Fresenius Medical Care AG Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Nathalie, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Report on the Third Quarter 2022. 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. I would now like to turn the conference over to Dominik, Head of Investor Relations. Please, go ahead.

Thank you, Nathalie. As mentioned by Nathalie, we would like to welcome you to our earnings call for the third quarter 2022, which is a day earlier than originally planned. I do apologize for the inconvenience that might have caused. We will start with our presentation followed by a Q&A session. As always, I 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 yesterday. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. We are aware that this is a call on short notice in your calendars in the middle of the reporting season. Therefore, we will try to keep the presentation short and leave time for questions. As always, we would like to limit the number of questions again to two in order to give everyone the chance to ask questions. Should there be further questions and time left, we are happy to go a second round. It would be great if we could make this work. The call is scheduled for 60 minutes. With us today for the first time is Carla Kriwet, our new CEO and Chair of the Management Board, who has started less than a month ago. Carla will share with you her first impressions of the company and initial strategic thinking. Of course, also with us is Helen Giza, our Deputy CEO Chief Financial Officer and Chief Transformation Officer. Helen will give you an update on the business development, financial performance, and outlook. This quarter only Helen will be available for the Q&A. I will now hand over to Carla, the floor is yours.

Thank you, Dominik. This is a privilege for me to say hello and welcome everyone to our Fresenius Medical Care Earnings Call. Thank you for joining our presentation. I'm very excited to be here today as CEO. Throughout my first months with the company, I've seen firsthand the incredible commitment of our employees around the world. The patient-centric mindset and clinical excellence is truly inspiring, and it is just one example of the many great assets we have to build on. At the same time, there's a clear urgency for bold interventions to drive business turnaround and position Fresenius Medical Care for future sustainable and profitable growth. I would like to share what I'm focusing on and will begin on slide three. Our FME 25 transformation program is already underway and on track to deliver much-needed financial transparency and simplification. We are currently transitioning to our new global operating model centered around our business segments, care delivery and care enablement, and supported by global G&A functions and our global medical office. Furthermore, our execution plans are on track to deliver €500 million of EBIT by 2025. Within care delivery, we have already started to address the substantial labor challenges. We are employing bold measures to fix our clinical operations to drive higher efficiency and productivity without sacrificing patient care. In addition, we will further consolidate our footprint. For care enablement, we are introducing mitigating initiatives, including pricing actions, to address impacts from inflation and supply chain constraints. We are advancing measures to reduce our cost of production, including platform strategies and optimization of our manufacturing footprint. Furthermore, we will regain innovation leadership and are developing a winning digital strategy that will leverage our unparalleled patient data sets to deliver unique value for our patients and customers. In SG&A, we are reducing overhead costs by optimizing shared services, utilizing automation, and transitioning basic operational tasks to low-cost locations. We will leverage business partnering and centers of excellence. Finally, we are reducing operational complexity by eliminating duplications. We are defining our future strategy with priorities becoming clearer. We will optimize our care delivery and care enablement business portfolio allocating capital to growth areas with higher profitability. This also means that we will exit unprofitable businesses and apply a strict investment and return on invested capital discipline. We are planning additional structural savings beyond the current FME25 program derived from competitive benchmarks. At the same time, we will capture growth opportunities in attractive segments such as value-based care, home, self and assisted care, upstream CTD, critical care, and pharma. We will inspire around our vision and global strategy to foster a one SME winning high-performance culture while ensuring role model accountability and teamwork at all levels. Finally, compliance, sustainability, inclusion, and diversity are all key requirements for our success. We will remain a mission-driven company striving to improve the lives of our patients. You will understand that one month is not enough time to have a full strategic plan detailed out, and I will not be in a position to answer questions today. We need to present this to our economic council first. But I want to be very clear that speed is of utmost importance. There is an urgency to address our operational performance now, and interventions are already underway. I look forward to sharing more details with you in February when we present our results for 2022. At the same time, I will be very open to answering your questions. For the rest of today, I would like to hand it over to Helen, who will walk you through the developments of the quarter and will handle today's Q&A. Thank you. Over to you, Helen.

Thanks, Carla. Hi, everyone. I'll pick up on slide 4. I'd like to start my prepared remarks with a quarterly performance before we go to the update on our outlook and implications for 2023. In the third quarter, our business delivered revenue growth of 15% reported due to the weak euro and 3% at constant currency. On a constant currency basis and before special items, the operating income declined by 18%. On the same basis, our net income declined by 25%, which brings us to an 18% decline year-to-date. Our business development continued to be impacted by the US labor market situation and slower organic growth in healthcare services than anticipated. Additionally, the persistent challenging macroeconomic environment with inflationary pressures and global supply chain constraints continues to heavily impact our Healthcare Products business. COVID-19-related excess mortality was somewhat elevated during the third quarter but has broadly developed in line with our assumptions for the year. We are closely monitoring the development of infection rates in the fall. The closing of the InterWell Health merger during the third quarter marked an important milestone for our value-based care capabilities and our continued leadership in this highly relevant strategic area. The numerous challenges that we and many others in the healthcare industry need to master right now are unprecedented. Following our guidance revision in Q2, we immediately initiated necessary interventions in our North America healthcare services business. However, these initiatives are taking longer than anticipated to show the expected results. While we expect to see some benefit from these measures in the fourth quarter, we expect a more meaningful contribution in 2023. We had assumed flat organic growth in healthcare services in North America for the second half of the year. It has sequentially improved, but not to the degree expected, and therefore, we now expect it to remain slightly negative. As a matter of caution, in light of the delayed improvement in North America, the associated impact on our downstream assets, continued labor challenges, accumulation of excess mortality, and the uncertainty in the macroeconomic environment, we are extending our guidance range for 2022. Carla already mentioned that we are working on a broader turnaround plan, which involves bolder interventions, including capacity adjustments. Turning to slide 5, you all know me by now, and I do my utmost to be very transparent with the sizable moving parts. From the beginning of this year, we shared our assumptions and how actual developments are tracking. I'd like to update you on where we now stand through the first nine months and how we see the full year finally shaping up. Unfortunately, the delta of the changes of our major headwinds and tailwinds is negative by around €60 million. Starting with the headwinds. Of the €450 million to €460 million for the full year, we have already realized €282 million. The macroeconomic inflationary environment remains challenging, and we continue to see elevated raw materials, logistics, and energy prices. Year-to-date, we have already realized €175 million in macroeconomic inflationary headwinds. In accordance with the current run rate, we expect this to be around €10 million higher than previously assumed. We have guided COVID-related excess mortality to impact us with a €100 million headwind for the year. Through the third quarter, we have realized €84 million. In the third quarter, we experienced COVID-related excess mortality of around 1,100, and the year-to-date number is around 4,300. While excess mortality was somewhat elevated in the third quarter, it was not a huge spike like we saw with Omicron at the start of the year, and we will continue to support that our excess mortality for 2022 will end at or below 6,000 as we have previously guided. Of course, we are watching closely as we move into the winter months in the Northern Hemisphere. For labor costs, beyond the typical 3% inflation, we assumed a €100 million headwind net of US provider relief funds. Through the first nine months of the year, the relief we received offset these labor costs. There is now only €9 million left from the provider relief fund, leaving minimal offset for the additional €100 million labor cost assumed for the fourth quarter. Following the analysis and interventions to address our clinic staffing situation in the US, we have adjusted how we manage these critical personnel vacancies through prioritization, focused recruiting efforts, and tailored training programs. We are just starting to see these initiatives translate into improving trends in our labor KPIs. While the labor market remains challenging, during the third quarter, we saw stabilization in net hires, and we have rebased the number of critical open positions to around 5,000. For the ballot initiative, we have spent €23 million to make our case. And as the election is next week, we are comfortably within the assumed €20 million to €30 million range. Turning to tailwinds. Of the €130 million to €160 million, we have assumed for the full year, we have only realized €78 million through the first nine months. For business growth, we had previously assumed €70 million, and so far have only achieved €15 million. For the full year, we now assume €20 million, a €50 million lower tailwind for 2022. This development results mainly from the delay in our North American services recovery plan, since we continue to face the challenging staffing and retention issues. This has limited our ability to realize the planned organic growth recovery, and the delayed growth in our dialysis services business also has a knock-on effect on our downstream assets. For PPE cost reduction, we have realized a €12 million tailwind compared to 2021. While we expect overall PPE spending to continue to decline, our clinics are not planning to modify our PPE policy for now due to the vulnerable nature of our patient population, especially as the annual influenza season is also underway. On our FME25 transformation program, we have continued to make important progress. Of the €40 million to €70 million in savings we assume for 2022, we have already realized a €51 million tailwind through the first nine months of the year, demonstrating that we are well on track. Turning to slide 6. On a reported basis, currency effects further extended our positive revenue development for both services and products during the third quarter. On a constant currency basis, Healthcare Services delivered revenue growth of 2%. This was mainly driven by organic growth in the international markets. The positive effect was partially offset by negative organic growth in North America due to accumulated excess mortality, staffing challenges, and capacity constraints in certain clinics. The products business delivered revenue growth of 4% in constant currency, mainly driven by higher sales of in-center disposables and renal pharmaceuticals, and partially offset by lower sales of machines for chronic treatment. To give you an update on the US FDA machine shipping hold, this has just been lifted, and we can now resume shipments. Next on slide 7. Here we show the operating income margin development for the third quarter on a reported basis. The largest negative impact on margins year-over-year, not surprisingly, relates to the unprecedented labor market challenges and macroeconomic inflation and supply chain disruption. The combination of business growth development along with COVID-related impacts also contributed to a negative margin development. During the third quarter, we applied €93 million of the US provider relief funds. We are not expecting further relief funds at this time, turning this into a significant headwind for next year. We also realized €30 million savings from FME25 during the quarter. Looking at the most pronounced special items for the quarter, we had €53 million in FME25 costs, and with the closing of the InterWell Health merger, we realized a net gain of €56 million before taxes. Next on slide 8. During the third quarter, we generated operating cash flow of €658 million. Year-over-year cash flow development was impacted by lower net income. Compared to last year, we had lower recoupment of the US government advanced payments received in 2020 under the CARES Act. €44 million were recouped in the third quarter, and the full recruitment effects were completed in October. We remain committed to our self-imposed leverage target of 3 to 3.5 times. While we are currently at the upper end of that range, we are reasonably comfortable with our positioning given our solid credit profile. Turning to slide 9. In September, we demonstrated our strong access to the capital markets with a successful issuance of a five-year bond with a volume of €750 million. This has further strengthened our solid credit profile and contributed to our financing strategy of continuously ensuring financial flexibility, managing financial risks, and optimizing financing costs. With the issuance of the new Eurobond, we have increased the percentage of fixed interest debt to 88% and have no major maturities to be refinanced until November 2023. This clearly underscores the long-term and sustainable nature of our well-balanced maturity profile. Following the refinancing of our syndicated credit facility in 2021, we are no longer subject to any active financial covenants. Moving on to slide 10. Like the rest of the healthcare market, we continue to face a high degree of uncertainty in the macroeconomic environment that impacts both the med tech and services sector in different ways. First, we are confirming our target for revenue growth at low-single-digit percentage range. Worth pointing out is the really high financial sensitivity of changes to our current low net income base. Every 1% of change to net income equates to only €10 million and also increases the tax rate due to a relatively higher proportionate share of the non-tax deductible expenses. Our tax rate guidance for 2022 is now 25% to 28%. Consequently, as a matter of caution to reflect the additional risks of the range of headwinds and tailwinds already outlined, we are extending our net income guidance range for 2022. We previously guided for a net income decline of around the high teens percentage range and are now extending that to a net income decline from a high teens to mid-20s percentage range. I would like to finish my prepared remarks on Slide 11. The budget process is currently underway. As every year, we will provide 2023 guidance in February. However, I recognize there are already many questions about our expectations for next year. I wanted to share with you what we are currently weighing up. I have to say in this environment with a number of moving parts, it is really hard to anticipate future developments and every month of additional insights is outstandingly valuable. So let's start with the tailwinds, we expect in 2023. Within business growth, we are evaluating the potential accumulation effect from COVID and its impact on organic growth in 2023. We assume an increased ESRD, PPS rate, hopefully, today for our Medicare fee-for-service patients and a smaller but incremental increase in our Medicare Advantage book of business. We are also well positioned for future expansion into value-based care and home dialysis. The contributions of the interventions to address our North America dialysis services business should have a greater impact on business growth in 2023. Business growth will, of course, be impacted by the full reduction of sequestration relief. FME is – while FME25 is well on track, we have said that we will achieve 50% of the savings by the end of 2023. As Carla has indicated at the start of the call, we are initiating a broader turnaround plan beyond what we have already defined in order to fix our operational core, simplify and drive efficiencies. Although we have not reduced our PPE protocol yet, we do expect the overall cost to further decrease next year. We are not anticipating costs related to balance initiatives to repeat in 2023 either. Turning to headwinds for next year. At this time, we do not have any reason to expect further provider relief funds to be made available. While we do expect some of the 2022 one-time measures for labor not to repeat, we do anticipate annualization of the temporary adjustments made in 2023. Higher merits and historical norms and potential mix changes from permanent to more temporary labor due to a persisting labor shortage are expected to overall result in a net headwind. Even though we have seen some stabilization, the pressure on the macroeconomic environment persists, and there is no indication that inflation, interest rates, and higher energy prices will abate by the start of the New Year. Of course, we are diligently working on pricing action initiatives. Finally, our 2022 earnings benefited from some one-time items. For example, lower compensation for our broader leadership teams due to underperforming short- and long-term incentive plans. This will have to be rebased for 2023. Other examples are the partial reversal of an accrual related to a revenue recognition adjustment for accounts receivable in legal disputes, and by increased income attributable to consent agreement on certain pharmaceuticals in North America. With that I'm happy to take your questions. And next quarter, Carla will join us for the Q&A. With that I'll hand back over to Dominik to start the questions.

Thank you, Carla. Thank you, Helen for the presentation. I'm happy to turn it over to Q&A. Nathalie, could you please open the line.

Thank you. Ladies and gentlemen, we will now start the question-and-answer session. Our first question comes from Tom Jones at Berenberg. Please go ahead.

Good afternoon. And thanks for taking my questions. Helen, I had two really. We'll have more, but I'll stick to two. The first is on labor. Obviously, it's been a bit of a headwind for everybody in the industry and many other healthcare businesses. You talked a fair bit about recruitment, but it also feels that employee retention has been a bit of an issue. So I just wondered if you could comment on what you've been doing to improve employee retention across the business. And the second question was just on the cost savings. Forgive me, I know, it's early in the process for you, so you may not be able to say too much. But from my recollection this will be the fifth cost-saving program. We had GEP I, GEP II, the group optimization program, FME25. One does have to start to wonder where the cost savings are going to come from, given this is a fifth go-round on trying to find incremental cost savings. You've gone through the fat into the muscle down to the bone; where else is there to go? Short of chopping whole limbs off, I guess is the question. So maybe it's just a bit of broad high-level color on how you're thinking about making yet more cost reductions across the business without meaningfully impacting the revenue growth of the business.

Thank you, Tom, it's great to hear from you. Let's discuss labor. You've mentioned that labor continues to be a challenge, and I agree that it's a significant issue at this stage. We have a lot happening in our recruitment efforts, but even more so in retention. We're facing increased turnover and difficulties keeping our newer employees. We're diving deep into the analysis to identify root causes and key performance indicators related to this. Our focus is on selecting the right, tailored training. We're implementing a buddy system in our clinics, and ensuring we have strong leadership support as well. There's a lot in motion here, and I believe we're beginning to see positive outcomes from these initiatives. Regarding cost savings, you're correct that we've initiated several programs. I know you've been around long enough to remember all of them. FME25 was largely focused on our operating segments and reshaping our organizational structure. Moving forward, particularly as we discuss our turnaround plan, we need to concentrate on structural costs. We've been dealing with COVID for two and a half years without adjusting our clinic structure, recognizing that we have lost some operating leverage. As Carla highlighted, our focus is now shifting deeper into structural issues given our current profit margins. More details will be shared in February, but we will clarify how our approach to costs is different moving forward.

Sure. And maybe just a quick follow-up on the recruitment and retention side, nurses in particular tend to boomerang a bit as the macroeconomic situation improves and then wanes again. Obviously, things have been pretty good for healthcare staff in the last couple of years, COVID aside but pretty good financially for them. Are we starting to see any evidence yet that the more challenging broader economic picture is pushing more nurses back into the workforce or encouraging the nurses you do have to work longer hours? And I ask the question last quarter, but it might be worth an update now as…

We track this metric closely, and currently, about a third of our new hires, which is roughly 13%, are returning employees. This highlights the strength of our workforce, as about a third of our employees come through our referral program. Overall, we are witnessing some stabilization in our hiring, and we're also considering the broader economic environment, which could lead more people to enter the job market. It's encouraging to see this stabilization, and it's beneficial for us to focus on these 5,000 priority positions to bring in the right talent. Additionally, as previously mentioned, emphasis on training remains crucial.

The next question is from the line of Graham Doyle from UBS. Please go ahead.

Thanks for taking my questions. Just one on Q4 and what's implied around that. So we know you obviously flagged the provider relief funds into Q4 as being clearly within the guidance. Is there anything else we should be thinking about? And should we look at Q4 as probably the best indicators to the smooth functioning you have for next year? So maybe that should be our base for which to extrapolate 2023? And then just one question on vaccination rates, can you give us any update in terms of the US specifically around booster rates there in your patient population? Thank you.

Hi, Graham. Thank you for your question. As you mentioned, looking at the midpoint of our guidance suggests a lower Q4. There are a few factors at play. We had some unusual one-time items in Q3, including long-term incentive plan benefits related to stock price adjustments and short-term incentive true-ups. Additionally, Q3 saw a higher volume of consent payments for pharmaceuticals, which inflated those results compared to Q4. We are still anticipating lower organic growth in Q4, and labor costs are fully exposed without any offsets, affecting the quarter. While I can't provide specific modeling guidance for 2023, we do expect the North America team's intervention measures to begin yielding results in Q4 and, more significantly, throughout 2023. Regarding vaccination rates, we are currently in flu and booster season. Although I don’t have exact figures, we are observing a slight uptick in vaccination rates, though nothing significant or concerning.

That’s super clear. Thank you. I’ll jump back in the queue.

The next question is from the line of James Vane-Tempest from Jefferies. Please go ahead.

Hi. Thank you for taking my question. I have two questions if I could. First, in the second quarter, you mentioned that delays in new starts were affecting the business. I’m curious how that situation has evolved in the third quarter and how it has influenced the mix as we progress through the year since I assume that some of the new patients entering might be more commercial patients. Secondly, while I understand you don't want to comment on 2023, I’d like to focus my question on the nine months we've seen this year. You provided a net income bridge, but could you clarify the impact this year from the ballot costs and funding relief you've received? Specifically, could you provide an estimate of what the nine-month net income would be excluding those two factors? For context, I believe the net income excluding special items for the nine months is €660 million. Would that figure be closer to €500 million? Thank you.

Cool. A lot to absorb there, James. So on your 2Q mix and commercial mix, we're not really seeing any variation there. That's been very, very resilient and pretty stable. So nothing to note there as we now look at Q3 and our guidance coming out. I think, I probably have to have Dominik and the team follow up with you on the net income bridge excluding those items. I don't have the…

So I think the ballot was 2023.

The ballot I can speak to. Yes, that was always 2023.

Both the funding relief and provider relief funds, we received I think €280 million or so.

But James, was your question what would net income be without those items?

Yes, in considering the base for this year regarding items not anticipated for next year, people are looking for clarity on what the minimum level is for business growth heading into next year.

Yes, let us follow up with you on that, James.

The next question is from the line of Hassan Al-Wakeel from Barclays. Please go ahead.

Hi. Thank you for taking my questions. I have two, please. Firstly, following up on Q4 and into next year, could you elaborate and potentially help us quantify some of the building blocks for next year given what is implied by your guidance for Q4, as an exit rate? Should we be thinking of a net headwind and earnings potentially being down in 2023 given the size of the provider relief funding at €200 million plus that is not recurring next year? Secondly, at Q2, Helen you talked about wage inflation running at 9% to 10% in aggregate. I wonder if this has changed at all and how you think about this into Q4 and next year. Where have open positions trended? And how reliant are you still on contract staff? Thank you.

Thank you, Hassan. Regarding the guidance for 2023 and the foundational elements, we are currently in budget discussions around the clock. It's too early to determine the final outcome, as we face several headwinds that we need to navigate. The growth assumptions are crucial, but we also need to invest time in our turnaround plan and related interventions to realistically assess their impact in 2023. We appreciate your continued patience. As for wage inflation, we are currently observing an increase of about 6% to 7%. This figure serves as a reasonable proxy but may not fully encompass our efficiency improvements. Regarding open positions, we previously indicated that maintaining 2,500 to 3,000 open positions was our normal rate. Recently, we have been tracking all open roles, witnessing a decline from 11,000 to 8,000, and currently, we are addressing around 5,000. It's essential to focus on filling the critical positions with the right capabilities and hiring standards, and we are confident in our progress there. You also inquired about agency-related costs. We are focusing on managing those expenses, and while the overall costs are decreasing, they haven't yet fallen as much as we hoped. We are seeing a slight reduction in agency rates as well, indicating a positive trend in both volume and rates, which we expect to enhance further in Q4.

That's really helpful, Helen. Maybe, if I could just follow up on the first part. You talked about one-offs in the quarter. Could you help quantify? I think one was around pharmaceuticals, and the other one was around remuneration.

Yes, well, happy to do so. So the remuneration is around €40 million, and the pharmaceutical higher volume consent payment is also around €40 million.

The next question is from the line of Veronika Dubajova from Citi. Please go ahead.

Hi. Good afternoon. Carla and Helen, thank you for taking my questions. I'll keep it to two please. One is, I guess, I mean, I'm going to circle back to what everyone else has tried to ask, but I'm going to ask it differently, which is, Helen, if I look at your guidance and what it implies for the fourth quarter, are there any reasons why that would be representative as a starting point for 2023? Are there either positives or negatives that might make it not a fair and true account of where the business is as we move into next year? So that's my first question. And my second question and I appreciate it. I think I ask you this every quarter. So far neither you nor I have been able to predict this correctly, but I'm just curious, Helen, on everything that you see when you feel that we might return to a positive same market or same-store growth rate in the US?

Welcome back. It's great to hear from you again. Regarding Q4, I believe it will be relatively stable and similar to what we are currently experiencing. We don't anticipate a significant uplift. For this quarter, we are focusing on the efforts we've previously discussed, particularly in areas such as labor, growth, and clinic operations. However, we are also facing considerable volatility and waiting to see how the COVID numbers develop. This is why I have expanded the range of our forecasts. We are diligently working on this, although predicting the outcome is challenging, yet we remain hopeful for improvements to materialize. As for your second question about when we might see same-store growth, currently we are around the low negatives, approximately minus one. We hope to turn this around early next year, but we've been consistently monitoring the situation. It's difficult to envision the impact of COVID since we have experienced about 25,000 excess mortality since the start. So, winter will be crucial for this, and I ask for your patience as we move forward. We expect to have more updates in February.

The next question is from the line of Oliver Metzger from ODDO BHF. Please go ahead.

Hi. Two questions from my side. The first one is on your development in EMEA. So it seems for me to be a quite good quarter on services as well as product. So last year was not ultra-high, but could you also comment on underlying trends in which you expect to continue into Q4? Second question is following the closing of InterWell Health merger. So, where do you stand right now with medical costs under management in a moment please?

Thanks, Oliver. Good to hear you. On EMEA, I don't think there's anything of note to call out on the quarter itself. We have a comp year-over-year from a license from one of our partners that's in last year's results. So, I think that kind of assists the year-over-year growth, if you will, but nothing else of significance on the volumes. However, I would say, clearly in EMEA, the inflation and supply chain challenges are something that we're watching and continuing probably into Q4. On your InterWell question, we are kind of looking at €5 billion to €6 billion medical costs under management and that 1% margin is fully on track. We're really excited about this merger and the possibilities here, a real important foundational building block of our strategy.

May I ask one follow-up to your second answer? So, when you say €5 billion to €6 billion medical customer management, I think you were at roughly €6 billion at the beginning of the year. So my thought was that the merger creates even more exposure to value-based care. Has anything changed over the last months?

No, I think that was always the plan. I think what I'm just speaking to is kind of currently what we're seeing at a €5 billion to €6 billion. So, no cause for concern there, Oliver.

The next question is from the line of David Adlington from JPMorgan. Please go ahead.

Thanks for taking the questions. Just coming back to those nonrecurring positive items in the third quarter, you sort of quantified it. I just wonder, if you could quantify those year-to-date or perhaps better for the full year 2022. And second, just sort of conceptual one. I just wondered why you were recognizing those one-off gains within the kind of operating income. And were you assuming that those gains or those positive effects within your guidance at the start of the year? Thanks.

No, it's pretty clear, David. Let me address both questions. The long-term incentive plan is linked to our performance and stock price, which fluctuates each quarter. Unfortunately, with our Q2 announcement, we saw a significant drop in Q3, which positively affects our P&L. This fluctuation will change again in the next quarter, so it's not a one-time event. I think it's unusual; a big number like €40 million in one quarter is significant, but we make similar market price adjustments every quarter. Regarding payments for pharmaceuticals, that's standard business conduct; we have them annually, typically in Q4, but this year we had one in Q3. They are not special items and don't need adjustments as they aren't large enough to warrant discussion in the context of the quarter.

Excellent. I don't think there's an accrual on a legal dispute as well as able to quantify that.

Yes, that was the accrual related to the legal dispute from 2019, and we managed to release a portion of that accrual in the first quarter, roughly around €35 million or something like that. I don't have the exact figures with me, but it sounds about right. We initially took a larger charge of €36 million for that case back in 2019. As the case has progressed, we have been able to release some of that amount.

The next question is from the line of Robert Davies from Morgan Stanley. Please go ahead.

Thank you for taking my questions. I'm interested in understanding the current capacity utilization across your facilities. I'm asking this in relation to your plans to potentially reduce site locations or headcount. I'm curious about the minimum requirements for personnel or facilities in each location and where the capacity utilization stands. Also, where do you see the most opportunity for changes, if any? My second question is about the home dialysis segment. Are you still witnessing an increase there? Is it progressing as quickly as you anticipated, or is it slower? Additionally, are the associated costs higher or lower than you had previously estimated? Those are my questions. Thank you.

Hi, Robert, good to have you on the call. Look forward to getting to know you better. So welcome. On the site location percentage, as you can imagine, that is part of our full assessment. We are doing a full scope analysis of all of our clinics and the utilization and the footprint. I don't have the numbers to hand of kind of the utilization of each clinic obviously, but something that we are doing is a full assessment of. You can expect this to be in scope for part of that cost reduction and structural cost reduction plan. Obviously, that has been hurting our operating leverage where we do have underutilization. On home, still growing. It's kind of at 15.4% now of US treatments and we're happy that it's growing. It is slower than we would like. Obviously, some of the training and so on has been impacted by the kind of lower staffing issues. It continues to grow more than the center and will be a key growth area for us. We've not necessarily seen the full benefit of the lower costs yet, but we are absolutely kind of focused on that and continuing to pull that through as another one of our key strategies.

Thank you. Following up on your initial response, do you have an idea about the variability in utilization levels? Is it around 80 with a fluctuation of plus or minus 5%? Or do we see some at 90 and others at 10? Can you give us insight into where we might find significant opportunities across your business?

It varies by region and is influenced by the geography where our patients are located. It's still early to make a definitive statement. Our capacity is sufficient to accommodate new patients, and our goal is to retain as many patients as possible during the consolidation process. I appreciate everyone's patience as we work through this. We need to conduct a thorough analysis, evaluate the results, and then determine how many clinics we will be closing.

The next question is from the line of Falko Friedrichs from Deutsche Bank. Please go ahead.

I have two questions as well please. Firstly, based on comments from your competitor, it seems that fewer patients are transitioning from CKD to ESRD. So, my question is whether you noticed that as well and whether you have any potential explanations for that? And then secondly, just a clarification question. Helen, did I understand you correctly that the number of job openings went from 8,000 in Q2 to 5,000 at the moment?

Hi, Falko, I'll address your second question first. It's not that the number dropped from 8,000 to 5,000; there were many open racks and positions that were perhaps not prioritized. We're now indicating that the relevant figure for open positions is 5,000. It decreased by a couple hundred during the quarter. We are actively hiring and reducing that number. Regarding the transition from CKD to ESRD, while we've heard Javier's comments, we don't have specific data or insights to reference. We are observing fewer diagnoses among COVID-19 related patients who may be avoiding hospitals. Some patients are going to hospitals and others to smaller dialysis clinics, but we don’t see any impact on that population. Our treatment numbers have been increasing sequentially from Q1 to Q2 and Q3, which is significant. We're continuing to analyze the data and understand what's affecting our volume. This analysis is a major part of our outlook for 2023, as we aim for strong organic growth assumptions for the coming year.

Okay. A quick follow-up on the first question for the job opening. So essentially, out of the 8,000 you had, you essentially closed a couple of job openings. Did I understand that correctly?

Yes, that's correct. So, it's like we had a lot of open racks. But now we're like really focused on all the racks worth top priority and then close the racks that maybe diluting our recruiting efforts. So rather than trying to do maybe we don't need 8,000 but maybe trying to do 7,000 at once. So, we're trying to really focus on the 5,000 that have the biggest impact.

The next question is from the line of Sezgi from HSBC. Please go ahead.

Hi, thank you for taking my questions. I would like to ask three questions. First, during the previous call, I found it notable that some clinics were closed, yet I see there is still an expansion taking place. Is this a strategic differentiation, or should we anticipate more closures in the upcoming year? My second question is congratulations on the lifting of the FDA hold. Will we be able to recover all the lost business on the product side due to the hold on the machines, or do you expect some market share to remain permanently lost? I would appreciate your insights on how you plan to recover from this situation. Thank you.

Yes, happy to take those questions. So, no I don't think our strategy is different. Maybe the announcement of timing is. But no we obviously saw that we have net five in the quarter of new clinics that's kind of a function of where they were being built and where they are for our patient needs. I think the strategy is the same. We're all looking at our cost structure and looking to see how we can optimize our clinic structures overall. So, I think that will be part of our update in February. And then yes, we are delighted with the FDA release. We have already started resuming shipments. I think we won't skip a beat. We have POs for those machines that were on hold. We already had assumed that we would resume shipments already in our outlook. So, we're just glad to have confirmation of the date and kind of get that product base back installed.

Thank you.

This concludes our Q&A session and I hand back to Dominik for closing comments. Thank you for being so flexible to join on short notice today. This is highly appreciated. Thank you for your questions and your interest. If you have further questions as always reach out to us, and we look forward to seeing you soon on the road at conferences and hopefully next year. Take care.

Thanks everyone. Bye-bye.

Thank you.

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