Fresenius Medical Care AG Q3 FY2024 Earnings Call

Ladies and gentlemen, welcome to the report of the Third Quarter 2024 of Fresenius Medical Care Conference Call. I'm Sandra, the Chorus Call operator. I’d like to remind you that all participants will be in listen-only mode and the conference is being recorded. A replay will be available on the company's website. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominik Heger, Head of Investor Relations. Please go ahead.

Thank you, Sandra. I would like to welcome everyone to our earnings call for the third quarter of 2024. Thank you for joining us today. I'll start 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. The call is scheduled for 60 minutes. We have prepared a presentation and we'll have time for your questions after the prepared remarks. We would like to limit the number of questions to two in order to give everyone the chance to ask a question. Let me now welcome Helen Giza, CEO and Chair of the Management Board; and Martin Fischer, CFO of Fresenius Medical Care. Following the prepared remarks, we are happy to take your questions. Helen, the floor is yours.

Thank you, Dominik, and welcome, everybody. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care, which we appreciate even more given the attention to the U.S. elections today. Before I start with details on the quarter, it's important for me to say a few words upfront. I'm continuously inspired by the dedication of our employees around the world who go above and beyond to ensure our patients receive the life-sustaining dialysis treatments they need and with the highest level of care, irrespective of how much effort, challenge, and difficulty the environment around them is. We see what continued in Ukraine and Russia, and more broadly in the Middle East and other crisis areas. Also, the U.S. faced some severe weather events, including Hurricane Beryl in Texas in July and Hurricanes Helene and Milton, impacting the Southeastern United States this fall. In anticipation of these hurricanes, we mobilized command centers a week in advance to begin coordination with our local teams, doctors, hospitals, and local authorities. We worked closely with patients to find alternative appointment times where patients could receive life-sustaining dialysis treatments before and immediately after the storms. Thanks to the tremendous response by our team, we were able to get our patients the treatment they require. Many thanks to the teams around the world who did an outstanding job in all these situations. I'll now begin my prepared remarks on Slide 4. The third quarter marked another period where our clear focus on improving operational performance and continued momentum in our company transformation directly resulted in strong improvement in our financial performance and meaningful progress towards our 2025 group margin target. Across both of our operating segments, we are realizing important progress as well as demonstrating our industry-leading capabilities. Beginning with Care Delivery, in the third quarter, we reached an important and reassuring milestone as underlying same market treatment growth in the U.S. turned positive. While the volume development is positive, it remains muted in the U.S. due to still elevated mortality. We continue to work on the volume pieces that are in our control, such as streamlining the admissions process and reducing missed treatments. As a result of these efforts, in the third quarter, we recorded improvement in cancellation rates and lower missed treatments. In our international business, we saw same market treatment growth accelerate to 3%, demonstrating that underlying trends for our industry worldwide remain intact. We like how the future of our international portfolio shapes up following the significant progress we made on our portfolio optimization. And as a result, we are more focused on growth markets with attractive returns. As already mentioned, thanks to the excellent hurricane disaster response by our teams, we were able to provide our patients their treatments and minimize missed treatments. In the third quarter, hurricanes and weather-related events only had a negative impact of 5 basis points on treatment volumes due to our strong disaster preparedness and quick response. I'm proud to say that our continued focus on quality of care as part of our day-to-day clinic operations has not wavered either. Fresenius Medical Care dialysis centers in the U.S. routinely rank amongst the safest and highest-quality dialysis centers in the country as measured by the CMS 5-Star Quality Rating System. In the just recently published rating for 2023, 65% of our dialysis centers in the U.S. received a weighting of 3 stars or higher. This was higher than the nationwide averages, which found fewer than 60% of all dialysis centers received similar 3-star or higher ratings. Earlier in October, it was reported that InterWell, our value-based care business achieved best-in-class quality performance in the first year of the U.S. government CKCC program. InterWell operated 10 of the top 10 and 17 of the top 20 highest scoring kidney contracting entities based on results recently published by the Center for Medicare and Medicaid Innovation. These results are a testament to the incredible partnership with our physician partners and our leading efforts to deliver value-based care initiatives and opportunities to the market. We believe this further strengthens InterWell's position as a partner of choice for nephrologists, payers, and patients in the future. While these results demonstrate our industry-leading efforts to deliver value-based care, we must also acknowledge that value-based care is still a relatively nascent industry with lumpy and at times volatile financial returns. CMS also announced the final ESRD PPS reimbursement increase for 2025 just last Friday. While the 2.7% increase is slightly better than the draft rule, it is still below what we would have liked to see given the inflationary pressures on our industry. It is in line with our moderate assumption for reimbursement increases in our 2025 margin outlook. Our Care Enablement business has continued to achieve improving returns through the third quarter and has maintained the significant margin progress realized in the first six months. Solid volume growth as well as continued execution of targeted pricing initiatives and significant contributions from our FME25 program supported the strong performance. As expected, we did experience a greater negative price impact in China related to the implementation of volume-based procurement. This developed in line with our assumptions, and China remains an important and attractive market for our product business. Beyond our pricing initiatives, the continued optimization of our supply chain and manufacturing footprint remains a critical focus of our FME25 program. At the same time, we are focused on the future, ensuring we are strategically positioned to leverage our industry-leading capabilities and maximize opportunities. We are fully on track with our preparations for the launch of our HDF enabled 5008X machine in the United States at the end of next year with full commercial launch in 2026, and we have seen strong interest at the American Society of Nephrology Congress at the end of October. While the 5008X will not need IV solutions for operations, we are also today benefiting from our vertically integrated business model. Thanks to our Care Enablement team stepping up after the hurricanes' impact on one of our competitors' production site, we had no interruptions in supply due to access to our own IV solution and PD products for our patients. As a consequence, we were not only able to accept more new PD patients at the end of the quarter in Care Delivery, but additionally, we were able to help other dialysis providers with access to products from our production. Moving to Slide 5. Turning to our specific third quarter developments. We delivered organic revenue growth of 2%, with positive contributions from both Care Delivery and Care Enablement. As mentioned, our underlying U.S. same market treatment growth turned positive in the quarter with 0.2% growth when adjusted for the exit of acute contracts. This also includes a 5 basis point negative impact from the hurricanes. Both segments realized increased operating income and increased operating income margins. Care Delivery extended well into its target band for 2025 and Care Enablement improved its margin significantly year-over-year. This was supported by strong contributions from the execution of our FME25 program. FME25 contributed EUR64 million in additional savings resulting in EUR173 million by the end of the third quarter. We are well ahead of the targeted EUR100 million to EUR150 million for 2024. And with this acceleration, we now expect to achieve already in 2024 around EUR200 million. This confirms how well we are on track to achieve our target of EUR650 million in sustainable savings by the end of 2025. In line with our disciplined financial policy, we further reduced our net financial debt and improved our net leverage ratio to below our target corridor, which Martin will speak about later. Given our year-to-date performance through the third quarter and development against our assumptions to date, we confirm our revenue growth outlook and heighten our previous operating income outlook towards the upper end of our range with 16% to 18% growth for full year 2024. I'll now hand you over to Martin to take you through the third quarter financial performance in more detail.

Thank you, Helen, and welcome to everyone on the call. I will recap our third quarter financials beginning on Slide 7. In the third quarter, we achieved organic revenue growth of 2%, supported by both Care Delivery and Care Enablement. On an outlook base, revenue decreased by 0.7%, and our revenue development was negatively affected by divestitures, resulting from the successful execution of our portfolio optimization plan. The divestitures realized through the third quarter negatively impacted growth by 230 basis points. As you might recall, we decided not to adjust our numbers in the current financial year for the divestitures we are closing this year. We absorbed this impact in our guidance range for the year. Moving to operating income. On an outlook base, we saw an increase by 10%, driven by the improved performance of both segments. This resulted in a meaningful higher margin of 9.8%. With that, we are approaching our 2025 target margin band of 10% to 14%. Divestitures realized so far had a neutral effect on operating income margin. Special items during the quarter largely offset each other. Moving to Slide 8. This slide provides an overview of the 90 basis points group margin improvement. On the left, you see how we get from the reported third quarter 2023 operating income to the starting point of our outlook base by adjusting for special items and 2023 divestitures. In the middle, the chart shows the quarterly contribution by segment, including intersegment eliminations and corporate. Both operating segments contributed positively. The impact on the progress we made in our Care Enablement transformation efforts stands out in particular. Last quarter, we explained that we entered into a virtual power purchase agreement for renewable energy, so-called vPPAs. This is an important step towards our goal of becoming carbon neutral in our operations by 2040. vPPAs do introduce a degree of volatility to the earnings development due to the required quarterly evaluation of the embedded derivatives that then flows through the P&L. While vPPAs had a small positive earnings impact in the second quarter of EUR6 million, in the third quarter, vPPAs had a negative impact of EUR24 million on our corporate line. On the right, special items for the quarter included negative one-time costs associated with the FME25 program, which were partially offset by positive one-time effects from the Humacyte remeasurement and legacy portfolio optimization. Turning to Slide 9. In Care Delivery, the 2% revenue decline in the third quarter specifically reflected a negative 330 basis points impact from divestitures closed this year. Our underlying Care Delivery business contributed positive organic revenue growth in the third quarter. In the U.S., revenue increased by 1% on an outlook base driven by growth in our value-based care business, an overall increase in underlying treatment volumes, and improved reimbursement rates and payer mix. This was partially offset by implicit price concessions. Thanks to a strengthened Care Delivery international portfolio, our international business contributed a very solid 4% organic growth supported by accelerated same-market treatment growth of 2.9% and higher reimbursement rates. Shifting now to operating income. In the third quarter, Care Delivery recorded an increase of 5% and a 70 basis point margin improvement, resulting in a margin of 11.2%. This is well within our 2025 target margin band. Positive business growth development was driven by price and volume effects as well as the phasing of a consent agreement on certain pharmaceuticals. While the phasing varies within a year, on a full year basis, we expect this to be broadly neutral. Business growth development was partially offset by negative contributions from the value-based care business. While value-based care is a positive contributor in the first half, unfavorable financial developments within the CKCC program had an adverse impact on business growth of around EUR40 million in the quarter. As mentioned in the past, there is some earnings volatility in this business, and nine months in, we now assume a negative contribution of value-based care to operating income of EUR20 million to EUR40 million for the year. FME25 savings were a relatively smaller contributor for Care Delivery as the majority of the program's initiative is focused on global G&A functions and our Care Enablement segment. Finally, the labor headwind in the third quarter was driven by higher personnel expenses, which were in line with our expectations. Next on Slide 10. In the third quarter, Care Enablement realized 4% organic revenue growth. This was primarily driven by solid volume development across all geographical regions. Continued pricing momentum outside China added to this positive development. As expected, the extended rollout of volume-based procurement in China negatively impacted the pricing development. This was in line with our expectations and is factored into our outlook for the full year. Turning to operating income now. Care Enablement achieved a significant increase, nearly quadrupling from the prior year quarter three. Accelerated savings from FME25 were the biggest contributor to operating income growth. A solid contribution from business growth was driven by positive volume and pricing development. This was partially offset by negative pricing effects related to volume-based procurement in China and impact from foreign currency transaction. Inflationary cost increases developed in line with our expectations. Care Enablement already achieved significant margin progress in the first half of the year, and it is positive to see the business maintaining its momentum through the third quarter, while absorbing the negative effects from volume-based procurement. The strong brokers today put us well on track to achieve our 2025 margin targets. Moving to Slide 11. In the third quarter, operating cash flow increased mainly due to the recovery of the cash impact following the cyber incident at Change Healthcare. With this strong quarter, we have partially caught up on the delayed collections in the first nine months. For the first nine months, the decrease in free cash flow was additionally affected by the phasing of dividend payments received from equity method investments as well as income tax payments for current and prior year periods, particularly in the U.S. Both our total debt and lease liabilities as well as total debt and lease liabilities and net debt and lease liabilities have further decreased compared to the prior year third quarter. And as a result of our commitment to a disciplined financial policy and positive EBITDA development, our net leverage ratio improved to 2.8 times. This is a great achievement, and it is below our self-imposed target corridor of 3 times to 3.5 times net debt-to-EBITDA. Our priorities have not changed. In line with our current strategic ambitions through 2025, deleveraging remains our top capital allocation priority. As we continue to execute our portfolio optimization plan, we will use the proceeds to further reduce debt and strengthen our balance sheet. We want to ensure that our company is in good financial health as we start to prepare for our future strategy. With that, I hand over to Helen.

Thank you, Martin. I'll pick it back up on Slide 13 with an update on our outlook. Overall, and despite some headwinds like vPPAs and lower contributions from value-based care, we are well on track to deliver against our positive outlook for this year. We expect to realize further improvements in our operational performance and transformation efforts in the fourth quarter. Therefore, we confirm our revenue outlook for full year 2024 and heighten our expected operating income growth towards the upper end with 16% to 18%. When we compare our assumptions, which we initially shared back in February against the development after nine months, we are broadly in line with our expectations in phasing. The biggest deviations from our initial assumptions were the successful acceleration of our FME25 savings program, which compensated for the more muted U.S. volume growth, negative contribution from our value-based care business, as well as the impact from vPPAs. Just as a reminder that in last year's Q4, we entered into a favorable settlement agreement with the U.S. government. The Tricare settlement positively impacted Q4 revenue by EUR191 million and Q4 operating income by EUR181 million and was not reported as a special item. We excluded this effect from the 2024 outlook base. We are also confirming our 2025 margin outlook of 10% to 14% group margin. The quarter once again demonstrated that we are on track with our turnaround and that we deliver on what we said. Both Care Delivery and Care Enablement are meaningfully progressing towards the 2025 target margin bands. Our transformation momentum continues positively. For 2025, we are still unpacking the full impact of the new rules of binders moving into the bundle. We still have elevated mortality and a flu season ahead of us as well as some other moving parts like vPPAs, value-based care volatility, and the volume increase from volume-based procurement in China, just to name a few of the moving parts. Therefore, we have decided that we do not tighten our 2025 target range today. As every year, in February, we will share the detailed outlook and the corresponding assumptions for 2025. Meanwhile, rest assured that my ambitions for 2025 remain rock solid, delivering as promised. And finally, as we approach the end of 2024 and everyone starts arranging their calendars for next year, I do want to highlight that we plan to host our next Capital Markets Day on June 17 in London. We hope many of you will be able to attend. So please save the date and look out for future communications from Investor Relations in the coming weeks. This concludes my prepared remarks. I'll now hand it back to Dominik to start the Q&A.

Thank you, Helen and Martin, for your presentation. Before I hand over for the Q&A, I would like to remind everyone to limit your questions to two. If we have remaining time, we can go another round. With that, I hand it over to Sandra to open the Q&A, please.

We will now begin the question-and-answer session.

Thank you very much. Thanks for taking my questions. My first one is on the medium-term margin guidance, please. So obviously, still quite a wide range heading into 2025. Should we assume that the decision not to narrow the range at this stage does indicate you still see a path to getting into the upper half of that 10% to 14%? That's question one. Question two, also on the topic of margin and specifically on the Care Enablement business. This year, making very good progress improving profitability, but I suppose, still quite a big gap up to the lower end of the 2025 target. Could you remind us of some of the levers you've got to keep up the momentum on margin progression for that part of the business? Thank you.

Thanks, Richard. I will address both of those questions. Regarding the medium-term margin, there's still a lot of uncertainty, and as we've observed this year, each quarter provides us with insights, especially regarding volume and mortality. We're already deep into our budget discussions for next year. With a few more data points, we’ll be able to guide you appropriately, and we'll do so in February. We know there are still broad ranges out there, but we aim to provide more clarity then with additional information. As for your second question on the margin for Care Enablement, we are pleased with the progress we've made. There has been significant development throughout this year. We have always mentioned that Care Enablement would be back-end loaded due to the scale of many of the FME25 programs, particularly related to manufacturing footprint and others. We will provide more details in February as we gain more insight into that range. However, you can expect it to be back-end loaded, and we remain committed to our margin targets, anticipating continuous progress through 2025.

The next question comes from Victoria Lambert from Berenberg. Victoria, line is yours.

Thanks for taking my question and thanks for providing the like-for-like impact from the hurricanes in Q3. You said it was about 5 basis points. What is the expected impact from hurricanes in Q4 just given the timing of Hurricane Milton? And then just on the Care Enablement margins, what benefit can we expect in Q4 from FMC being able to step in and supply the PD machines? And will this benefit next year as well? Thank you.

Thanks, Victoria. I think I'll take those two. On the hurricane, we're still kind of quantifying what the impact is on the hurricanes for Q4 that we could expect it to be similar, maybe slightly lower level. Obviously, we were impacted but back up and running pretty quickly, but we'll provide more color on that when we get to full year. And then on the CE benefit, obviously, we are seeing increased demand from the CE product side for PD products where obviously, I'm packing some of that in real time. I don't have anything I can speak to today in terms of sizing but I think we'll take that into account when we do the kind of the business development growth numbers for 2025 and we'll be able to scale it accordingly once we have a little bit more solidified. But obviously, happy to help out and kind of work through the increased demand from PD and on the CE projects business.

Next question comes from Robert Davies from Morgan Stanley. Robert?

Yes. Thanks for taking my question. My first one was just around the issue of, I guess, the growth progression, the same market treatment growth. And just if you could provide any color in terms of what you're seeing on the excess mortality side; it has obviously been a big sort of discussion topic over the year. Just be curious of what your view of where we sort of stand on that and how that would impact the sort of outlook over the next sort of three to six months. The other one was just where we are in terms of sort of clinic closures? Anything additional since the last quarter that you've identified for potential clinic closures that wasn't in the original plan or anything left to go? Thank you.

Thanks, Robert. Regarding treatment growth in the market, we're still looking at small numbers here. We did notice some progress during the quarter, but September was affected by the hurricane. So we're dealing with small fluctuations. The excess mortality rate remains high, and this is a key figure we're monitoring closely. We anticipate that growth will return to normal levels once these numbers stabilize. That’s why we are observing this data monthly and quarterly to inform our growth expectations for the upcoming year. Regarding clinic closures, the situation is somewhat complex. We are investing in new centers where we see growth opportunities in certain areas, and we opened 11 centers this year at full capacity. However, for clinics that are underperforming, we are evaluating them individually to decide if closures are necessary. I don’t foresee this becoming a large initiative, but we are assessing clinics regularly and identifying a few that may be closed when it makes sense. We are being very selective with our investments and closures.

Maybe just one quick follow-up. Just in terms of where you are in terms of those new clinic openings in terms of getting staffing and headcount because obviously, labor inflation was a bigger issue maybe a year ago. Are you having any issues in terms of getting new dialysis nurses into the clinics in terms of cost or difficulty in finding them? Thank you.

Yes. Thank you. Taking your third question. In terms of open positions, we actually came down in the quarter from 3,500 to 3,300. The mix of nurses and PCTs has stayed pretty stable. So we're filling more nurse positions, which is great than PCTs. So I'd say labor is pretty stable. I mean clearly, we're still through some hotspots in terms of where we do have some constrained clinics and trying to do what we need to with staffing, but that number has come down significantly over the course of the year. So overall, managing labor quite well, I would say.

Thank you, Robert. And the next question comes from Hugo Solvet from Exane BNP. Hugo, the line is yours.

Thanks, Dominik. Hi, guys. Thanks for taking my questions. I have a couple. First, thank you, Helen, for the details on the volume progression during the quarter. Just a quick clarification. I think in previous calls, you mentioned that we potentially expect an exit rate in FY 2024 of about 2% to 3%. Do you still think that this could be possible? And lastly, I'm sorry if I missed that, Martin, in your comments. Can you maybe quantify the impact of the consent agreement on pharmaceuticals in the quarter? That would be helpful. Thank you very much.

Thanks, Hugo. I'll take your first question, and Martin can take your second. We stay confident in the underlying fundamentals of the industry that when we see the normalization of mortality and the normalization of the funnel that we do expect to return to that kind of 2% to 3% pre-COVID growth rate. Obviously, as we see, we are across the industry still seeing elevated mortality I think the timing of that is something that we are kind of obviously watching. But there's nothing to say that once that normalizes, we don't return. We had always said that, that was an exit way for 2025. So more of a normalization rate for 2026. And I think that's why, obviously, as I talk about guidance and tightening those ranges for '25, kind of really thinking through what do those volume trends continue to progress through the next few months and quarters here. But the improvement in mortality, obviously, is something that we are looking for as well as the normalization of the CKD funnel.

Yes. And Hugo, perhaps on the margin development for Care Delivery in quarter three. Main drivers were positive price and volume effects. And then we saw the phasing of the consent agreement that you mentioned. This was this year in quarter three. Last year, we had that in quarter four. So that is, from our perspective, over the full year, more or less neutral. And when you look in quarter three, you had then the consent agreement positivity. Also, as outlined in the presentation, partially offset by the volume-based care topic.

Thank you, Hugo. The next question comes from Oliver Metzger from ODDO BHF Bank. Oliver, the line is yours.

Thank you. Good afternoon. My first question is about your updated EBIT guidance. I appreciate the narrowing of the range, but it still seems quite broad with just one quarter remaining. How do you view this? Are you focusing on the midpoint and adding a percentage point on each side for safety, or have you developed the updated guidance considering different scenarios for the lower and upper ends? My second question pertains to FME25. It's encouraging to see that your progress in savings is exceeding expectations. Is this experiencing a pull-forward effect, or do you anticipate additional savings that might emerge? Martin, I recall you mentioning previously that you wouldn't expand FME25, but do you still see potential for further savings that could materialize for 2025? Thank you.

Thank you, Oliver. Let me address those questions. Regarding EBIT guidance, we build it from the ground up based on what we’ve observed year-to-date and what we anticipate for the remaining months of this quarter. It's not simply about taking the midpoint; there are factors that could positively or negatively impact it. This is why we provide a range and monitor any potential headwinds or tailwinds closely. We've refined our estimates and are confident in our delivery requirements, but that 1% variation isn’t just a matter of averaging things out. As for FME25, I am very pleased with our progress. The acceleration we’re observing is encouraging. We aren’t considering expanding the FME25 program, as our focus remains on achieving the EUR650 million target. Some initiatives are coming to fruition sooner than we initially anticipated, which is fantastic. As I have shared during our discussions, we are increasingly considering a cultural shift in how we strategically manage the business, particularly through the lens of continuous improvement. Our goal is to drive efficiencies that can help mitigate inflationary pressures. Beyond FME25, we are still dedicated to our turnaround and enhancing operational efficiency. I believe future initiatives won't require the large-scale programs we've undertaken in recent years; instead, there will be a consistent emphasis on fostering continuous improvement. When we provide guidance for 2025, we will be able to share more details in February.

Okay. Thank you. Very, very quick follow-up on this. So do you see from now a higher saving potential by 2025 compared to the FME25 saving aspiration?

No, we're still saying we save EUR650 million for FME25 through 2025.

Thank you, Oliver. The next question comes from Sezgi Oezener from HSBC. Sezgi, the line is yours.

Hi. Thanks for taking my question. I will also have two, please. One, very straightforward one maybe, but the other income that you have in this quarter seems quite strong. What are the underlying factors from that? And the second one is on this consent agreement on the pharma side that you've mentioned. What's the outlook going forward? What are some of the deciding factors behind it? And yes, what's the impact you're estimating, if any, beyond 2024.

So thank you, Sezgi. Let me start with the other operating income one. So there are a couple of effects that we see in the year-over-year improvement here. On one hand side, you have the special items like Humacyte remeasurement and the legacy portfolio optimization positively impacting this. And then you have FX exchange topics in here as well and also the consent agreement on pharmaceuticals that we mentioned in the CD business is showing up in that line as well. So that should give you a bit of a flavor of the underlying driving factor. And then on the consent agreement itself, this is a topic that we normally have throughout the year. As I mentioned before, it is a phasing topic, which is why it shows up in quarter three this time. Last year, it was in quarter four. And on a full fiscal year basis, we see this broadly neutral, and it is not an underlying driver of our improvement. I hope this helps and answers.

Thank you, Sezgi. The next question comes from Giang Nguyen from Citi.

Hi, guys. Thanks for taking my questions. My first question is back on the U.S. volume growth. Could you quantify the headwind from elevated mortality in the quarter, please? And also, given your progress on new patients, does it make you more confident now? Just looking at the trends from here, do you expect this progression to continue in sort of the next quarter so Q4 and Q1 next year? And then on top of that, how are you feeling about your relative momentum versus peers this quarter?

Thank you, Giang. I may need you to repeat the third part of that question. But first, let me address the U.S. volume growth and the increased mortality rates. In the first half, we noted a roughly 60 basis points increase in mortality impact due to flu and COVID, and we are still experiencing mortality rates that are higher than what we observed before COVID. For this quarter and the remainder of the year, we are projecting similar levels. We will need to refine our expectations for 2025 as we begin to see the Q4 numbers when we provide guidance in February, and we will clarify it then. Another point I mentioned earlier is the flu season and how it might inform us about the flu season for 2025. This year, the flu season started later. Regarding new patients, we are optimistic about the positive volume, but there is an aspect related to the net new patient flow, which is largely due to our efforts to enhance our processes. Overall, treatment volumes are increasing. The final part of your question was about our momentum relative to the competition. We are all reporting small improvements, and the market appears to be performing similarly across the board. However, we are pleased with our operational performance and progress this quarter, which highlights the effectiveness of our efforts in revitalizing the U.S. Care Delivery business. I believe this marks a significant turning point for us.

Thank you. I have a quick follow-up question. This is regarding the PD business in the U.S. Could the current hurricane situation influence your long-term perspective on this PD business? When you mentioned helping other providers, is that based on a new long-term contract or is it more on an ad-hoc basis? Thank you.

We have consistently stated over the past few years that our PD business in the U.S. is currently unprofitable, and we are taking significant steps to improve its profitability. Some of these efforts are part of the CE FME25 initiative. For PD, we source our own supplies and already have agreements with other dialysis providers. Increasing the number of patients we serve through PD will positively impact both our Care Delivery and Care Enablement businesses. Additionally, securing longer-term contracts with new providers will enhance our Care Enablement product offerings. This effort is ongoing, and we will provide more insight into the volume progression for Care Enablement when we present our outlook for 2025.

Thank you, Giang. The next question comes from David Adlington from JPMorgan. David, the line is yours.

Thanks, everybody. So maybe just it would be great to get your thoughts on the inclusion of the oral drugs in the bundle next year, and how much of a tailwind that might bring you, but also your thoughts in terms of whether it actually gets them active? And maybe just any update you got in terms of the timing of the pharma companies' appeal against that? Thank you.

Hi, David, I'm happy to address that question. We are still analyzing the details of the ruling, which was released on Friday. Although it is not final, it provides some insight into what the reimbursement might look like. We recognize that the orals included in the bundle don't only affect our FKC clinic business, but also have implications for our pharma and pharmacy divisions. Currently, we view the situation as neutral to positive. We will revisit this when we provide guidance and receive a final rule in February. There is certainly a lot to evaluate. Regarding your inquiry about the actions of pharma companies and the broader industry, there continue to be significant discussions in D.C. Whether the drugs are included in the bundle or excluded, we need to be prepared for either situation come January 1. If changes do occur, we likely won't know until the upcoming lame-duck session in December. I may be anticipating an election announcement by February. In summary, the rule is still in draft form, and we will determine its implications for us as well as the exact timing of the ruling.

Perfect. And then maybe just a quick follow-up. You obviously wanted to start this year expecting to narrow the guidance for next year, the 10% to 14% guidance as it went for the year and you've now pushed that back out to February. Do you think your visibility has reduced as the year is going on? Or has it maintained the kind of steady trajectory? And if most of that visibility is just down to the lack of volume growth?

Great question. We have detailed analyses of the factors affecting the margin for both Care Delivery and Care Enablement. The new operating model provides us with excellent transparency and insight into these factors, allowing for improved forecasting. However, as you can understand, there are numerous variables at play, with volume being one of the key factors. I didn't mean to merely list everything we are balancing, but there truly is a comprehensive list, including volume growth, value-based care, value-based procurement, reimbursements, and more, all of which we are evaluating in real time. This complexity can significantly affect our projections, making it essential to avoid making premature commitments, given the many uncertainties. At the start of the year, I had hoped for fewer factors to monitor, but clearly, volume and our internal transformation efforts are significant considerations. I appreciate your patience. I would prefer to share a definitive outlook once we have more real-time data, taking into account all the moving components we are navigating.

Thank you, David. The next question comes from Marianne from Bank of America. Marianne, the floor is yours.

Thank you for taking my question, and good afternoon. I just have one quick one. On your leverage ratio now that you have reached below your target range. Just wondering if you had any idea on how you think about capital allocation going forward? Anything special that has come up in your discussions?

Yes. Martin, do you want to take that?

Yes. Happy to take that. So first of all, we are very happy that we reduced our leverage ratio by 0.4 points, and 0.3 comes from debt reduction, and 0.1 comes from EBITDA improvement. And we will continue to deploy our capital to further reduce debt in line with our priorities that we set. And as I outlined in the prepared remarks, we are strengthening our balance sheet on purpose. And until 2025, that's our core focus.

Yes. And Marianne, maybe I would just add to Martin's comments. We clearly want to align our new capital allocation priorities to our new strategy. I don't want to be changing that around or kind of anybody speculating on what that means until we have done kind of a clear articulation of our strategy in post-2025, and the capital allocation will be aligned with that, and that's what we'll get to share when we do the Capital Markets Day on June 17. My plug for Dominik there.

Thank you, Marianne. The next question comes from Falko Friedrichs from Deutsche Bank. Falko, the line is yours.

Thank you. I have two questions, please. Firstly, outside of COVID and the flu, are there any other reasons that explain the sticky excess mortality that just doesn't really want to come down? And then secondly, and I'm sorry if I missed that point. Is it fair to assume that the same-store treatment growth should improve further in the fourth quarter over the third quarter? And are trends in October, have they been supportive of that? Thank you.

Thank you, Falko. Regarding mortality, I don’t have much more to add beyond noting that it remains elevated in the current patient population and is influenced by flu and COVID figures. We maintain that the impact from new drugs is not a significant factor since those numbers are relatively small and the fallout rate is high. The normalization of the CKD funnel is affecting patient inflow, and we're actively monitoring this situation. As for the trend in same-store treatment growth for Q4, we observed a small sequential improvement each month in Q3. The hurricane's effect has dampened this somewhat; for instance, with a 20 basis point growth, 5 basis points were attributable to the hurricane, highlighting its impact on our monthly figures. However, we anticipate the underlying positive trend to persist through Q4, aligning with our earlier guidance of 0 to 0.5% volume growth for the full year. We're optimistic about this underlying progression, keeping in mind that the figures are still modest.

Thank you. The next question comes from Sezgi Oezener from HSBC. Welcome back. Sezgi?

Oh, sorry. Thanks for taking the question as well. I just wanted to ask about why you have decided not to adjust your 2024 base for the divestments going forward? Is it because they're coming towards an end? Or is there a different reason that makes it different from the 2023 position?

Martin, do you want to take that?

Yes, that's fine. When we presented our portfolio optimization plan, we were clear about its scope. Since we provided that clarity, we mentioned that we would incorporate the effects of our plans into our guidance and manage them accordingly. Thus, each quarter, when we report the impact from divestitures, such as the 330 basis points seen this time for Care Delivery, we outline our progress. We are also committed to finalizing that list and are executing effectively, remaining on schedule. Regarding 2025, we have not yet made any decisions on adjustments, as that will depend on the timing of completing a few transactions.

Thank you. The last caller is Christian Ehmann from Warburg Research. Christian, the floor is yours.

Thank you for taking my question. I have just one. Considering that we are now at plus 3% same market treatment growth, and you stated before that you expect those to return to 2% to 3% over the next years. What kind of factors play into this assumption? Thank you very much.

Yes, hi Christian. As we transition from the current quarter's 0.2%, we maintain our expectation that the market will eventually return to pre-COVID levels. Elevated mortality rates are a factor, as is the normalization of the CKD funnel. We are aware that our transplant numbers remain very stable year-over-year and that the drug impact does not seem to be affecting us. Essentially, the decrease in mortality and the influx of patients from the CKD funnel are crucial. Regarding international growth, we are very pleased with our progress there. We previously cleaned up our portfolio by exiting several countries over the past two years, and we are now seeing 2.9% growth in same market treatments. In Europe and other regions, mortality rates have returned to pre-COVID levels, which boosts our confidence that U.S. mortality will also decline, albeit more slowly. On the international front, we are strategically focusing on countries where we see significant improvements in growth and operational performance, and we are very satisfied with the performance of our Care Delivery International team. Thank you.

Thank you very much.

So we do not have any further questions, have three minutes left. So we'll not fill those. You're lucky. Thank you for joining and your interest and the many questions, highly appreciated, and we'll hope to see you or some of the listeners on the road in the next couple of weeks. Thank you. Take care.

Thanks, everybody. Have a good day.

Thank you. Take care.

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