Fresenius Medical Care AG Q1 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Timo, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Report on the First Quarter 2023 Earnings Results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.

Thank you, Timo. As mentioned by Tim, we would like to welcome you to our earnings call for the first quarter of 2023. We appreciate you joining today to discuss the performance for the first quarter. I will, as always, 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 try to keep the presentation short and leave time for questions that might be new to all of us in the new reporting structure. As always, we would like to limit the number of questions again to two without sub-questions in order to give everyone the chance to ask questions. Should there be further questions and time left, we can go a second round. It would be great if we could make this work again, please. With us today is Helen Giza, our CEO and Chair of the Management Board and also our Acting CFO. Before I hand over to Helen, I want to remind everyone that we hosted a virtual Capital Markets Day on April 19th. If you were not able to join, the slides and replay from the CMD are both available on our website for watching. With that, Helen, the floor is yours.

Thank you, Dominik, and hi everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care. I'll begin my prepared remarks on slide 5 today. A few weeks ago at our Capital Markets Day, we spoke at length about our operational turnaround to improve profitability. We have a clear aspiration to unlock value as the leading kidney care company and a clear path to achieve that. What I hope came across at the CMD is that we not only have a detailed plan, but we are already executing against these important initiatives. And I would like to highlight some first quarter accomplishments and areas of focus before I turn to the quarter's financial performance. Starting with structure, the conversion of the legal form including the preparation of the carve-out and all the administrative filing requirements are progressing as planned. A physical EGM is expected to take place on July 14th and this is an important step towards simplifying and improving our governance structure and strengthening the rights of our free-float shareholders. Our new global operating model with two distinct global segments has been fully in place since January 1st of this year. And in April, along with our CMD, we published the historical financials for the financial year 2022, reflecting the new financial reporting format. As acting CFO, I have to say this was a Herculean effort to reorient our entire reporting. And I know that we still owe you the quarterly numbers for 2022 and we'll be providing those soon. Today, as promised, we are able to present our first quarter results in this simplified reporting format around our two global segments; Care Delivery and Care Enablement. We continue to make progress on our FME25 transformation program. In the first quarter, we achieved sustainable savings of €60 million, which keeps us on track to achieve €250 million to €300 million in savings by the end of this year. In terms of other strategic drivers, we are seeing a necessary and overdue increase in home training in the U.S. by 14% and we have expanded our value-based care population in the first quarter by 5% to around 95,000 lives. We also realized the first tangible results of our portfolio optimization efforts with a discontinuation of a development program for PD Cycler, and we are continuously working on developing a winning culture focused on accountability and underpinned by our efforts around sustainability, diversity, equity, and inclusion. And as a sign of our commitment to gender equity in the workplace, we signed the United Nations Women's Empowerment Principles last month. Our patients are core and center to everything we do. Through the global medical office, we are continuously monitoring our clinical performance to enhance care and we take a consistent global approach to pursue equity and high standards of care across diverse patient populations. An important KPI in this regard is our quality index, a global indicator for patient well-being and treatment success. The quality index considers dialysis effectiveness, vascular access and anemia management, and we are tracking this on a quarterly basis and saw sequential stability at a high level. While we continue to face macro pressures and the annualization effect of COVID-19-related excess mortality, I'm encouraged by the improving trends and execution on our turnaround plan. During the first quarter, both Care Delivery and Care Enablement segments contributed to organic growth. This was driven by improving sequential volume development in Care Delivery, and strong performance within our Critical Care business and Care Enablement. Our expected strong year-over-year decline in operating income was moderated by several factors and improved business performance like the phasing of Critical Care product sales in China, which were especially strong in the first quarter, and the turnaround measures starting to materialize. In the first quarter, we delivered revenue growth of 2% at constant currency and we continue to deliver organic growth, with positive contributions from both Care Delivery and Care Enablement, in line with our expectations. During the first quarter, operating income on a guided basis, which is in constant currency and excludes special items and U.S. provider relief funding, declined by 13% resulting in a margin of 7.5%. As expected, our business development continued to be impacted by macroeconomic inflationary pressures. While we are seeing signs of stabilization, the increased costs especially relating to raw materials, continued to put pressure on Care Enablement. At the same time, the turnaround drivers are leading to improved business performance, which was also supported by the phasing of strong product sales in China. A significant contributor to the year-over decline in the margin relates to the absence of positive prior year effect in the base in Care Delivery. In Care Delivery, we continue to execute on our turnaround plan to drive operational efficiencies and we are seeing green shoots of recovery, particularly around labor trends and volume. The improved staffing situation enables us to increase our home dialysis training and also increases our ability to take on new patients. And while the annualization effect of COVID-19-related excess mortality continues to weigh on growth, we see sequential improvement. Even though we have seen some stabilization in the macro environment, Care Enablement continues to face significant inflationary pressures. Inflation continues to be the biggest headwind for this business. It was partially offset by FME25 savings and positive business growth.

Thank you, Helen, for the very first presentation in the new structure. I'm sure there are many questions and I'll turn it over to Q&A. Timo, could you please open the line?

Thank you. First question is from the line of Victoria Lambert.

Thanks for taking my question. The first one is just on the outlook for wage increases this year. Is this still expected to be around 4% to 5% increases? And then my second question is just on the progress of clinic closures as your guidance for the year is still 50 to 100 closures targeted for the year and how many have you closed so far? Thank you.

Hi, Victoria. Thanks for your questions. Yes, look, I think in Q1 we saw this wage inflation around this 4%, maybe just a little bit over 4%, which seems to be consistent across the industry. And obviously, when you look at our guidance on labor for 2023, we have this €140 million to €180 million. Q1 looks a little strange because of the quarterly year-over-year comp from Q1 last year where obviously labor was very significant due to Omicron. But I think we're seeing the sizing of the labor number as the year-over-year impact holding and in line with our guidance. But I think for the quarter, we did see it just a little bit over 4%. In terms of your question on clinics, we're really, really pleased with how that is progressing. We closed already 51 clinics in Q4 and Q1, and I think that sizing that we've given of 50 to 100, if you take the midpoint of that, that's kind of how we're thinking about that right now.

We can take the next question, please.

Sure. The next question is from the line of Hassan Al-Wakeel with Barclays.

Hi, thank you for taking my questions. I have two, please. Firstly, given the better development in patient dynamics in the US, could we see same market treatment growth turning positive in the second quarter? And could this perhaps point to the upper end of the volume growth guidance range being more realistic for the full year? And then secondly, could you talk about the Care Enablement strength and how significant the contribution was from China acute sales and how should we think about margins for the remainder of the year in this business? Thank you.

Thanks, Hassan. As you know, we have one quarter under our belt and we saw that at minus 0.3%. Obviously, it does include the impact of the clinic closures as well as some of the acute unprofitable contracts that we're exiting. I think right now we still feel pretty good regarding our guidance of minus 1% to plus 1%. I'm not going to tighten that guidance yet. I think we just need to see another quarter or two under our belts. But obviously, we're pleased with the development from Q4 to Q1. The China impact was roughly around €20 million of operating income in the quarters and obviously we saw that as a kind of accelerated pull forward, which we're encouraged by but we obviously would expect the forecast that we had for the back of the year now to have already been achieved. I'm not going to give guidance by quarter on CE and what we're seeing, but obviously, what we outlined at Capital Markets, we're executing against every component of that. And I know we haven't guided between CD and CE and don't intend to at this stage but very encouraged by the progress in the first quarter, particularly in Care Enablement. But that inflation number is real. As you can see, we have over €50 million or so of inflation in Q1 against a guided number that looks to be tracking against that full year.

We can take the next question, please.

The next question is from the line of Veronika Dubajova with Citi. Your question, please.

Hi, Helen. Hi, Dominik. Thank you for taking my questions. I have two, please. One Helen, I just wanted to circle back to the wage, overall labor dynamics. Obviously, you commented on inflation. I think the other sort of dynamics that you've been seeing is the switch from temporary to permanent labor. And you also gave us some stats on the openings. As you look through the second and the third quarter, would you expect those open positions to come back down to the historical 2,500 to 3,000? And if that is the case, are you still comfortable with that €140 million to €180 million labor cost headwind that you've assumed for the full year? And then I have a follow-up after that.

Okay. Let me hit the labor one. And hi, Veronika, thank you for the question. Look, there's a lot of moving parts on labor as I think you can appreciate. What we are seeing and I think consistent with the industry is definitely a decline in the use of contract labor both in kind of traveling nurses if you will as well as a decline in agency. At the same time we're seeing a decline in volume. We're also seeing a decline in hourly rates. I touched on the kind of what we're seeing on the inflationary aspect, if you will. And of that that 4,000 open positions, we are encouraged by that. It's about down 10%, as I said over the last quarter. And those open positions still set at around 50-50 between PCTs and nurses. But we're encouraged with our recruiting efforts there and kind of where the sources are coming from either in referrals or rehires. And on top of that, our turnover trends are improving, quarter-over-quarter as well. So look, I think we're on a good track. I still feel good about the €140 million to €180 million. We obviously had assumed that we would be reducing open positions and kind of reducing some of this over the course of the year when we gave guidance. So for now, I feel good.

Okay. That's great. And then my second question is just on the sort of one-time contribution from China to Critical Care. Apologies if I missed this in your prepared remarks, but what would the products growth have been excluding that? And do you expect that to reverse out in the rest of the year or just not to recur? Thank you.

I didn't mention in my prepared remarks, but I think I just addressed Hassan's question about the €20 million EBIT impact for the year. Essentially, that reflects some favorable forecasting we might have regarding demand. We'll see how the rest of the year unfolds. Did I cover both parts of that question, Veronika?

We can take the next question, please.

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

Hi. Good afternoon. Two questions from my side. The first one is also on your U.S. clinics network. So on net base, we were down by 2%. You also made a few comments regarding recent closures. That's basically the reflection of the lower volumes. Now, things really seem to normalize. So how should we think conceptually about your clinic network? Do you expect some net growth in the context of home hemodialysis? And that's also part of my second question because you mentioned the HHD machines. And how should we think about the output of your machines versus your internal demand? In theory, I would assume you could digest all the machines you produce just only for yourself, but you still want to sell some in the open market. So potentially can you give us some more visibility on how we should think about these external sales of the machines?

Yeah. Thanks, Oliver for your questions. Look, I think, obviously, we had underutilized capacity in our clinic network. And obviously, we are addressing that with the clinic closures and probably still expect some more to happen over the course of the year. At the same time, we want to make sure that we are driving productivity and efficiencies to make sure we're maximizing that overhead structure. So the other piece of this which you touched on is obviously as home now starts to ramp back up. We're really encouraged by what we saw and the increase in training here in the quarter. That will obviously kind of take some of that capacity. So in terms of normalizing, it's been a while since we've talked about normalizing. I think this is just going to get us back to the kind of the plans that we had pre-pandemic. So I think from here on in the volumes will naturally take care of itself and that infrastructure will follow. On your second question regarding HHD, obviously, it's important to us that we have enough machines for our own business but also we have capacity and we have external third-party customers and we don't see that changing.

One quick follow-up, did you see significant room for an increase of production capacities for HHD machines?

We're not capacity constrained there.

We can take the next question, please.

The next question is from the line of Robert Davies with Morgan Stanley. Your question please.

Hi there. Thanks for taking my questions. Just wanted to pick up on your capacity utilization comment earlier across your clinics. Given the sort of clinic numbers you were talking about earlier, where do you see the utilization of the clinics to be at the end? Are there still going to be certain clinics in the network where utilization is still very low, but you just have to hold on to them for strategic reasons or political reasons where you couldn't exit them? That was my first question. And then the second one was just on, I guess, the overall profitability guidance over the medium-term. I just wonder in terms of current market developments, is there anything that sort of changed your thinking versus what you previously gave out? And what would take you to sort of lower or upper end of that guidance range? Thank you.

Thanks for your question, Robert. Look, obviously capacity we look across our entire network and in the US across 2,600 clinics. Obviously, our utilization has been under what we would have liked it to have been. If I recall, Bill said we were around 60% at the moment when we gave the Capital Markets Day update a couple of weeks ago. Obviously, we continue to want to drive that number up and continue to increase that. So, but of course, you're right. It does vary state-by-state region-by-region. So if you can appreciate this is a complex overview of the entire network of things like network adequacy and so on. And obviously the balance with home. So, it's a number we track clinic-by-clinic, and we want to improve our operating leverage. On your second question on guidance and do I change that guidance? I’m pleased with how the first quarter has developed but I’m going to continue to be careful and cautious here and take it quarter-by-quarter and hopefully provide more of an update in Q2.

We can take the next question, please.

The next question is from the line of David Adlington with JPMorgan.

Hey guys. Thanks for the question. So, maybe just on the U.S. pricing on the Care Delivery side. I just wonder what you're seeing there on the private side and what your expectations were evolution from here on sort of price mix through the rest of the year? And maybe sort of following on from that, any early thoughts on the proposal for CMS for next year, which will be out fairly shortly?

Hi David. I want to ensure I've understood your question accurately. You mentioned CD and products, but I assume you meant clinic and Services? Yes, that's fine. We're all adjusting to the new model. So, you're asking about our assumptions for reimbursement and what we're expecting or observing with CMS. We've discussed this over the past few months regarding the mechanisms for PPS and cost reports. Generally, when inflation and costs are high, reimbursement should reflect that, although there is typically a lag. We have assumed a 3% increase for this year. The preliminary MedPAC report indicates a full increase, but we'll see how that develops based on CMS logic. I believe around July we will get an early look at the preliminary PPS rate. By the time we reach Q2, we should have a clearer picture.

Thanks. I just wonder what you're seeing on the private side as well on the pricing?

On the private side, on the pricing, nothing of note, I would say. We're on the cycle of kind of renegotiations with the bigger payers nothing of note for 2023. I think a smaller one at the end of this year but nothing of note to mention on commercial pricing.

We can take the next question, please.

The next question is from the line of James Vane-Tempest with Jefferies. Your question please.

Hi, good afternoon. Thanks for taking my questions. It's James Vane-Tempest from Jefferies. Two please. Firstly, full year I think missed treatments were up, which I understood was somewhat of a mystery. And I was just wondering what you're seeing there and what the reasons were for mistreatments and is that why volumes are better? And second question is just on the portfolio optimization we've seen today, which isn't insignificant. I guess when we look what's more to come from portfolio optimization, would you say that's going to be more streamlining existing businesses, or would you look at other kind of further product development? Thank you.

Let me address your second question regarding portfolio optimization first. I recognize that the VersiPD write-off is significant. My perspective on this portfolio and its various components is structured into four main areas. Firstly, we have the initiatives and projects under FME25, which focus on internal structural operational changes aimed at enhancing efficiencies and savings. Next, we have the R&D product portfolio, where we've made a decisive choice to terminate VersiPD after thorough evaluation. This is likely to be the most substantial change. Then there is the international services market, which we have discussed, where we plan to exit and divest from markets that are either underperforming or unprofitable, particularly those where we can’t achieve meaningful profitability due to factors such as reimbursement challenges. We have begun making progress in this area, although timing remains a challenge and it’s hard to forecast when these exits will occur. We have identified certain markets we intend to leave. Finally, the fourth area involves divesting non-core assets, from which we expect to gain some proceeds, though these may involve smaller gains or losses as we exit those assets. We're focused on these four distinct areas, each driven by different strategies, and we will provide updates throughout the year. As for your initial question about treatment, we are seeing improvements this quarter compared to last year, but it hasn't completely normalized yet. There have been encouraging signs with new starts, fewer mistreatments, and patients adhering to their schedules. However, this also includes the impact of clinic closures and acute contract exits. Overall, while progress is evident, we aren’t back to previous levels yet, but there are promising developments.

We can take the next question, please.

The next question is from the line of Lisa Clive with AB Bernstein. Your question please.

Hello. Just two questions for me. Number one, DaVita and Medtronic has started this product joint venture. Baxter is now going to be a stand-alone company. There's a lot of moving parts with the competitive landscape. And given you've discontinued products, how should we think about the FMC products business from here? You've long been the industry leader, but given the profitability of that business, it sounds like there just hasn't been a lot of focus on new product introductions. Should we expect R&D to go up? Do you expect more commercial intensity from the sort of structural changes amongst your competitors? And then second question, just in terms of new patient start training for home hemodialysis and all that. Thank you for some of the commentary on that. But are you sort of happy that we're kind of back to normal run rate now and should continue on that path? Thanks.

Thanks, Lisa, and I appreciate your questions. Yes, look, obviously, we're watching the market developing in this space with Mosaic and Baxter quite closely. We obviously are cleaning up our own portfolio. VersiPD is a good example of that. We feel we're very focused on improving our profitability. Driving efficiencies internally, but also on pricing externally as well. We feel good about what we have in our portfolio and what we can do with that. On your second question, on new patient starts and training and home, I mean obviously the labor challenge really sorted our ability to train in the home setting. And to see this bump after many, many quarters where we haven't seen anything is really encouraging. So I hope this is the start of the kind of the acceleration again, that we saw pre-COVID and gets us back on our track to hit our aspiration of 25%.

Great. I have one last follow-up question. Did you mention the specific number of COVID-related deaths, or if not, could you provide that number?

No. We moved away from that. It's now just all wrapped up in our organic growth number. The number that we have been speaking to and I think it's probably more relevant now than ever is what is the total mortality number. And I think as of February, I don't think we have anything for later than that yet, but the overall mortality number was 18%, which compares to 17% historically. So, I think we're seeing it come down and come down rapidly, but nothing new. And we're not teasing out this excess mortality number going forward.

We can take the next question, please.

The next question is from the line of Christoph Gretler with CS. Your question, please.

Thank you, operator. Good afternoon all. Thanks for the presentation. Two questions. One on PD and the other on same-store market growth. On PD, I was a bit surprised by the write-off of the PD cycler program. Could you discuss how you think that will impact your future growth and the achievability of this 25% home dialysis treatment target in the midterm? And then the second question is just on excess mortality to follow up on that. I think there was quite a substantial drop in this 12-month mortality rate particularly internationally in Q2 looking at the comp base. Is it reasonable to assume that we should see some positive growth also in the US from Q2 onwards already?

Yeah, thanks, Chris. Yeah, let me maybe give some more color on the decision around VersiPD because we feel very, very strongly about this and hence the reason why we've acted on this decision so quickly. We've taken a look at our entire portfolio. And obviously we are a global company. And when we looked at VersiPD, it was much more of a regional play. And we have another offering in development called Safe Sleep Harmony and that is a global offering. So we've discontinued the regional one, if you will, to really focus on the global one. And we feel that Safe Sleep has a much more competitive profile for PD than what VersiPD had. So sometimes you just have to make these tough decisions and I think it’s given the clarity to the organization as we move on. Your question on excess mortality is a good one and one that we've asked ourselves many times right? As we normalize coming out of COVID, do we see a point where the overall mortality number is less than the previous historic excess mortality number? We haven't seen that yet. Obviously, every quarter that goes by we start to see it. But you're absolutely right. We do see better trends in Europe than maybe the US. And I think we reported that at CMD as well. We'll see how that plays out in the US over time. It will be what it will be, but I think it will be an interesting dynamic after all the unfortunate lives that we have lost over the last three years.

We can take the next question, please.

The next question is from the line of Sezgi Ozener with HSBC.

Hi. Thanks for taking my questions. I hope you can hear me well. We have heard that the labor market is easing, but at the same time you still have the higher year-on-year growth. Is there any hope whatsoever that there might be another provider relief fund or something similar? And my second question relates to I know you looked closely into the product portfolio and what kind of other write-offs discontinuations can we expect? And can you maybe provide more color on the potential volume impact that might come from that?

Thank you for your question. We do not expect any provider relief funds or government funding for this year, as we clearly stated in our guidance assumptions. We hope that the increased cost base will be reflected in reimbursement rate increases moving forward. Regarding the portfolio, as I mentioned, we have discontinued one R&D program, but we believe we are developing a better program to replace it, so there are no volume implications. Any other initiatives we are considering would likely be smaller in nature, and we do not anticipate a significant volume impact from those.

There are no further questions at this time and I hand back to Dominik for closing comments. So no questions. Thank you very much for the participation in the lively discussion. And with that, we would close the call now and we look forward to seeing you over the next couple of weeks on the road or virtually. So thank you for participating.

Thank you all. Thank you for your continued support. Take care.

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