Earnings Call Transcript - FMS Q2 2020

Operator, Operator

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

Dominik Heger, Head of Investor Relations

Thank you, Emma. We would like to welcome all of you to the Fresenius Medical Care earnings call for the second quarter of 2020. We appreciate you joining today despite the markets being a bit in turmoil. Now it is my pleasure to start 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 we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. We will be hosting a virtual Capital Market Day on October 8 and hope all of you sign up for it. In preparation for this event, we will pause all non-mandatory capital market communication until our CMD. Therefore, please use the opportunity today to ask your questions. With us today is, of course, Rice Powell, our CEO and Chairman of the Management Board. Rice will give you more color around the business development and go through some of the major topics of the quarter. And of course, also with us is Helen Giza, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours.

Robert Powell, CEO and Chairman

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

Helen Giza, CFO

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

Dominik Heger, Head of Investor Relations

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

Operator, Operator

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

Patrick Wood, Analyst

Perfect. I have two questions. First, you've provided some comments, but I'd like a bit more detail. The guidance indicates that there will be significantly less growth in the second half of the year. What factors contribute to this, such as any additional CARES funding, costs, or prior year effects that we might not be aware of? I'm trying to understand the reasons behind the contrast between a strong first half and a flatter second half. My second question is about your outlook for network adequacy and MA pricing in 2021. Any insights you can share would be appreciated.

Robert Powell, CEO and Chairman

Hey Patrick, it's Rice. Helen, why don't you take the first question on guidance, and I'll take the second question on Medicare Advantage, please.

Helen Giza, CFO

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

Robert Powell, CEO and Chairman

Patrick, it's Rice. I'll address your Medicare Advantage question. Just to add to what I think is a great answer Helen provided, we are seeing some large metropolitan school systems in the U.S. announce school will be virtual. Children will not be going to school. We are already anticipating the need for childcare credits and eldercare credits. L.A., San Diego, Dallas, Houston, Chicago, and Miami have all made these decisions. So we foresee the fourth quarter potentially being as intense as the second quarter was. If you recall, the entire U.S. school system shut down in mid-March. As for Medicare Advantage, we feel quite relaxed about where we stand and what we see today. Keeping in mind that no matter how they attempt to draw these network adequacy lines, there are requirements that must be met. In those markets where we are well entrenched, it will be difficult for others to work around us. Hence, we are comfortable that we'll continue to do our business the way that makes the most sense. And as we stated, I can't predict volume growth at this time. I can say Q2, Medicare Advantage was still our fastest-growing book of business. I want to highlight that many believe our relationships with payers must be terrible, and that's not true. For instance, we believe Humana is one of the plans at the forefront of innovation, and we have extended our contract with them. We are working on a value-based relationship to improve quality of care for our members. There will be members living with ESRD, and you cannot extend such an agreement without a good history and relationship. I assure you, we are not worried or nervous about how this will unfold over time.

Thomas Jones, Analyst

Rice, I had two questions. Firstly, one for you on home dialysis. I noticed in the press release you are expecting a fairly significant increase in the number of transitional care units you operate. Could you provide a rough timeline on when you expect to have those up and running and operational? Is this just the beginning of a longer-term program or is that where you think you’ll meet your ultimate needs in terms of home dialysis training? And then a question for Helen. The reevaluations you alluded to that went down in Q1 and were positive in Q2. Could you provide a bit more color on those and what they pertain to? Perhaps some indication of what the negative impact in Q1 was and the positive impact in Q2? This would help us get a sense of the underlying EBIT progression in those quarters.

Robert Powell, CEO and Chairman

Tom, it's Rice. Let me take the first question. On transitional care units, we had 65 at the beginning of the year and plan to expand that by an additional 100. This will take us through the course of the year to achieve that, although we may not get to the full 100 depending on developments with COVID and other challenges that emerge. COVID takes precedence nearly every day as we navigate through this second surge. We believe transitional care units will greatly aid in getting patients home and support those coming off transplants and needing to make decisions between in-center or home. This approach enables us to help each patient through their avenues of care transition. We anticipate a maximum of 165 total, with the additional 100 likely finished by 2021. I am aware you might ask if we plan to have an additional 100 next year; however, we are not planning to repeat that. We believe this number is right for the foreseeable future but can adjust as needed. On home dialysis, looking at Asia Pacific, home dialysis generally involves peritoneal dialysis. We are seeing growth there. We are enhancing our factory capacity as we advance, particularly in China, Malaysia, and Thailand. Australia has a historical record of home hemodialysis, and we see a fair amount of it in Hong Kong as well, largely due to population density and increasing preference for home therapies. In Europe, we have completed the integration with NxStage, expanding our home product line and continuing to add to our offerings in that market. However, there are specific European markets, like Germany, that have not been major prescribers for home therapy due to physician preference. We will continue to work to drive that forward. Regarding the reevaluations Helen mentioned, they fall into two categories, investment and particularly our investment in Humacyte. The valuation there is driven by discount rates and risk premiums. We saw a significant negative impact in Q1 due to economic stock market declines, and that rebounded in Q2. The other reevaluation pertains to our captive. Both were significantly impacted by the stock market in Q1, which also bounced back in Q2. So the Q1 to Q2 impact is neutral, totaling about €40 million of EBIT for both positive and negative across the quarters. As I mentioned in Q1, we expected about two-thirds of the impact to return, and I’m pleased to report that it has fully rebounded. We continuously monitor these and all external factors as the year unfolds.

Veronika Dubajova, Analyst

I have two questions, please. The first one is just about the slowdown in same market treatment growth in the U.S. It would be great to understand from you, to the extent you can comment on July, especially the referral piece of it, whether you are seeing a rebound or are you worried about this becoming a more significant issue beyond Q2? So Rice, if you can share your expectations on that, that would be very helpful. My second question relates to the broader political environment in the U.S. Obviously, we're heading into elections in the second half. I'm curious about your thoughts on the risks under a Democratic administration, in particular, as it relates to the expansion of Medicare.

Robert Powell, CEO and Chairman

Veronika, I’ll take both questions. Regarding referrals in July, the data we have indicates a return to normalcy for weekly week-over-week referrals. We believe we will see growth in that area over the next few months. However, we have experienced a small increase in mortality rates and some missed treatments due to patients being in the ICU or skipping appointments. We need to monitor this closely. I cannot predict precisely when we expect a complete recovery, but we are reassured by the trends we observe. Concerning the political landscape, election season is inherently unpredictable, but I want to assure you that I have little concern regarding Medicare expansion from age 65 to 60. If that were to happen, some of that population already has pathways to access Medicare if they have end-stage renal disease. Hence, that won't have a significant effect on our business. As we engage politically with both sides, we recognize that Medicare expansion does not seem to be the top priority for the Biden campaign. Our focus remains on maintaining our relationships with payers as we navigate this complex environment. Tax reform could be more impactful, but I believe there will be further appropriations as the pandemic continues. It's essential to balance support for individuals with the needs of businesses, ensuring we don’t plunge into further economic challenges.

Oliver Metzger, Analyst

One question on Dialysis Products in EMEA. There was a significant acceleration of organic growth, not only compared to Q1 but also compared to last year. Could you provide more insights on this acceleration? In my view, it cannot be purely a catch-up effect. What has changed for Dialysis Products? Secondly, on home dialysis, you mentioned a 41% increase in home hemodialysis. Would you describe this increment as demand-driven, where patients have increased demand for home treatment? Or is it more supply-driven due to NxStage being fully operational, thus contributing to strong acceleration?

Robert Powell, CEO and Chairman

Oliver, let me address those questions. On the products business in EMEA, I believe the growth has been genuinely robust due to sustained demand. The acute side, particularly in ICUs, remained high, especially during the pandemic peak in April, May, and June. While the continent was coming out of the COVID situation, hospitals were still in need of more equipment. This holds true for our business in Eastern Europe and the Middle East. To clarify, the main growth factors are demand for acute products from hospitals and the continued stability in dialysis products. On home dialysis, there is a strong preference among patients to transition back to home therapies, influenced by lifestyle choices made more prominent by COVID-19 concerns. The reality is that patients are now more inclined to opt for home treatments. NxStage’s operational integration has certainly expanded our offerings, but the primary driver is the patients' increasing preference to avoid in-center visits due to safety concerns.

James Vane-Tempest, Analyst

I have two questions, if I may. The first relates to the CMS release regarding the sustained higher hospitalizations of ESRD patients. How do you see that impacting growth as the year progresses? The second question pertains to the operational guidance you provided, which indicated mid to high single-digit growth for both revenue and net income. Are the moving parts fairly uniform, or more likely mid-growth in the top line with some operational leverage or perhaps operational deleverage as a byproduct of higher top-line growth?

Robert Powell, CEO and Chairman

Sure, James. The hospitalization rates you refer to particularly align with the U.S. dynamics. We have aimed to avoid flooding the ER with our dialysis patients by establishing protocols to treat COVID-positive and negative patients separately. We did not see an overwhelming number of patients requiring hospitalization compared to our earlier concerns at the pandemic's onset in March. Thus, any impact we have due to these hospitalizations should be manageable. This is less confirmed in developing regions where distinguishing COVID-related deaths remains unclear. Regarding guidance, I’ll pass over to Helen for deeper insights.

Helen Giza, CFO

As far as guidance goes, I think it's how I answered earlier. Revenue will continue along the steady growth trajectory observed. However, on the EBIT side, there will be some variability tied to quarterly costs. Our ongoing cost-saving measures remain effective. We are highly focused on managing expenses. While there are COVID-related indirect costs that are outside of cash funding eligibility, it’s likely these will be more evident in the rest of the world. Yet, I believe we have firm control over unexpected impacts we previously did not foresee at the beginning of the year.

Michael Jungling, Analyst

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

Robert Powell, CEO and Chairman

Yes, Michael. We can hear you.

Michael Jungling, Analyst

Great. I have two questions, please. Firstly, on Medicare Advantage, as we approach the opportunity for 2021, I am trying to understand how these deals are progressing. Specifically, do you feel most of the patients will be treated on a rate per treatment basis as we do today? Or do you anticipate a more complex relationship, potentially focusing on shared savings stemming from reduced hospitalizations, which might lead to cost-reduction sharing programs? Some guidance on this would be useful. Then secondly, on the accounting aspect regarding minority interest, the €76 million figure seems quite low in comparison to North American EBIT. Can you clarify why it is so low, and were the minority interest holders excluded from CARES Act benefits?

Robert Powell, CEO and Chairman

Michael, I will take your first question on Medicare Advantage. The relationship is likely to be a blend of both models. Some will continue to follow the traditional rate per treatment approach, while others will engage in value-based care agreements focusing on shared savings. It's important to note that we've maintained ongoing pilot programs for value-based care, and our history with payers shows no significant issues. Now, regarding your question about minority interest, I will pass that to Helen.

Helen Giza, CFO

Michael, for this quarter, the €76 million amount is in contrast to €61 million last year. The decline can be attributed to the hefty ESCO charge we incurred last year, which amounted to €41 million. To answer your question regarding CARES Act funding, our execution at the tax ID level dictates that COVID-related expenses eligible for funding were managed to ensure that minority interest holders would also benefit. So that should not have distorted the figures we've seen. The primary driver of the small relation this quarter is the ESCO charge.

Christoph Gretler, Analyst

I have two questions. The first relates to cash flow. If I back out what you mentioned, Helen, my calculations show around €1.2 billion in cash flow from CARES costs and advanced payments. Is that correct? Can you provide a breakdown of those two items? Additionally, any indication of what is left from CARES for the second half would be helpful. The second question concerns the Humacyte stake. It appears the valuation of this investment has remained volatile for some time. Can you explain why this asset is marked to market while others, such as the Vifor JV, aren't? What is different about the Humacyte stake accounting, causing this volatility?

Helen Giza, CFO

Yes, Christoph, your calculation of cash flow does indeed include €1.2 billion in advanced cash flow. Even when excluding that amount, we still see a 38% improvement in underlying cash flow. It has been driven by strong business performance and working capital efficiency. As for cash flow, regarding CARES funding, we recorded advance payments of around €250 million, of which we are around two-thirds through in the first half. But there are no constant factors to consider. Early in the pandemic, we saw extraordinary measures that increased costs temporarily, like emergency pay and PPE expenses, which have since declined. That leaves substantial uncertainty about what Q4 may hold as we weigh potential lockdown scenarios at that point. On the Humacyte stake, we engage in a decision-making process when accounting for this type of investment, at the beginning, to determine how to categorize it from the outset, whether through P&L or equity. We determined last year to classify Humacyte in the P&L category. This is likely the reason we see volatility reflected in our earnings over the past six months. In contrast, Vifor has remained stable, particularly due to the long-running nature of that relationship. We've only seen relatively minor impacts with Vifor, which has been historically favorable.

Falko Friedrichs, Analyst

I have two quick questions. Firstly, at what pace are you seeing elective procedures picking up again in your Care Coordination business? Secondly, could you provide a quick update on the payer mix in the U.S. and any changes observed?

Helen Giza, CFO

On the elective procedures, we recognized that early COVID led to a slowdown in elective procedures. However, we were able to clarify that vascular surgery was deemed critical elective, allowing procedures to proceed. We saw some catch-up in Q2, and recovery continues. Still, a lot will depend on individual responses across different governments concerning the pandemic. With our Cura clinics in Australia, the elective surgery hold has caused significant impacts. However, we expect recovery as things stabilize.

Robert Powell, CEO and Chairman

Regarding payer mix, we saw continued improvement in our payer mix in Q2. Our rates improved compared to previous quarters as we assess our commercial mix with clarity. While GDP and unemployment in the U.S. are factors, we analyze the situation carefully, observing that much of the unemployment does not stem from individuals with employer-sponsored plans, and thus, potential Medicare enrollment remains a positive for our growth.

Veronika Dubajova, Analyst

I wanted to ask a broader question. It seems the prior four or five years have been quite challenging for your business. In contrast, it appears things are improving significantly, even amid COVID-19. Is there something extraordinary happening this year in terms of performance, or do you feel the negative headwinds that previously affected are dissipating? Is this the operational new normal that you envision going forward?

Robert Powell, CEO and Chairman

Veronika, considering the volatility in the market today, you really want me to discuss broader trends? Just kidding. Here's what I would emphasize: We are experiencing success this year due in large part to our dedicated team. We made some tough decisions in prior years that weren’t popular; however, they have yielded benefits now. The workforce in North America is doing a great job, and we've efficiently allocated resources with the visibility we have now. While there will always be unpredictable events that can impact operations, we aspire to greater stability in coming years without unforeseen circumstances disrupting our plans. Value-based care has been a long journey, but we are pleased to see progress, as evidenced by extending our relationship with Humana. I sincerely hope we can build on our momentum and possess clarity moving forward. We appreciate your understanding during this uncertain time.

Dominik Heger, Head of Investor Relations

Thank you, everyone, for joining our call. We have now run out of time. I want to remind you of our upcoming Capital Market Day on October 8, and we are excited to have you with us. We appreciate your interest in Fresenius Medical Care, and we look forward to presenting to you then. Take care and speak to you in October.

Robert Powell, CEO and Chairman

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

Helen Giza, CFO

Thanks, everyone. Bye-bye.

Operator, Operator

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