacy that we were looking for in terms of treating Focal Segmental Glomerulosclerosis, which is basically a situation where you've got a part of your glomeruli do the filtration, they don't work. And therefore, you end up leaking protein out through excretion of your urine, and that creates a big problem for dialysis patients. Several other companies are working on products like this. But quite honestly, for all the years that I've been associated with the Vifor JV, this is really 1 bit of bad news that we've gotten. Most of it has been fairly stable, if you will.

The next question comes from the line of Falko Friedrichs with Deutsche Bank.

I would have two quick questions. Firstly, at what pace are you elective procedures picking up again in your Care Coordination business? And then secondly, could you provide a quick update on the payer mix in the U.S. and what you have seen here?

Helen, do you want to take elective procedures, please? And I'll do the payer mix.

Sure. So we did see -- on the outset of COVID, we did that elective procedures slowed because it was used kind of deemed to be part of the overall elective surgery hold with some -- a lot of great discussions very early on. We were able to get -- our vascular surgery as deemed to not be classed as like just deferred elective but to be critical elective. So we did see some catch up happening in Q2 and recovery is well underway there, which is why we are seeing that impact -- the favorable impact in the Care Coordination business outside of the ESCO adjustment from last year. Obviously, going forward, it will depend on how the pandemic proceeds. And we -- if things get completely locked down, we could have an impact. But right now, we feel like we've got the right support around how they're thinking about these elective procedures and kind of looking quite positive. I think, obviously, the bigger impact on electives that we saw in the quarter was in the Cura hospitals in Australia where -- and we are seeing those different governments are responding to these in different ways. So there, we do have an impact because we do have a -- had a delay with Australian government saying we couldn't do elective for a while. But we would hope that, that would recover as well in Q3.

Yes, Falko, it's Rice. I would say one thing. As the calendar marches on and the Australian government has basically put the electives on hiatus, at some point, we won't have enough time to catch up. So we just have to see how that's going to play out over time. On payer mix, in the quarter, Q2, we saw our payer mix improve again. So we are seeing some basis point improvement pretty consistently over the last couple of quarters. So we feel good about that. I'm sure, I'll go ahead and go there. People say, "How can it be? The GDP in the U.S. is really down. Unemployment is high." and we come back to -- when we measure the way we look at this, a big piece of that unemployment in the U.S. is going to be people that are in the gig economy or they were not in a place or in a job situation where they had any type of group or company-sponsored health plan. So they would come to us as a Medicare patient in all likelihood. By way of example, if you look at United, the airline company, they just furloughed 30-some-odd thousand of their employees; American about 22,000. And by being furloughed, they keep all of their benefits. So they would not be a drag on our commercial mix, let's say. That's just one example. So you really do have to slice and look at the various aspects of what goes on with unemployment and how do we keep people that have commercial insurance, how do they maintain that, what are their options? But at this point in time, we are still seeing continued small improvements in our commercial mix.

The next question is a follow-up from Veronika Dubajova with Goldman Sachs.

I just wanted to kind of ask a bigger picture question. If I look at your business, Rice, I think it's obviously been a pretty challenging period for the prior 4, 5 years. And it finally seems like things are starting to get better in spite of COVID, but they certainly seem to be improving pretty substantially. Just curious, I mean, when you think about this year, do you think there's something truly exceptional in the performance and what you guys are delivering? Or do you feel that a lot of the headwinds that had impacted the business negatively are starting to dissipate a bit, and this is kind of operationally, the new normal in terms of what you can do in the business?

Boy, Veronika, given what the market is doing today, you really want me to talk about this? No, I'm just kidding. Look, here's what I would tell you. We are doing well this year because I have got the best group of people working to work with that you can possibly imagine. And we have taken some very difficult decisions in the last couple of prior years. We knew they weren't popular, we did them, and now we're seeing benefit to that. I mean folks weren't crazy. No investor was crazy when we talked about, we were going to take $100 million cost optimization program, but it is paying dividends. The folks in North America, it's evident, what they're doing. So I'm more comfortable about D.C. as it relates to reimbursement and where we are seeing that. Now for a couple of years in a row, it's getting better. So there's always puts and takes. I think if there's anything we've learned with COVID, as happy and pleased as I am with what a great job we do and how we try to plan and look to the future, we've also learned how little control we have over some of these things. And we just have to be excruciatingly detailed and aggressive in our planning to try to work our way through them. I really truly hope '21, '22, '23 are going to bring these years are a little more stable, and we're not going to have these cataclysmic events going on. But I would just say, we will continue, when necessary, to perhaps take unpopular decisions in order to benefit for the long term. Value-based care has been a long road, as you well know. But just as I mentioned, I'm excited about the extension of our contract with Humana and the ability to work with them in this. We are making progress as we go through time. It's just sometimes, you have to take a step back or step around in order to go forward. And we're going to talk more about that, October 8, for sure. And hopefully, you guys will understand and appreciate where we're trying to go. But COVID has taught us that you just never know what's coming around the corner, and we just have to be as prepared as we can be.

In the interest of time, we have to stop the Q&A session, and I hand back to Dominik.

Thank you, Emma. Yes. We did run out of time. Before we close the call, I'd like to be annoying and mention again our Capital Market Day on 8th of October, and we look forward to virtually seeing you there. So no risk of dangerous travel. With that, we can actually close the call, and we say thank you for participating in the call and the great interest. Have a great summertime to the extent you can enjoy. Take care, and speak to you in October.

Stay healthy. Stay well, everyone. We appreciate your interest.

Thanks, everyone. Bye-bye.

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