Earnings Call Transcript - FMS Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I'm Andrea, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care Q3 Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. At this time, it's my pleasure to hand over to Dominik, Head of Investor Relations. Please go ahead, sir.

Dominik Heger, Head of Investor Relations

Okay. So unfortunately, we had some technical issues, but I've heard the introduction has happened. Thank you, Andrea, for the introduction. As already mentioned, we would like to welcome you to our earnings call for the third quarter 2023. We appreciate you joining us today to discuss the performance of the third 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 yesterday evening. For further details concerning risks and uncertainty, please refer to these documents as well as to our SEC filings that have already happened. As we have a hard stop at 4:30 CET, we have prepared only a short presentation to leave time for questions regarding the quarterly earnings and for our new CFO to introduce himself. I'm aware that there is one dominant topic in health care research overall, which we fully understand, but we would appreciate it if we could focus on the quarterly business development. With us today is, of course, Helen Giza, our CEO and Chair of the Management Board, and as just mentioned, for the first time, Martin Fischer, our CFO. Having joined the company on October 1, and after quarter end, Martin will share a bit about his background and focus areas in his new role, but he will not answer questions today, but for sure in our call in February. Helen will provide an update on the business development, financial performance and outlook and will then be available for Q&A. And with that, Helen, the floor is yours.

Helen Giza, CEO and Chair of the Management Board

Thank you, Dominik. Welcome, everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care. I'm very excited to talk to you today about the meaningful progress we made in the third quarter as we executed against our strategic plan. However, before I begin the presentation, I wanted to update you on two changes to our Management Board. As announced earlier this week, Craig will succeed as Care Delivery CEO as part of a planned transition following Bill's plans to retire by the end of the year. Craig has many years of proven track record of operational management experience and successfully driving profitable business growth in different companies in the U.S. health care services industry. He will be a very valuable member of our Management Board and will continue our turnaround and transformation while leading Care Delivery into its next chapter. The second change is our new CFO, Martin Fischer, who started on the 1st of October. I would like to say how thrilled I am to be joined here today by Martin and I'd like to hand over to Martin to introduce himself.

Martin Fischer, CFO

Thank you, Helen. Good afternoon and good morning to everyone on the call. I'm honored to speak with you today as the new CFO, as I've just completed my first month in the company. I would like to share a bit about my background and why I'm so very excited to be part of Fresenius Medical Care. I spent most of my professional career with the technology company side, especially within its health care division. In my most recent role, I served as the Global Head of Finance for the diagnostics segment of Siemens Health, based in New York. Prior to that, I held a variety of management roles, mostly in finance leadership with some positions in corporate as well as operational areas. I have extensive experience in the European and American health care markets and had the opportunity to be an active part of the IPO of Siemens Health in 2018 and to shape the stand-alone organization of the newly listed company post-IPO. Joining Fresenius Medical Care was a very conscious and deliberate decision on my part. FME is a global player with a great company purpose, a great legacy, and an even brighter future. In my role, I will work with Helen and the team to drive forward the successful turnaround of the company, particularly paying attention to securing sustainable profitable growth. A prerequisite for this is the continuous implementation of the FME25 transformation program and a stringent financial approach. I will focus on driving performance with clearly defined value creation priorities, targeted resource and capital allocation, and rigorous assessment of our investments and strategic treasures. At least doubling the return on capital by 2025 is one of my priorities, as is a clear commitment to manage the leverage ratio. To me, transparent capital market communication is a key element of my approach. As a pragmatic and optimistic person, I highly value clarity, integrity, and reliability. It is very encouraging to see the company's turnaround measures already beginning to translate into improving financial performance. I'm optimistic about our ability to drive further improvements to 2025 and beyond. I look forward to speaking with you in the future. And with that, I will hand back to Helen.

Helen Giza, CEO and Chair of the Management Board

Thank you, Martin. I'm really excited to have you on board and already see how great we are working together as a team. I will now begin my prepared remarks on Slide 4. You are all familiar with our strategic plan to unlock value as the leading kidney care company, and I would like to highlight some of the accomplishments of the quarter. The simplification of our governance structure with a change of legal form is the only remaining structural element to finalize. I'm pleased to report that we have cleared all relevant hurdles and expect the conversion to be completed by December 1 of this year. With that, we will have completed all of our major structural changes within less than 1 year. We continue to advance our operational efficiency and turnaround plans. Our FME25 transformation program is well on track to deliver EUR 250 million to EUR 300 million in sustainable savings by the end of the year. In the third quarter, we realized an additional EUR 97 million in sustained savings, bringing year-to-date savings to EUR 232 million. This is positively supported by the now 70 net clinic closures in the U.S. We have realized accelerated productivity improvements in Care Delivery, which have helped to meaningfully mitigate the originally anticipated labor headwinds of EUR 140 million to EUR 180 million for the year. As we focus on sustainable profitable growth and seek to divest noncore and dilutive assets, we have continued to execute against our portfolio optimization plan. We announced yesterday that we have entered into an agreement for the sale of National Cardiovascular Partners. This business comprises 21 facilities, providing outpatient cardiac catheterization and laboratory services in the U.S. In line with our disciplined financial policy and well ahead of maturity, we successfully refinanced a EUR 650 million bond expiring at the end of November without accessing the bond market. Rather, we used a mix of long-term bank financing at very attractive conditions as well as cash and short-term debt. The term loans carry very favorable interest rates, which gives us more flexibility to reduce debt. Of course, upcoming extraordinary cash inflows will enable us to further delever. I am not only proud of the fact that we are executing with speed and success against our strategic plan but also that we are driving an important cultural shift. For the third consecutive year, we were named one of Newsweek's top 100 most loved workplaces in the U.S. Turning to Slide 5. While it's not a third quarter earnings topic, the GLP-1 medication headlines are acknowledging. We think it's important to reinforce our assessment of the future population and volume development. As our Chief Medical Officer, Frank Maddux, outlined at our Capital Markets Day in April and confirmed again more recently in an expert call, we expect the GLP-1 class to have a balanced impact on the ESRD patient volumes in the long run. We treat a complex patient population with multiple comorbidities, and it's important to remember that roughly 46% of our dialysis patients crash into dialysis, meaning they have not been diagnosed nor been receiving regular medical treatment for their kidney disease earlier. So when we talk about the potential impact of these new medications, we refer to the other 54% that are more likely to have access to these medications. At a high level, when assessing the potential real-world impact of the drug, we consider three main features of the use of the medications: Medical effectiveness, prescription rates, and patient adherence. Starting with medical effectiveness, based on the limited information that is available to us today, GLP-1 helps control type 2 diabetes and has proven benefits for cardiovascular health that could have a potentially significant positive effect on people with diabetes. More CKD patients are likely to survive early CKD status and progress to ESRD. Additionally, we have assumed that GLP-1s would have a positive impact on slowing the progression of kidney disease. Based on what we know today, we expect these two competing effects to balance each other with respect to population impact. Looking at the prescription rates, there are unknowns here. Currently, calendar pricing of GLP-1 is prohibitive to broad adoption in the short term, as could availability or access, but we would assume these would normalize over time. The impact of known and developing side effects will impact prescribing choices as prescribers gain experience in managing patients on the drug. SGLT2 inhibitors, for example, have been widely available for a decade with proven medical effectiveness for both cardiovascular health and more recently for slowing the progression of kidney disease, yet only 8% of our patients have ever been prescribed an SGLT2 inhibitor in the predialysis CKD stages unless they have consistently taken them. Finally, we have to consider expected patient adherence and compliance over long periods of time. We know that the adherence rate to medications that require permanent use has not been anywhere near 100%, and that will challenge the full effectiveness of this class of drugs in our patient population. When assessing all of these factors, based on the limited information available today, we come to the conclusion that the effects would be rather balanced on our patient population development in the long run. Multiple independent experts in this field are of the opinion that it may take at least a decade before we could fully observe the effects and impact from GLP-1 on our patient population. Moving to Slide 6. Ensuring the highest quality of care for our patients is of the utmost importance. To that extent, we are continuously monitoring our clinical performance to enhance care. Our Global Quality Index is an important KPI in this regard. The quality index considers dialysis effectiveness, vascular access, and anemia management. Through the third quarter, we continue to see sequential stability at a high level. I'll now move to Slide 8 to review our third quarter business performance. In the third quarter, we continue to deliver solid organic revenue growth, both in Care Delivery and Care Enablement. This was supported by sequentially stable same-market treatment growth in the U.S. The successful execution of our turnaround plans continues to translate into improved financial performance. Most notably, this included productivity improvements in Care Delivery and higher pricing in Care Enablement. Savings from our FME25 transformation program also contributed meaningfully to the improved performance in the third quarter. We continue to execute our portfolio optimization strategy. As I mentioned earlier, we have entered into an agreement to divest NCP in the U.S. Based on the earnings development for the first 9 months of the year and solid business expectations for the remainder of the year, we are raising our full year 2023 operating income guidance, which I will speak to later on. You will have seen on the 27th of October that CMS announced the final ESRD PPS rate for 2024. The final ruling increased from 1.6% to 2.0%. The market basket has not been adjusted to reflect the higher labor costs, nor has the inflation forecasting error been addressed. While a 2% increase is a little improvement, it is still disappointing. However, in our 2025 margin targets, we have only assumed a moderate increase. So this is in line with our assumptions. On a very positive note, last week, the CMS Star ratings for clinics were published, and I'm delighted to report that we outpaced the industry for 3-, 4-, and most importantly, 5-star clinics. This shows our strong and clear commitment to deliver high-quality care to our patients. Turning to Slide 9. In the third quarter, we delivered revenue growth of 7% at constant currency, and we continue to deliver organic growth with positive contributions from both segments. This development was driven by favorable pricing, including hyperinflation in Care Delivery. In Care Enablement, it was supported by both volume and price. During the third quarter, operating income on a guided basis improved by 20%. This resulted in another sequential improvement of our group margin to 8.7%. Earnings development in the third quarter was driven by business performance supported by FME25 savings and reduced personnel expenses—accelerated productivity improvements. Although we have seen a degree of stabilization, our business still faces inflationary pressures that particularly impact Care Enablement. In the third quarter, we also had a negative impact from the absence of a nonrecurring percent payment on certain pharmaceuticals and experienced a further increase in transactional exchange rate headwinds in Care Enablement. Next, on Slide 10. Starting from the left, you can see how we get at the starting point of our guidance basis. The EUR 107 million special items in the third quarter specifically comprised EUR 53 million in legacy portfolio optimization costs, primarily relating to the NCP costs. FME25 costs were EUR 49 million, which has us well below our planned run rate for this year. We will likely stay below the lower end of our planned FME25 onetime costs this year but should see a shift into next year. EUR 6 million in costs were associated with the legal form conversion, and the human site investment remeasurement contributed positively with EUR 1 million. Turning to Slide 11. In Care Delivery, in the third quarter, organic revenue growth was supported by a positive impact from our U.S. value-based care business, InterWell Health, along with reimbursement rate increases and a favorable payer mix. In light of our commitment to drive sustainable profitable growth, we continue to exit less profitable acute care contracts in the U.S., and the negative 60 basis point impact was particularly pronounced in the third quarter. When adjusted for acute contract impact, same-market treatment growth in the U.S. improved from negative 0.4% to positive 0.2% compared to positive growth of around 0.1% in the first half of this year. In Care Delivery International, revenue growth was supported by the effect of hyperinflation in various markets but was negatively impacted by exchange rate effects. Care Delivery earnings overall were positively impacted by business growth, lower personnel expenses resulting from the improved productivity and FME25 savings. We had planned to show a bigger contribution to earnings from InterWell Health in the third quarter. While we are continuing to generate positive savings from CMS' CKCC programs within the late-stage CKD and ESK segments, we realized lower-than-expected contributions from our CKCC models for the 2022 program year. This translated into a higher-than-assumed margin dilution in the quarter. As I highlighted earlier, we also continued to execute on our portfolio optimization strategy with the signing of the agreement to divest NCP in the third quarter. Next, on Slide 12. Care Delivery revenue increased by 6% on a constant currency basis, driven by a 7% organic development for the reasons I just outlined on the previous slide. Operating income development for Care Delivery faced a meaningful headwind from currency translation effects in the quarter. Although we realized positive business growth, this lagged our own expectations due to the already mentioned lower-than-anticipated contribution from InterWell Health on CKCC. FME25 savings were a strong tailwind in the quarter as we continue to drive clinical operational efficiencies with 17 additional net clinic closures in the U.S., bringing the total now to 70 closures. Although initially expected to be a sizable headwind for the year, we were able to compensate for the higher wages and other labor cost increases by the accelerated productivity efficiencies which yielded strong savings. Turning to Page 13. Care Enablement revenue in the third quarter was impacted by negative exchange rate effects but supported by higher sales of in-center disposables and machines as well as home hemodialysis products. It also benefited from increased average sales prices driven by our targeted pricing measures. The third quarter earnings were supported by increased volumes, pricing, and FME25 savings. These positive developments offset inflationary cost pressures, which developed broadly in line with expectations, and a further increased transactional exchange rate headwind. Care Enablement continued to execute on the FME25 and turnaround measures. We have made progress with organizational as well as manufacturing and supply chain initiatives. Next, on Slide 14. In the third quarter, Care Enablement revenue increased by 5% on a constant currency and organic basis. This was driven by the reasons I outlined on the previous slide. On our guided basis, operating income for Care Enablement increased to EUR 22 million. The improved operating income was driven by positive business growth, which already includes meaningful currency transaction losses as well as FME25 savings. Operating income was partially offset by inflation, which, as assumed in our guidance, continues to be a headwind for this business. We have also seen a smaller currency translation impact. Turning to Slide 15. A clear focus for us is our cash flow management. In the third quarter, we experienced a strong cash flow development compared to the prior year period. The increase in net cash provided by operating activities was the result of a change in working capital items. This was mainly driven by the weaker prior year comparable resulting from the CMS recruitment of advanced payments previously received under the Medicare Accelerated and Advanced Payment program in 2020. Supported by our disciplined capital allocation policy, free cash flow conversion accelerated in line with operating cash flow. Our leverage ratio of 3.4x remained in our target corridor of 3 to 3.5x. As it is still at the upper end of this self-imposed range, delevering remains a top priority for capital allocation with any proceeds from divestments to be used for further delevering. As I mentioned earlier, we were successful in refinancing the EUR 650 million bond expiring at the end of November. We used a mix of long-term bank financing under very attractive conditions as well as cash and short-term debt. This better positions us for further delevering. By diversifying away from the bond market, we support further balancing of our financing mix and utilize our ability to access various funding sources. I'd like to finish with an update to the outlook on Slide 17. For 2023, we continue to expect revenue to grow at a low to mid-single percentage rate, but are likely to land in the upper half of this range. For our earnings outlook, we previously guided for a flat to low single-digit operating income decline for 2023. Our assumptions around installation and volume have broadly developed in line with expectations. FME25 savings are likely to be at the upper half of the EUR 250 million to EUR 300 million range. While labor costs developed as assumed, the accelerated labor productivity we are realizing provides a compensating tailwind, which has additionally helped offset the emerging transactional exchange rate headwind in Care Enablement. Based on the resulting stronger-than-assumed earnings development in the first 9 months and our solid outlook for the remainder of the year, we now expect operating income not to decline but to grow at a low single-digit percentage rate. Already in the third quarter, our group margin improved by 130 basis points to 8.7%, and in Care Delivery, we are at a 10.3% margin, already at the lower end of our target margin band. Year-over-year, the Care Enablement margin of 1.7%, while low, has improved. As laid out at our Capital Markets Day, the complexity and scale of the initiatives in Care Enablement to get into the 8% to 12% band result in a more back-end loaded improvement. We are confident in our path to unlock value as the leading kidney care company and to achieve an improved operating profit margin of 10% to 14% in 2025. This concludes my prepared remarks, and I'll now turn it back to Dominik.

Dominik Heger, Head of Investor Relations

Thank you, Helen. Thank you, Martin. And with that, I hand over to Andrea to open the Q&A, please.

Operator, Operator

The first question comes from Victoria Lambert with Berenberg.

Victoria Lambert, Analyst

The first one is just on home treatments. Could you provide an update on how this is progressing? I think when we last spoke, it was about 16%. And then the second question is just on the labor market. How many open positions are you at? And where is wage growth trending?

Helen Giza, CEO and Chair of the Management Board

Thank you for your questions. On home treatments, it's still stable at around that 16% that we saw last quarter. And then on your labor question, we have seen some improvements since last quarter, and we're sitting at around 4,300 open positions, which is improving. Clearly, our focus on labor is kind of on the hotspot areas that some metro areas are still experiencing. But obviously, the labor situation is much more stable and controllable than it was a year ago or even quarters ago. So we feel good with the development that we have there.

Dominik Heger, Head of Investor Relations

We will take the next question then.

Operator, Operator

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

Hassan Al-Wakeel, Analyst

I have two. So firstly, sorry to start with GLP-1. But as it relates to operational performance, to what extent do you think you are already seeing some impact from GLP-1s or SGLT2s among diabetes patients? Or could we see an impact sooner than in weight loss? You noted that only 8% of your patients have been prescribed SGLT2s and CKD. Do you know what the number is in GLP-1s for diabetes? And related to this, are you seeing any increased uptake in transplantation on the back of improved eligibility around GLP-1s? And then secondly, you talked about margin dilution from CKCC models in the quarter, could you quantify the full-year contribution and help us understand why this is different from ESCOs given the challenging experience you've had in the past here? And to what extent is this a worthwhile business for you?

Dominik Heger, Head of Investor Relations

Thank you, Hassan. I'm sorry for making you repeat that.

Helen Giza, CEO and Chair of the Management Board

Thanks, Hassan. Yes, look, as far as we can tell, we're not seeing any significant impact from GLP-1s at this time and nothing that we could quantify. In terms of your SGLT2 question, yes, it's pretty small, as you say, at 8% at CKD. I don't have that number to hand for diabetes but would have to follow up with Frank on that question. However, I do know with regard to the transplantation piece of your question, the rates are very stable at the moment. So we're not seeing any kind of real change there. With regard to the number of patients who have any exposure to weight loss, I think we would see that as small, perhaps only a couple of kilograms, and the only improvement was a slightly lower blood pressure. So in terms of the diabetes piece, I'll follow back up. But overall, so far, we're not seeing any other impact. In regard to your margin dilution question on CKCC, it came in, and we had the 3 quarter true-up for plan year 2 come in during the third quarter. While it was positive, it was lower than we had anticipated. And clearly, it immediately raises the same question of whether this is like ESCOs all over again because we've definitely learned the hard way on some of these government programs. We're definitely seeing less transparency and more variability in the government reporting in terms of their data and methodologies around trend adjustment factors and patient alignment, which is making it more challenging for us to be able to predict those results with the lumpiness that we're seeing. What I would say is we, along with the coalition of CKCC participants, are very much providing feedback to the government to improve the collaboration between CMS and participants to drive the intended results. We will continue to do that work and ensure that we're getting the expected results. If we're not or if something changes, then clearly, we would exit when it makes sense.

Dominik Heger, Head of Investor Relations

The next question comes from the line of Lisa Clive with Bernstein.

Lisa Clive, Analyst

Helen, I'll ping you, although if the same Frank isn't on for giving the interest in GLP-1 today. But I guess per your comments around SGLT2s and GLP-1s, I mean, they're not very widely used today, but SGLT2s are going generic in 2 years. That will change quite quickly. What I really would love to know is where we've seen similar experiences historically? I mean, the CKD population in the U.S. has actually been remarkably stable over the last 15-plus years. Over that time, the ESKD population has grown 3% to 4% per annum. I know that the ACE and ARB class adoption has really helped control hypertension and improve mortality. I take your point that there could be a tailwind of sorts from these drugs to some extent. But I would just really love to understand what the historic experience has been within the dialysis population? And then secondly, I guess one of the issues around this delay in progression—you may well get these patients in the end, especially if the mortality goes down—but at what age? Because the proportion of patients in the broader ESKD population, 20 years ago, 2/3 of those patients were under 65. Now it's more like 57%. A lot of these patients may age into Medicare before they end up with ESKD. So I would love to get your thoughts on the delay in progression and how that could affect your economics longer term.

Helen Giza, CEO and Chair of the Management Board

Yes. Thanks, Lisa. I will try my best there, but I can also follow up with Frank afterward. So the RAS inhibitors have been available, yet they've only been used in about 50% of the eligible people despite the low price and wide availability. As we think about, you mentioned, this 15 years of ESRD population growth, I think it’s relevant that we've seen improvements in mortality and an extension in the average life on dialysis. The growth trajectory seems to be flattening in recent years, and we also have the COVID effect in those years. In terms of your question on the delay in progression, I think what's behind your question is whether we will see a change in the mix as we consider an expanded funnel on CKD and the cardiovascular benefits, which may delay a larger pool from coming into dialysis. If they benefit from those cardiovascular improvements, we could possibly see an age shift where you have younger, healthier patients who could be working or on commercial insurance before entering the ESRD population. The average commercial patient is insured for about 30 months, and if we increase the number of commercial patients, we might see that shift in age occur. We already notice the average age of new starts now is over 65, reflecting this change.

Lisa Clive, Analyst

Okay. Just one quick follow-up. On the patients, obviously, the MSP period is 33 months. But my understanding is actually a lot of your patients drop off after around 18 months, if they’re on COBRA because it gets a lot more expensive at that point. Is that a fair statement?

Helen Giza, CEO and Chair of the Management Board

Yes, I think that's fair. On average, it's more like 18 to 24 months.

Dominik Heger, Head of Investor Relations

The next question comes from the line of Richard Felton with Goldman Sachs.

Richard Felton, Analyst

My first one is on the guidance, EBIT growth. Given the first 9 months has been very strong, the upgraded guidance implies quite a sharp deceleration in Q4. So my question is, is that all comps related? Or is there anything else you're seeing in the momentum of your business that's keeping you a little cautious on Q4? That's my first question. And then my second is on Care Enablement. It's another quarter where margin's quite a long way below your target. Can you maybe provide a bit of color on how much the margin was impacted by transactional FX in the quarter? And then maybe a bit of an update on what you're doing to drive better performance and better margin in that part of the business within the new organizational framework?

Helen Giza, CEO and Chair of the Management Board

Thanks for your question, Richard. Yes, and I think the flavor of the day from many of the analysts has been we seem to be predicting a sharp decline in Q4. The high-level answer is that it is one of comps. There is nothing fundamentally happening or shifting in the business in Q4 from an operational perspective. However, it is worth unpacking for the wider audience. Q4, year-over-year, over '23 to '22, in Q4 of last year, we had some significant favorability from our bonus plans—around EUR 30 million last year. We're on track to achieve that this year as well. We also had some NCP deconsolidation gains in Q4 of last year of around EUR 40 million. This year, we also have the foreign exchange impact in Care Enablement that we didn't have last year. That number is projected to be around EUR 22 million. As I think about what we've seen in Q3 and what our implied guidance assumes for Q4, a couple of things come to mind. There is favorable phasing in corporate, and you noticed a very low corporate number that is tied to timing that we expect to balance back in Q4. The CKCC true-up of three quarters included in Q3 that wouldn't be expected to repeat in Q4 is around EUR 25 million. We have ongoing exchange plans in Care Enablement, and in Q4, we expect lower contributions from equity investments in our joint ventures. So it's important to clarify that none of this is operational; it mainly relates to phasing or one-time factors we've already called out as headwinds in the business.

Dominik Heger, Head of Investor Relations

The next question comes from the line of Veronika Dubajova.

Veronika Dubajova, Analyst

I will keep it to two. Firstly, I just want to follow up on Richard's question about the fourth quarter. I appreciate that the year-on-year comparison looks very difficult. But also looking at the absolute level, I mean normally, fourth quarter is the strongest quarter that you guys tend to have from an absolute EBIT perspective. Is there something that's changed in the seasonality of the business or something that's been pulled forward into the other three quarters of the year? I'm just trying to understand that. And then my second question is on same market treatment growth; obviously, I appreciate we're still annualizing the mortality impacts from COVID. But just curious about how you're thinking about the fourth quarter and whether you think we're going to be in positive territory. Are you still comfortable with an assumption that is greater than 1% for 2024?

Helen Giza, CEO and Chair of the Management Board

Thanks, Veronika. Look, there’s nothing fundamentally changing in Q4. You’re right; it’s always our strongest quarter. This really is one of phasing of expenses, as I mentioned earlier, the lower contribution from equity investments, and the ongoing transactional foreign exchange effects in Care Enablement contribute to this. The quarter was buoyed by the CKCC true-up which came in with three quarters. So I do not see anything in Q4 that raises concern about changes in seasonality or underlying performance. Some of this will depend on your expectations for where our guidance will land. All of the initiatives we have undertaken will continue in Q4. On your question regarding same-market treatment, we're encouraged by the continued sequential improvement leading into positive territory once you adjust for acute contracts. The improvement in Q3 over Q2 is promising. We have guided for minus 1% to plus 1%, and we feel confident in our performance toward better than 1% in ’23. We haven't laid anything out for ’24 yet, as we are still working through our internal budgets. We firmly believe in continuing to improve in that trajectory.

Dominik Heger, Head of Investor Relations

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

Oliver Metzger, Analyst

The first one is more broad. So now with the final DPS rate, can you elaborate on your expectations? What does it mean for the U.S. dialysis market? The rate is clearly below inflation, so do you think that this is a rate where smaller operators might be forced to leave the field? The second question is about your value-based care approaches in general. So also, Hassan mentioned, you had similar issues with the ESCO some years ago. It seems, at least from the outside, that although you do work hard, you receive lower compensation for providing extraordinary work. Is there any hypothesis behind this? Are we talking only about minor benefits? Or would you say this is more of a general issue where potentially CMS-driven value-based care looks nice on paper, but ultimately, it only makes sense to do value-based care with some commercial operators?

Helen Giza, CEO and Chair of the Management Board

Thanks, Oliver. Clearly, our PPS final rate is disappointing. We continue to work with the industry to engage with CMS on this calculation. They have acknowledged that there is a forecasting error in their calculation. There’s significant pressure from service providers to get the right reimbursement raise in this higher cost environment. We continue to do the good work needed there. What does that mean? While we focus on operating leverage and our cost structure, we also have a scale where we can manage costs effectively. I cannot speculate regarding smaller players, but for us, we are prioritizing our turnaround and reasonably forecasting our needs so that we can right-size our organization accordingly. Regarding CKCC, we had disappointments but are still positive. We will continue to assess the government programs we are involved in. We are excited about the role we are taking in value-based care and our partnership with InterWell. The implementation of managing patients earlier in the CKD funnel aligns well with our approach. When we intervene effectively with this patient population, the data suggests we can reduce costs. It is still early days in the evolution of VBC. We are optimistic about where we stand and how we can leverage our market leadership in this space.

Oliver Metzger, Analyst

One quick follow-up in this context. There appears to be a disagreement surrounding the metrics or quality metrics that need to be fulfilled. Is it that difficult to define the correct targets and agree on a variety of targets? We live in a digital world, and one would expect this could be more straightforward.

Helen Giza, CEO and Chair of the Management Board

Yes. We've made significant advances in the clarity of our programs. Our CKCC initiative was a substantial improvement from the ESCO programs. There is still a lack of full transparency and some variability in government reporting, thus making it difficult for us. However, we now have data to aid in these discussions with CMS, ensuring we receive a fair share of our participation in programs.

Dominik Heger, Head of Investor Relations

Okay. We can take one last question.

Operator, Operator

The last question comes from the line of Graham Doyle with UBS.

Graham Doyle, Analyst

Just a quick follow-up on the volume question from Veronika. One of the points you made on the last call was just around some challenges due to mortality in the sort of pre-ESRD funnel. Do you have any visibility on how much longer this may continue before we see normalization? It’d be good to get a sense of that. Additionally, regarding pricing, what are your considerations in terms of negotiations for next year and even 18 months down the line? Are private payers being more reasonable about inflation than Medicare has been?

Helen Giza, CEO and Chair of the Management Board

Thanks, Graham. Currently, we cannot pinpoint specifics regarding what's happening in that late-stage CKD funnel and its translation into growth. Growth remains vital for us, but we are experiencing the annualization of COVID effects while we exit acute contracts. I can’t provide additional information at this time. On the private payers, yes, these are typically longer-term contracts, and many come with escalators already in place, which provide some protections against inflation. While we want a higher price and they prefer a lower price, negotiations are collaborative. We've been selective in transitioning out of non-profitable contracts but maintain careful discussions with larger payers.

Dominik Heger, Head of Investor Relations

Okay. So thank you, everyone. I'm sorry that we ran out of time, and I apologize for the technical issues we had, which cost us time. Thank you for being patient with us and listening in. Thank you.

Helen Giza, CEO and Chair of the Management Board

Yes. Thank you all. Take care. Bye-bye.

Operator, Operator

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