Earnings Call Transcript - FMS Q4 2024

Dominik Heger, Head, Investor Relations

Thank you, Sandra. I would like to welcome everyone to our earnings call for the fourth quarter and financial year 2024. Thank you for joining us today. As always, I start out the call by mentioning our cautionary language that is in our safe harbor statement as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents and to our SEC filing. As our call is scheduled for 60 minutes, we would limit the number of questions again to two in order to give everyone the chance to ask questions. It would be great if we could make this work again as always. Let me now welcome Helen Giza, CEO and Chair of the Management Board, and Martin Fischer, CFO of Fresenius Medical Care. Helen, the floor is yours.

Helen Giza, CEO and Chair

Thank you, Dominik. And a warm welcome to everyone. Thank you for joining our presentation today. I'm excited to speak about the remarkable progress that we have made in executing our strategic plan and the strong set of financial results we have delivered. Before I begin my prepared remarks, I want to take a moment to acknowledge that this success would not have been possible without the unwavering commitment of our employees around the world. We have set ambitious targets to turn around and transform our company all at the same time, and our employees continue to rise to the challenge. I'm especially inspired by the way our teams have stepped up in the face of natural disasters and geopolitical challenges. During our last call, I talked about the hurricanes in the southeastern United States and ongoing conflicts in Israel and Ukraine. Since then, we've also faced devastating wildfires in California, extreme ice and snowstorms, especially in Texas and Louisiana in January, and more recently in New England, as well as flooding in the Mid-Atlantic. Through it all, our dedicated teams continue to ensure our patients receive their life-sustaining dialysis treatments with minimal interruption, an incredible testament to the strength of our teams and resiliency of our operations, recognized in this year's Net Promoter Score of 72, matching last year's very high level. This score, based on patient surveys, demonstrates strong patient satisfaction with the quality of our services. Executing such a turnaround and transformation plan while maintaining an unwavering commitment to delivering the quality of care to our patients is no small feat, and I want to extend my deepest gratitude to our employees for their dedication and hard work. Now I'll begin my prepared remarks on Slide 4. Two years ago, we embarked on an ambitious plan to turn around and transform our company over a three-year period. I'm proud to say we have made significant progress on all dimensions, which is why this chart is so full, but I feel it's worth to recap all we have achieved. This serves as a reminder of our commitment to deliver on what we set out to do as it lays the foundation for the future success of our great company. In 2023, we implemented major structural changes, including the change in our global operating model, provided more transparent financial reporting, and changed our legal form. In parallel, we successfully advanced all aspects of our plan, and we did not stop there or let up the pace. In 2024, we built on this momentum, further strengthening our foundation and driving accelerated progress to position our company for sustained profitable growth in the future. We further upgraded our leadership team, including a new head of care delivery and a new head of legal HR and compliance at the Management Board level. Also, on the executive level, we have made several important changes, creating new key positions as well as upgrading our capabilities and talent bench. In 2024, we further accelerated our FME25 transformation program, achieving incremental sustainable savings ahead of plan. As a result, we have been able to compensate for the lower than expected volume growth in the U.S. dialysis business of the last two years. Due to the great momentum in the FME25 program, we are now raising our total savings target from EUR650 million to EUR750 million by the end of 2025. We continued the execution of our portfolio optimization plan, ensuring our business is focused on a strengthened core with a higher return profile. And in 2024, we realized important milestones in our business. While we continue to experience elevated mortality in the United States, as is the case for the general population in the country, the work we have been doing in our U.S. Care Delivery operations to drive operational excellence, upgrading and standardizing and streamlining our operational processes, as well as reducing missed treatments, is really paying off. Our same market treatment growth in the U.S. turned positive for the full year, supported by an accelerated 0.5% development in the fourth quarter when adjusted for the exit of less profitable acute contracts. Additionally, the excellence of our disaster response and clinic operations meant that despite more pronounced weather-related incidents, we only had a 5 basis point impact on third and fourth quarter volume development. We are further detailing the rollout plan of our high-volume Hemodiafiltration-capable 5008X machine in the U.S. We received FDA approval in early 2024, and we performed our first HDF treatments on the machine in our clinics in the meantime. We are excited about the opportunity this innovation brings to our U.S. market. The improvements we have made in care enablement not only supported recent performance but strengthened the base of our operations and positioned us for profitable growth going forward. This includes rationalization of our supply chain and manufacturing footprint, as well as broad-scale cost and efficiency improvements. These positive developments supported strong operational progress over the course of the year. By sharpening our focus on the core business, we delivered 4% organic growth and achieved the upper end of our earnings outlook for 2024. As a result, our group operating income margin further improved as planned, and our commitment to a disciplined financial policy and priority to deliver resulted in an improved leverage ratio, which brought us below our self-imposed range. For our shareholders, we are planning to propose a dividend increase of 21% in line with our current dividend policy. Slide 5 shows how our progress translates into numbers. This slide highlights the tangible impact of our strategic execution reflected in our strengthened financial performance and enhanced value creation. Our operating income margin has shown consistent improvements towards our target margin bands for 2025, supported by both operating segments. Care delivery has already reached the lower end of its target band, with a margin over 10% in full year 2024. This improvement reflected our turnaround efforts, including positive price and volume effects, realization of productivity gains and labor efficiency enhancements, as well as a focused international portfolio. Care enablement has improved its full-year margin to 6.1%, almost tripling the margin from only a year ago. The improved profitability of both segments has been supported by the acceleration of our FME25 program. Here, we have already achieved EUR567 million in sustainable savings through 2024. As a result, we are now on track to realize the new increased target of €750 million savings by the end of this year. In line with our dividend policy and improving financial results, we plan to propose a dividend of €1.44, reflecting a 13% compound annual growth rate over the past two years. As outlined, our leverage ratio has improved as a consequence of our current financial policy from 3.4 times at the end of 2022 to 2.9 times and below our self-imposed target range. S&P, Moody's and Fitch now have us rated an investment grade with stable outlook. Moving to Slide 6, we have continued to execute against our portfolio optimization plan as we look to divest non-core and lower margin assets. Just yesterday, we announced the divestiture of select assets of Spectra Laboratories, our U.S. lab service business. Collectively, in addition to exiting non-core assets like Spectra, NCP and Cura, we have now exited around a dozen dialysis service markets as we strategically refocus our international portfolio on growth markets with attractive returns. This includes the exit of all of our Latin America service business with only Brazil left, which we expect to close in the first half of this year. We have made significant progress since we first presented this slide at our last Capital Markets Day in 2023. By the end of 2024, we had realized total cash proceeds of EUR750 million. We remain focused on our core business.

Dominik Heger, Head, Investor Relations

Okay, so we actually don't know where we lost you. We will restart at Slide 7. Sorry for the inconvenience. So, going back to Slide 7. Helen, sorry.

Helen Giza, CEO and Chair

Thank you, Dominik. On Slide 7, I'm proud of the fact that we are setting ambitious targets and delivering on our commitment to achieve them. In 2024, we realized a 2% revenue growth after accounting for a 1.6% headwind from divestments. We achieved an impressive 18% operating income growth at the upper end of our earnings outlook for the year. I will now hand over to Martin to take you through the fourth quarter financial performance in more detail.

Martin Fischer, CFO

Thank you, Helen, and welcome to everyone to the call also from my side. I will give you an overview of the fourth quarter performance beginning on Slide 9. Starting with the highlights. In the fourth quarter, we delivered strong organic revenue growth of 7.4%, supported by both Care Delivery as well as Care Enablement. For the second consecutive quarter, we recorded positive volume growth in the U.S. When adjusted for the exit of acute care contracts, our same market treatment growth increases to 0.5%. We continued our accelerated progress on our FME25 savings target. With a strong fourth quarter that contributed an additional EUR48 million in sustainable savings, we realized EUR221 million for the full year. We exceeded our already increased incremental savings target for 2024 of originally EUR200 million euro. On an outlook base, both segments delivered further improved operating income and margins. This keeps us fully on track to achieve our 2025 margin ambitions. We delivered a significant improvement in operating and free cash flow in the fourth quarter, and our net leverage ratio of 2.9 times remains below our self-imposed range. I will continue on Slide 10. In the fourth quarter, we realized 5% revenue growth on an outlook base driven by accelerated organic revenue growth with contributions from both segments. As we continue to execute our portfolio optimization plans, we realized divestitures did negatively impact our revenue development by 250 base points in the fourth quarter. As a reminder, we decided not to adjust our numbers in the fiscal year 2024 or 2025 for the divestitures that we closed in those years, but to absorb it in our guidance range for the respective year. We saw a significant increase in operating income in the fourth quarter. On an outlook base, operating income grew by 31% driven by both segments. This positive development led to an improved margin of 9.6% compared to 7.7% in the previous year. Divestitures realized in 2024 as part of our portfolio optimization plan had a neutral effect on group margin development in the fourth quarter. Special items negatively affected operating income by EUR230 million. They mainly included costs related to the execution of our portfolio optimization plan. Our FME25 transformation program also added to those. The biggest impact had our portfolio optimization plan where the sale of select assets of Spectra laboratories was classified as an asset held for sale. Moving to Slide 11. The slide provides an overview of the strong group margin improvement we achieved in the fourth quarter. On the left, you can see how we get from the reported fourth quarter 2023 operating income to the starting point of our outlook base by adjusting for special items and 2023 divestitures as well as the effect of the substantial Tricare settlement. We achieved the margin improvement of 190 basis points with a positive contribution from Care Delivery and an impressive step up in profitability from Care Enablement. The development of operating income included the negative valuation effects of virtual purchase power agreements amounting to EUR7 million in the fourth quarter. As mentioned on the previous slide, special items negatively affected reporting operating income while foreign currency translation had a neutral effect this quarter. Turning to Slide 12. In the fourth quarter, Care Delivery revenue increased by 3% on an outlook base. This includes the 370 basis point headwind from divestitures realized in 2024. At the same time, organic growth for Care Delivery accelerated to 6% in the quarter. In the U.S, organic growth of 7% was driven by growth in our value-based care business, higher treatment volumes with an underlying same market treatment growth of 0.5%, as well as improved rates and payor mix. Our excellent disaster response and clinic operations teams mitigated the severe weather-related incidents to an impact of only 5 basis points on the fourth quarter volume development. Care Delivery international contributed a solid 4% organic growth. Same market treatment growth in our international markets continued to outpace the U.S. In the fourth quarter, Care Delivery achieved a 10 percentage points increase in operating income on an outlook base. The segment also saw a margin improvement of 70 basis points, leading to a margin of 10.7%. Positive effects mainly came from the business growth, driven by a lower negative contribution from the value-based care business, higher treatment volumes, and favorable rates and mixed effects. Business growth compensated for the phasing of a consent agreement on certain pharmaceuticals, which we had highlighted to you in our quarter three earnings call. While the loss was reduced year over year, our value-based care business did realize a revenue of EUR1.8 billion, and the negative contribution roughly in line with the midpoint of the communicated range of negative EUR20 million to EUR40 million euro. Care Delivery earnings growth was additionally supported by savings from our FME25 program, and partially offset by labor and inflationary headwinds in line with our expectations for the year. While being margin neutral in the full year, Care Delivery also faced a EUR13 million headwind from divestitures realized during the year. As in the revenue line, this was absorbed in our outlook range for 2024. Next slide, next on Slide 13. In the fourth quarter, Care Enablement revenue grew by 10% on an outlook range, with impressive 10% organic growth, driven by volume growth in all geographies and continued positive pricing momentum. As expected, volume growth in China did accelerate as a consequence of the implementation of volume-based procurement, which was partially offset by the negative pricing impacts from volume-based procurement. Care Enablement realized a significant increase in earnings. Compared to the fourth quarter of 2023, operating income on an outlook base grew by more than six-fold. As a result, Care Enablement accelerated its margins expansion trajectory with a 650 basis points improvement to a 7.8% compared to prior year. This strong increase was driven by positive volume and price effects and supported by savings from the FME25 program. In the fourth quarter, we continued our organizational optimization and realized further cost efficiencies in manufacturing and supply chain. The positive drive was offset by inflationary cost increases as well as the mentioned negative price impacts from volume-based procurement in China. Next on Slide 14. In the fourth quarter, we realized a 16% increase in operating cash flow driven by favorable development in working capital. This strong result comes on top of a tough prior year comparison, which included the Tricare settlement payment. On a full-year basis, we saw a decline in operating cash flow, mainly due to the negative impact from the phasing of dividend payments that we received from equity method investments and the absence of the Tricare settlement in 2024. In line with our current strategic ambition, we further reduced our total debt and lease liabilities as well as total net debt and lease liabilities compared to the prior year period. As a result of our strict financial discipline, our net leverage ratio of 2.9 times continues below our self-imposed target range corridor. We are taking a holistic approach in detailing our strategy beyond 2025, including considerations of future capital needs for the profitable organic growth and the importance of shareholder returns. With that, I will now hand back to Helen to go through our outlook.

Helen Giza, CEO and Chair

Thank you, Martin. I'll pick it up on Slide 16. Now moving on to the assumptions for 2025, starting with revenue. We are assuming positive U.S. market treatment growth above 0.5% based on similar elevated mortality trends as in 2024. Annualization of mortality in earlier chronic kidney disease states has clearly taken longer to normalize than the industry expected. We are encouraged by the trends we saw in the last two quarters and in January. Once mortality has normalized, there is no indication that we would not see a recovery to a 2% plus same market treatment growth in 2026 and beyond. Of course, we are monitoring the current flu season, but we would expect an acceleration throughout the year. Our 2025 revenue outlook assumes headwinds from the successful execution of our portfolio optimization plan. Divestments executed in 2024 are expected to have a negative impact of around 1% in 2025. We also expect an additional EUR100 million in revenue from our value-based care business, increasing revenue in that book of business to around EUR1.9 billion. On the earning side, we now expect an incremental EUR180 million in FME25 savings, which has helped to cover the cumulative effects of the lower than expected same market treatment growth in the U.S. in the last three years. Business growth is expected to positively contribute EUR500 million to EUR600 million in earnings in 2025. In addition to volume growth and pricing improvements across both operating segments, the business growth range includes a benefit of around EUR100 million in our Care Delivery business, resulting from the inclusion of binders in the bundle. The size of this benefit in the TDAPA period significantly depends on the uptake, prescription patterns, and the mix of branded versus generic products, as well as the impact on the assets we have within our portfolio. Business growth also includes our value-based care book of business, which we assume to have a slightly negative to breakeven operating income contribution in 2025. Similar to previous years, we expect a net labor headwind of EUR150 million to EUR200 million, mainly in Care Delivery. In addition, we anticipate cost inflation of EUR100 million to EUR150 million. In respect to tariffs, we recognize this is a fluid situation, and we continue to evaluate the impact on our business. So far, we estimate the impact to be very limited due to the nature of our footprint and supply chain. While special items are excluded from our guidance and are hard to predict, we do expect FME25 costs of around EUR100 million to EUR150 million, and costs relating to legacy portfolio optimization of EUR50 million to EUR100 million. To help with your modeling, we are assuming a tax rate of 25% to 27%, a net financial result of EUR300 million to EUR320 million, and for corporate costs, we expect EUR70 million to EUR90 million. I will now continue to the outlook on Slide 17. Against this background, we approach 2025 with confidence in our strengthened foundation and ability to further accelerate earnings growth. For full year 2025, we expect a positive to low single-digit percent revenue development, which only looks muted as it includes a 1% headwind from our portfolio optimization as just outlined. For operating income growth, we expect a very strong year. We are guiding for a high teens to high 20s percent growth range. And while this seems like a wide range, this outlook raises the implied operating income margin to around 11% to 12% in 2025. We are tightening our former 2025 midterm range of 10% to 14%, and we do expect both operating segments to make progress within or into their margin target bands. We remain laser focused on executing this third and final year of our turnaround and transformation plan, ensuring we are well positioned for our company's future strategy and to enhancing shareholder value and returns. I look forward to sharing the details of our strategy beyond 2025 at our upcoming Capital Markets Day on June 17th 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. This concludes my prepared remarks, and I'll now hand back to Dominic to start the Q&A.

Dominik Heger, Head, Investor Relations

Thank you, Helen and Martin. Thank you for your presentation, and to the listeners, apologies for the disruption. Before I hand over for the Q&A, I would like again to remind everyone to limit your questions to two. We have 12 people in the line, so please give everyone a chance. If we have remaining time, we'll go another round. So with that, I hand it over to Sandra to open the Q&A, please.

Operator, Operator

Thank you, Helen and Martin, for your presentation, and to the listeners, I apologize for the disruption. Before we begin the Q&A, I would like to remind everyone to limit your questions to two. We have 12 people on the line, so please give everyone a chance. If we have time remaining, we will go for another round. Now, I will hand it over to Sandra to start the Q&A.

Dominik Heger, Head, Investor Relations

Thank you, Sandra. The first caller is Hassan from Barclays. Hassan, the line is yours.

Hassan Al-Wakeel, Analyst

Hi, good afternoon. Thank you for taking my questions. A couple for me, please. Firstly, on margins, it'd be great to get some color on your expectation on segment margins in 2025, as well as phasing. You're already in the 10% to 14% initial range provided for Care Delivery. So how are you thinking about incremental improvement here versus Care Enablement, where there's a bit more to go, but presumably a lot more pricing benefits coming through? And then secondly, can you talk a bit about your expectations for same-store growth throughout 2025? How is Q1 trending and any expectations given a delayed flu season? And appreciate you're giving guidance for at least 0.5% growth, but you've also in the past talked about an exit rate of 2% coming out of 2025. So any color on phasing would be helpful? Thank you.

Helen Giza, CEO and Chair

Hi, Hassan. Thanks for your question. I'll address both of those. We're not providing specific margin segment guidance for 2025. However, we have shared the overall group guidance. We anticipate both segments to progress within the margin band for 2025. We're really excited about the significant progress we saw in Care Enablement in Q4, which reached 7.8%, nearly at the edge of our expected margin band of 8% to 12%. We plan to continue moving along that trajectory and will provide updates throughout the year. Regarding same-market treatment growth, I expect many may share this question. We're feeling very positive about the progress made over the past couple of quarters, improving from 0.2% in Q3 to 0.5% in Q4, which has turned the full year positive. The efforts we are implementing are yielding results, particularly our turnaround plan in Care Delivery, which we have discussed for some time. Streamlining admissions and reducing mistreatments are enhancing our processes. Additionally, we're noticing a slight sequential improvement in referrals or new patient starts. Although mortality rates remain high, we believe that once those normalize, we should see a return to a 2% growth rate. We're closely monitoring the flu season; we didn't notice much impact in January, and our underlying growth looks strong that month. We observed a spike in flu cases during week 7, which decreased the following week, and we are assessing how that might influence the quarter. We expect our volume growth of over 0.5% for the year to accelerate continuously. I'm confident in the resilience of our operations, especially considering the industry's challenges with weather conditions, which only affected us minimally. Furthermore, we didn't experience headwinds in Intravenous and Peritoneal Dialysis. Our analysis shows that we picked up fewer than 100 new patients in our Peritoneal Dialysis segment, leading me to feel optimistic about the underlying volume trend, which appears to be stable. Mortality is a key focus for us, and again, once it normalizes, we anticipate returning to the 2% growth rate by 2026.

Hassan Al-Wakeel, Analyst

Very helpful. Thank you.

Dominik Heger, Head, Investor Relations

So next question comes from Giang from Citi.

Giang Nguyen, Analyst

Hello, I hope you can hear me and thank you for allowing me to ask questions. I have two questions. First, I've noticed that you mentioned a recovery to over 2% volume growth in 2026 and beyond. Can you provide any insights on what you expect the U.S. to achieve by the end of 2025? Are we still looking at that 2% rate we've discussed in previous quarters? Also, how do you see the progression towards that growth through 2025, particularly after Q1? My second question pertains to slide 6, specifically regarding the assessed area on the graph. Can you share any comments about the other assets represented in those bubbles? Thank you.

Helen Giza, CEO and Chair

Thanks, Giang. Yes, I'll take those questions and maybe just picking up on the back of the, you know, the answer to Hassan's question as well. Yes, look, we do expect volume to ramp up as we go through the year. I think the exit rate obviously will be dependent on that elevated mortality and when that normalizes. So that's why, you know, I think Dominik would say, does exit rate mean 12, '31 or does it mean 11 of '26? And not to be flipped with that comment at all, is that we just feel we'll continue to see volume momentum as we go through the year and we'll see that 2% normalizing in 2026. What we're looking at and encouraged by is the, you know, the kind of the positive trend quarter after quarter. You know, obviously that elevated mortality is there, but we're also encouraged by what we're hearing from nephrologists on terms of waiting lists filling up and patients waiting to see their physician after, you know, kind of this normalization of the earlier stages of CKD. On your question on divestitures, obviously there was a lot that we put out there at the last Capital Markets Day and you can see the, you know, the check marks of what's been done. It wasn't meant to suggest that if they were in that bottom mark that they were all going to be divested. I think you can see the, you know, the assessment of them in terms of growth potential and strategic value to FME. We like those assets. Some of those assets that are in there that haven't been divested and, you know, they're kind of part of our overall strategy and portfolio. Obviously, we continue to evaluate that portfolio and would provide a further update of how we're thinking about, you know, the growth opportunities on this portfolio when we get to Capital Markets Day in June, and as you can appreciate, we revisit this periodically as we refresh our strategy.

Dominik Heger, Head, Investor Relations

Next question comes from Lisa Clive from Bernstein.

Lisa Clive, Analyst

Hi. I've got two questions. Number one, while there is still a lot of uncertainty in DC on just about everything, I just wanted to ask about the potential impact from the increased ACA insurance subsidies that were created during COVID, which potentially end in December of this year. Your main competitors indicated this has been a tailwind to private payer mix over the last few years, and they've quantified the impact of a cumulative EUR75 million to EUR120 million hit to EBIT by 2028, which they expect to be phased over three years. Do you have any thoughts on how this could affect your payor mix and any quantifications? And then second question, given the shift of phosphate binders into the clinic reimbursement, could you talk about Fresenius Rx, which also used to be quite a bit bigger before Sensipar went into the bundle, and just how we should think about that part of your formerly sort of care coordination initiatives? Thanks.

Helen Giza, CEO and Chair

Thank you for the questions. I'll address both. Regarding the ACA, we estimated that transitioning to Medicare could result in approximately a 2% hit to EBIT for our U.S. business. Our overall assessment is that this figure is smaller than what you mentioned. In terms of binders in the bundle, the situation is a bit more complex due to our three assets in that portfolio. The part included in the bundle, along with the additional payment into DAPA, is benefiting the FKC business. However, this shift negatively affects the pharmacy. Depending on prescribing habits throughout the year and the medications patients use, we are also forecasting a positive impact on our pharmaceutical business. Considering all three segments, we anticipate a benefit of around EUR100 million in 2025. For just the FKC component, we project it to be about half of the EUR100 million estimate.

Dominik Heger, Head, Investor Relations

Thank you, Martin. The next question comes from Victoria from Berenberg.

Victoria Lambert, Analyst

Thanks for taking my questions. The first one is just about guidance. Does this include a contribution from the 5008X launch due later this year? And then, just how you guys are thinking about CapEx this year and in 2026 as it relates to the 5008X? And then, just a clarification question on the excess mortality rate. In Q3, I think you mentioned, Helen, that there was a 60 bps headwind from excess mortality in H1 and that you expected a similar negative impact in H2? Can you confirm that it was around that negative 60 bps and that you expect that same rate for 2025? Thank you.

Helen Giza, CEO and Chair

Thanks, Victoria. Why don't I have Martin take the 5008 question for one and two, since it has some financial connotations, and I'll take the third question?

Martin Fischer, CFO

Yes. Hi, Victoria. So on the 5008X, since we are starting our commercial launch in 2025 and more also towards the second half of 2025, there is not much of an impact into our guidance out of that launch. That would be too early for it to have an impact. We are ramping up through the year and the full commercial launch is then in 2026. Similar on the CapEx, I would say there is a, let's say, lower CapEx involved in the ramp-up, but also when we look in 2026 and beyond, I would not expect this to be massive CapEx. It's more like a, let's say, regular medium-sized topic that when you think about the EUR900 million that we normally have in our guidance outlook that we also published, it's more towards, let's say, a mid-double-digit CapEx number, I would think, about in 2025.

Helen Giza, CEO and Chair

Thanks, Martin. Victoria, on your question on excess mortality, yes, look, we're still seeing it elevated, a slight improvement in H2, but I would say slight. You know, even on a full-year basis, we are still seeing, you know, kind of a much higher number than we would like to see at this point, but a slight improvement from H2 to H1, but still more elevated than prior.

Dominik Heger, Head, Investor Relations

Thank you. The next question comes from Oliver Metzger from ODDO BHF.

Oliver Metzger, Analyst

Good afternoon. Thanks for taking my questions. First question on the Care Enablement, so we saw quite good growth and also a nice margin accretion. So, how should we think about the volume price mix for 2025? So, do we expect a similar price contribution in 2025 compared to 2024? Second question on value-based care, you named for 2024 a EUR1.8 billion recognized revenues or EUR1.8 billion more for next year, but you mentioned also negative contributions of EUR20 million to EUR30 million on the bottom line. In the past, you talked only about the medical cost under management, and you had set a few years ago the target of $11 billion medical cost under management for 2025. Can you first provide still some clarity whether this $11 billion is still a valid number, and also what is needed to achieve a positive bottom line contribution, because initially you talked about more above 1% EBIT margin for the medical cost under management. There seems to be a gap. Thank you.

Helen Giza, CEO and Chair

Thank you, Oliver. I will address both questions. We are very pleased with the performance in Care Enablement, and as you pointed out, we expect to see continued volume and pricing growth into 2025. The insights Martin provided regarding value-based procurement for China support our expectation of annualized growth next year, along with an increase in volume in that region. It's not just about price and volume growth for Care Enablement; there are also significant positive developments across the entire profit and loss statement. The progress the team is making in manufacturing and supply chain efficiencies is outstanding. We have previously stated that for the Care Enablement business, while we expect margins between 8 to 12 percent through 2025, our goal is to return to true med-tech margins, despite the significant progress already made. Additionally, as a reminder, we've indicated that these improvements would be back-ended, meaning some benefits will extend into 2026 and 2027, providing sustainable savings. We look forward to sharing more of this progress at our Capital Markets Day in June. On value-based care, you're correct about the numbers. This area remains a vital business, though it's still developing. We had hoped to see positive results in 2024, but we are still in the negative. The growth we are experiencing is genuine, but the industry's early stage means we are experiencing several adjustments and true-ups, both in government programs and with payers. For us, the revenue we recognize is a significant measure, and the margin aspect is important as well, given its overall dilutive effect on margins. I can't share the expected medical cost under management number for 2025, but we are focused on booked revenue and margins, which reflect the nature of the contracts and their volatility. We believe these factors provide a clearer picture of EBIT contribution and revenue in absolute terms. We plan to discuss value-based care in more depth at Capital Markets Day in June, as we consider its evolution as a strategic lever for supporting our U.S. clinic business.

Dominik Heger, Head, Investor Relations

Okay, great. Thank you very much. The next caller is Graham from UBS. Graham, the line is yours.

Graham Doyle, Analyst

Afternoon. Thanks, guys. Just one question sort of short term and one slightly longer term. In terms of this year, the phasing, just of margin or EBT contribution, usually you can hopefully give us the Q1 sort of rough sense as to how we should think about that contribution, given the flu season, it would be quite helpful just to understand that? And then just, like, longer term, I suppose, you had this 10% to 14% midterm target range for margins for '25. That's been narrowed for this year, but you've obviously talked about more cost savings and we'll get more information, I suppose, at Capital Markets Day. But if we think about volume growth maybe coming out at that 1 to 2, rather than 2 necessarily, what is the sustainable margin once you've extracted the bulk of the cost, I suppose, from FME25 at a lower growth rate, just to understand what's kind of bedded in and from what you can build in terms of we think about the optionality of volume growth going back to 2% plus. Thank you.

Helen Giza, CEO and Chair

Thanks, Graham. We're smiling on the phasing question because normally in our script every year, we talk about Q1 is traditionally lower. But, you know, it is definitely, you know, kind of the weaker quarter. But, you know, other than that, we don't have anything more to provide in terms of color on phasing for '25. Obviously, as you've rightly said, we're watching the flu season and feel good about where we're seeing January. So, more to come, I guess, once we report Q1. But, kind of similar phasing, I would guess, to the traditional pattern. So, your tough question on question 2 on the margin bands and how that's going to move, clearly will show the building blocks of what we see post 2025. And as you can imagine, you know, both Care Delivery and Care Enablement have a lot of levers specific to your, you know, your question on, say, market treatment growth and if that was lower, what would it do? Obviously, you know, that's not our current assumption. We would also look at what the cost structure would be there to support it. Look, I think the other thing that we're super excited about, which would also play into that future growth potential, is clearly HDF. And that is, you know, kind of the implementation plan of getting those machines in our clinics and then, you know, seeing the improved mortality that we see in Europe for having HDF treatments and that 23% improvement. You know, it's still, I think, a lot of moving parts on the volume to unpack. Clearly we're not seeing an impact of the new drugs or you could argue mortality would be lower. We're excited about what we think we can bring to the, you know, HDF in volume. So I think more to come at CMD and I think also that the kind of the guards of how we're thinking about it.

Graham Doyle, Analyst

And maybe just a quick one on HDF. In terms of as you roll that out, would you expect to see just new patients benefit or do you think everyone benefits to some extent as they switch over even if they're, say, halfway through as their treatment courses you'd expect in, you know, say year 2.5 of the therapy?

Helen Giza, CEO and Chair

Yes, we believe everyone could benefit. In the study, no patient lived less as a result of being on HDF.

Dominik Heger, Head, Investor Relations

Thank you. The next question comes from David from J.P. Morgan.

David Adlington, Analyst

Hey, guys. Thanks for questions. First one is, it might be my math, but I think there's a bit of a disconnect between the 11% to 12% margin in the high teens to high 20s expansion. 12% seems unlikely unless you don't get much revenue growth at all. I just wonder what I'm missing there. And then secondly, just on the phosphate binders bit, also a bit surprised to see you getting EUR100 million additional profit going into the bundle. We've seen before with bundle changes that CMS quite quickly claws back any benefits that the industry gets. Just wondered how sustainable you thought that EUR100 million benefit was?

Helen Giza, CEO and Chair

Yes, I think David grabbed both of those. In terms of the 11% to 12%, clearly we have a wide OI range and obviously the 11% to 12% is reflecting that. So I don't know how else to answer that question other than you see the building blocks of how we get there and the range that that would provide. On binders in the bundle, yes, clearly, right, there is a benefit of having these assets, actually an unfavorability too of having some of these assets. So, you know, it's not just FKC. We do have a pharma business and we have a pharmacy business. So that's why I wanted to put color on, you know, the EUR100 million is a proportion of that is there's two positives and a negative, if you will. And overall, it's netting to EUR100 million. Obviously, as the binders utilization changes, we may see that, you know, the kind of utilization going down and the cost of those drugs changing. So I think that's why we have the period to monitor what happens to the utilization. Look, this is a little different, I would say, as well to calcium emetics, which is the other kind of bundle edition. We all recall, well, maybe before my time, but you all recall in binders in the bundle, there are different generics and branded in the mix. So we'll see how this plays out, obviously, over time. But we feel good about the assumption across the entire portfolio, and that's why we will also keep looking at the assets in the portfolio as that evolves over the period.

Dominik Heger, Head, Investor Relations

The next question comes from Robert from Morgan Stanley.

Robert Davies, Analyst

Thanks for taking my question. I had one around just on the additional savings that you announced, could you kind of break it down the components of where that's coming from? And just in terms of the phasing and timeline, how you expect those to play out through '25? And then just the second one was around the commentary you provided on labor and cost inflation, just perhaps, could you give us a little more detail? What's the sort of main areas of sort of labor cost inflation? Is it bringing in new nurses? Is it higher sort of turnover and bringing people back? I know you'd mentioned previously that it sort of started to settle down. So I just wondered if we get a bit more color where the remaining bite points are. Thank you.

Martin Fischer, CFO

So when we look at the program, we have accelerated the execution quite a bit, as you saw also in our quarter 4 results, where we ended with the EUR221 million. Main drivers in that, when you look at the savings, is number one, being anchored in our more efficient setup of the functions, which contribute about 50% of the savings. And we see more potential as we doubled down on those and drive efficiency in our processes, as well as a significant contribution to our Care Enablement business. And this is on the back of continued manufacturing optimization, logistics, supply chain. And those are the bulk of the initiatives, also for the EUR100 million additional savings. And lastly, there is a smaller portion of about 10% being with the care delivery business when we think about the clinic network.

Helen Giza, CEO and Chair

Yes. And Robert, on the labor cost, thank you for asking that. We're assuming in that headwind around a net 3% increase. You know, there's two pieces of that. Obviously, we say net because we're continuing to drive efficiencies and managing wage inflation. But I think the other piece to think about that for '25 is, as we have now normalized our headcount and open positions have reduced again further, so we're pretty normal now on open positions, it means we have more people, which is great for keeping our operations running. So that's the way to think about the labor headwind, a net 3% of efficiency and growth. And we're managing through that accordingly.

Dominik Heger, Head, Investor Relations

Thank you. Next question comes from Marianne from Bank of America. Marianne, the line is yours.

Marianne Bulot, Analyst

Hello, good afternoon, and thank you for taking my question. The first one is, could you please remind us how much debt is coming up to maturity in 2025 and what evolution we should see for the net debt to EBITDA ratio given you're already below the self-imposed target for next year? And as a quick follow up, can you talk a little bit about the capital priorities for 2025, especially you were mentioning the CapEx, so just wondering how is the order looking between CapEx and cash return to shareholders? Thank you.

Martin Fischer, CFO

Thank you, Marianne. Let me address those two points. First, regarding maturities, we have around EUR500 million due in 2025, followed by a larger amount of about EUR1.9 billion in 2026. We believe we are well-positioned, as demonstrated by our strong cash generation in both the fourth quarter and the entire fiscal year. As for capital allocation priorities, we will provide a more detailed update at the Capital Market Day along with the company’s strategic priorities. We reduced our leverage ratio to 2.9 due to our strong cash generation, which we expect to sustain in 2025, putting us below our current self-imposed limit. There is limited room for further improvement in our investment rating, but maintaining our investment rating was crucial, which we have achieved. When considering a comprehensive update on capital allocation, there are two main focuses. First, we aim to support the business and ensure profitable, sustainable growth in line with our strategy. Second, with our robust cash generation, we will also focus on the significance of shareholder returns. You can expect more clarity on this at the Capital Markets Day.

Dominik Heger, Head, Investor Relations

Okay, thank you very much. The next caller is James from Jefferies. James, the line is yours.

James Vane, Analyst

Hi, thanks for taking my questions. I'm just a couple on FME25, if I may. I guess if we just take a step back when you first announced the program, there's sort of EUR500 million in savings, I think it was, and now we're sitting at EUR750 million. Given it was such a comprehensive review at the outset, can you help us understand how this has evolved? Was it initial conservatism to the market on the scope? Was it a forward impact of some savings which he made which had a better benefit to the business or additional programs which perhaps were announced down the line? I know you sort of spoke that this is sort of evolutionary rather than kind of revolutionary from here, but just a sense in terms of how that's evolved and how we should think about sources of incremental improvements from here operationally? Thank you.

Helen Giza, CEO and Chair

Thanks, James. Great question. And I know when I kind of architected this program, I think people had thought I'd lost my mind when I sized this EUR500 million. So it does feel good to sit here today and say we're clearly at EUR567 million and achieved that and so much more. Look, James, what I would say, it's not just about the cost program and the efficiencies. This is all kind of embedded in the reorientation of the company into the operating model. And that real visibility into end-to-end P&L, every line item, the financial transparency to look at where we have opportunities, I think has clearly outperformed our own initial expectations. Obviously, with a program that size at the beginning in the EUR500 million, we had hoped we could do more, but we didn't have any living experience of running the company this way. So I think clearly as we have now been running this company as the segment for a little while, we are continuing to go deeper. And I think that's really important with the color that Martin gave you of where it's coming from. So I think you're right. It continues to evolve and we will continue to look for every opportunity we can. We know what we're trying to get to, to be leading industry margins and improve the margins that we had. And I think that progress is visible. So very, very excited about the momentum and the sustainability of those savings into '25 and beyond. So yes, happy to upgrade it and actually put the execution behind it. So thank you for the question.

James Vane, Analyst

No, thank you. And I guess maybe just in terms of delivering the EUR750 million, I mean, it's obviously cost you mentioned in the release EUR700 million to EUR750 million to get that. And I think related to FME, it's about EUR164 million or so in 2024. So I'm not expecting you to go beyond '25 today. And I know you're going to be talking about stuff for the Capital Markets Day, but should we think that it's sort of what you've been having in terms of related to this program of EUR130 million, EUR160 million of costs, whatever, will essentially kind of disappear because as we get into next year, those sort of sustainable savings have kind of come through just to help us sort of understand what basically will be considered adjusted?

Dominik Heger, Head, Investor Relations

Next question is from Hugo from BNP Paribas.

Hugo Solvet, Analyst

Hi, hello. Thanks for taking my question. I just left with one. On the 5008X, the clinical benefits are impressive, just conceptually. And then maybe how critical do you think this platform is to drive volumes maybe back to 2% should volumes remain noted beyond 2026, or maybe help drive volumes higher than that? And what's the timeline here? Thank you.

Helen Giza, CEO and Chair

Yes, look, this is part of why I'm so excited about this opportunity. We're obviously all looking for mortality to come down and, you know, volumes to normalize, which we fully expect them to. What we haven't had in this industry is the kind of innovation that drives this significant improvement in mortality that 5008X and the HDF treatment can do. Look, when we talk about elevated 17% mortality in the United States, we do need to compare that to the 12% that's in Europe, where HDF has been on the market for a decade, and it is the standard of care. So, you know, with a convinced study really supporting that 23% improvement in all-cause mortality, there's no reason to believe that we don't get that in the U.S., and that's the exciting opportunity. So, you know, taking that on average to the N degree, you could say it's a 23% improvement in volume, not a 2% improvement in volume. Now, obviously, that needs to ramp up over time, and we'll see how the numbers really stack up in the United States, but I think that is obviously the opportunity that we're excited about.

Hugo Solvet, Analyst

Thank you, and congrats on the results.

Helen Giza, CEO and Chair

Thank you. Thank you. Really appreciate that.

Dominik Heger, Head, Investor Relations

Thank you. And as we are out of time, we'll take one last caller who hadn't had a chance to ask a question so far. So, Falko from Deutsche Bank, the line is yours.

Falko Friedrichs, Analyst

Thank you very much. I'll ask one. On the same market treatment growth, do you feel like you are gaining a little bit of market share again here in the fourth quarter, and feel like you're in a position to potentially gain a little bit again throughout 2025? Thank you.

Helen Giza, CEO and Chair

Yes, thank you for the question. I think a little bit of both. Obviously, you've seen our results from what we posted today. You've seen some other industry numbers. I think, you know, our work is paying off. Clearly, we had been kind of lagging where we wanted to be operationally. So, I think the, you know, our work in terms of accepted referrals, improving our processes, and better disaster management is clearly enabling us to get those patients, but keep those patients as well. So, it's probably a little bit of both, but, you know, it's very complex where all the patients coming in, but also keeping those patients. So, I feel the team is doing a terrific, terrific job, which is what gives us the confidence going into 2025 from what we've seen the last couple of quarters and even January. And, you know, you know we wouldn't be guiding if we didn't kind of see that that was the kind of the projections that we have because it is an element of our own work and that strength in our performance.

Falko Friedrichs, Analyst

Thank you.

Dominik Heger, Head, Investor Relations

Thank you. Good. So, and thank you, Helen, Martin, for running over. I apologize to everyone who couldn't make it in the queue. So, thank you very much. We'll be out on the road many conferences, road trips, and calls. So, I guess you get more opportunity to learn more about our exciting 2025. And with that, thank you.

Helen Giza, CEO and Chair

Thank you, everybody. Take care.

Martin Fischer, CFO

Thank you. Bye.

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