Earnings Call Transcript - FMS Q1 2024

Operator, Operator

Thank you, Alice. Good afternoon or good morning, depending on where you are. I would like to welcome you to our Earnings Call for the First Quarter of this year. We appreciate you joining us today. I will, as always, start out the call by mentioning our cautionary language that is in our Safe Harbor statement as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. As we have only 60 minutes for the call, we have prepared a short presentation to leave time for questions. As always, we would like to limit the number of questions to two in order to give everyone the chance to ask. Should there be further questions and time left, we are more than happy to do a second round. With us today is Helen Giza, our CEO and Chair of the Management Board; and Martin Fischer, our CFO. Helen will start with an update on the major developments and Martin will provide a review of the financial performance in the first quarter. Then we are happy to take your questions. With that, Helen, the floor is yours.

Helen Giza, CEO

Thank you, Dominik. Welcome everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care. I will begin my prepared remarks on Slide 4. I'm pleased to report that we continue to make tangible progress on both our transformation and our turnaround efforts. We are meaningfully advancing toward our 2025 group margin target band. The progress is visible in both of our operating segments. Care Delivery, the first quarter was marked by important leadership changes and organizational improvements. As you know, Craig Cordola, our new Head of Care Delivery, officially started on the 1st of January. A key priority for his first 100 days was to implement a new organizational structure and leadership team for his business and focus on holistic end-to-end process improvements. With the streamlined Care Delivery organizational changes now in place since the 1st of April, I'm very encouraged by the focus, professionalism, and speed of implementation that Craig and his new leadership team are bringing to the business and their priorities centered around driving patient growth are very clear. In the U.S., a major focus for the Care Delivery team is on improving clinic utilization, optimizing processes, as well as unconstraining clinics, and optimizing the clinic footprint, especially in growth markets. We were able to decrease the number of constrained clinics by about one-third by the end of the first quarter. We have very good visibility on the capacity constrained markets and specific clinics, and the challenges are not uniform. For example, in several constrained markets, staffing shortages remain a factor. Therefore, hiring and reducing turnover remains a priority. By the end of the first quarter, our open positions for nurses and technicians across the U.S. were reduced by around 500 to approximately 3,500, which is now very close to a normalized level of 2,000 to 3,000 open positions. This will position us better to take on more patients in the coming quarters. In other markets, for example, we are seeing strong demand and do not have sufficient capacity to capture all the patients. For growth markets, it is not just about more hires, but we also need to consider how to make more dialysis chairs available if the expansion drives profitable growth. Expanding our strategic growth areas within Care Delivery remains a priority. The main driver of the mentioned favorable phasing in the first quarter comes from our value-based care business. We had a strong first quarter with patient lives increasing to 125,000 lives and positive revenue and earnings contributions. We know that value-based care revenues and returns can be lumpy and therefore, focus more on annual performance. We have planned for our medical costs under management to grow to €8 billion for the full year. We expect our value-based care business to be a positive contributor for the full year 2024, and the positive EBIT contribution in the first quarter puts us in a good position to achieve that. As you have seen, we continue to move at speed in our portfolio optimization plan with several additional market exits announced and others closed since our last earnings call. I will review those in more detail later on. Turning to Care Enablement. I'm very excited about our progress with further proof points demonstrating the continued momentum of our FME25 transformation efforts. This resulted in an inflection point in our Care Enablement margin expansion from 1.3% in the fourth quarter of 2023 to 6% in the first quarter of 2024. Driving this positive margin development is a further improvement in pricing as we both renegotiate and sign new contracts on more favorable terms. With an eye toward cost reduction and margin improvements, several initiatives are underway to optimize our manufacturing footprint and supply chain, which will further benefit the margin development in 2025 and beyond. For example, we are in the process of moving production from our plant in Concord, California to Mexico with production set to wind down in California later this year. We continue to optimize the production of a lower-cost fluid line in Knoxville, along with additional cost reductions across initiatives across the manufacturing network. In January, we launched further supply chain initiatives in North America to improve the operational effectiveness of our distribution network. Pricing as well as margin expansion continue to be a key focus of the CE commercial and operation teams globally. At the same time in Care Enablement, we are preparing for the rollout of high-volume hemodiafiltration in the U.S. and the opportunity to bring much-needed innovation and set a new standard of care for patients and at the same time, maximize the benefits of our vertically integrated strategy. While all of these developments in Care Delivery and Care Enablement are essential for the future success of our business, it is terrific to see our turnaround and transformation efforts, driving improved financial performance already, and we are on track to achieve our 2025 margin targets. Moving to Slide 5. For the group, the first quarter result was relatively weaker compared compared with the full year, which usually ends with a strong quarter. Please keep this in mind when we guide you through our first quarter developments although we have benefited this quarter from favorable phasing effects, which I'll come back to later. In the first quarter, we delivered solid revenue growth of 4% with positive contributions from both Care Delivery and Care Enablement. For Care Delivery U.S., we knew that the first quarter was not going to be easy from a volume perspective and it broadly developed in line with our expectations for a broadly flat quarter. Adjusted exit from less profitable acute care contracts, U.S. same-market treatment growth came in at minus 0.3%. This reflected some more significant weather events within our clinic footprint and an increased impact from the flu season this year. Both led to a higher level of missed treatments, and while improving at the end of the quarter, we continue to have some capacity-constrained clinics, but at the same time, we are encouraged by the increase in referrals sequentially. Therefore, in line with our planning, we expect to see growth of 0.5% to 2% over the course of the year, and the changes and focus of the new Care Delivery leadership are ensuring that we are well-positioned to better capture the growth. In the first quarter from an earnings perspective, both segments realized an improved operating income margin on a year-over-year basis. In particular, strong momentum in Care Enablement led to an accelerated margin improvement on a sequential basis and solid development against the strong first quarter of 2023. This was supported by the strong execution of our FME25 transformation program. As planned, FME25 contributed €52 million in additional savings and we are well on track to achieve the targeted €100 million to €150 million in additional savings by year-end. As already mentioned, we continue to move at speed on our portfolio optimization plan. While we were executing against our turnaround and transformation plans, it is paramount that we do not lose focus on our patients. In the first quarter, we remained on a high level of clinical quality, which is not only the core of all we do, but integral to our sustainability agenda. To this extent, we will host a Sustainability Expert Call on the 13th of June to highlight our initiatives and achievements in this area. Information on the call is available on our Investor Relations website.

Martin Fischer, CFO

Thank you, Helen and welcome to everyone on the call. I will recap our first quarter performance beginning on Slide 8. In the first quarter, we delivered strong revenue growth of 4% on an outlook basis. Organic growth of 5% was mainly driven by our growing value-based care business and the favorable rate and mix development in Care Delivery. In Care Enablement, growth was supported by positive pricing development. During the first quarter, operating income on an outlook basis improved by 23%, supported by higher prices, higher value-based care contributions and strong but expected FME25 savings resulting in a meaningful margin improvement of 130 basis points. As Helen mentioned, our value-based care business not only improved year-over-year, but was a positive earnings contributor in the quarter. This led to an earnings development that was somewhat better than expected from a phasing perspective. The €157 million in special items that you see on the chart comprise €143 million in portfolio optimization costs. This is primarily related to the impairment of tangible and intangible assets resulting from the classification as assets held for sale. It also includes FME25 costs of €28 million as well as €1 million in costs associated with the legal form conversion. Additionally, Humacyte remeasurement contributed positively to special items with €15 million. Turning to Slide 9. This slide provides an overview of the 130 basis points improvement for our operating income margin compared to the first quarter of 2023 on an outlook base. Starting from the left, as a reminder, the special items in 2023 mainly were related to our portfolio optimization efforts in Care Enablement. This brings us to the starting point of our outlook base and then the quarterly margin contribution by segment. The positive margin contributions from both Care Delivery and Care Enablement are important proof points that we are successfully executing against our turnaround and our transformation plans. While there is more work ahead of us, the step up from 7.3% to 8.6% group margin in the normally weaker first quarter is visible progress towards our 2025 group margin target. Next, on Slide 10. Care Delivery revenue increased by 5% on an outlook base, supported by 6% organic growth. In the U.S., growth of 6% was driven by a growing value-based care business, assumed moderate reimbursement rate increases, and a favorable payer mix development as we continue to see incremental increases in our Medicare Advantage population. As expected, our U.S. volume development was down by 0.3% when adjusted for the impact of acute contract exits. This is broadly in line with our expectation for the first quarter, and we expected this to improve over the course of the year. Revenue in the internal markets increased by 2%, driven by organic growth and the benefit of increased dialysis days year-over-year. In the first quarter, we observed operating income growth of 25% year-over-year. Positive business growth was driven by improved pricing, payer mix effects, and higher contributions from value-based care. Additionally, FME25 savings also contributed to improved earnings. This was partially offset by higher labor and inflation costs, largely related to the annualization of merit increases in the prior year and fully in line with our assumptions for the current year. Turning to Page 11. In the first quarter, Care Enablement revenue increased by 2% on an outlook basis supported by 2% organic growth. This growth largely reflects our continued pricing momentum. We need to compare this to a very strong first quarter in 2023 that benefited from higher sales in critical care products in China as part of a corporate-related one-time government initiative. On an outlook basis, operating income for Care Enablement grew by 23%. Business growth remained stable with continued improved pricing being offset by the negative volume base effect from the mentioned prior year China critical care sales as well as unfavorable foreign exchange transaction effects. The positive development was driven by strong FME25 savings, but partially offset by inflationary cost increases. This is well in line with our outlook assumptions for the year. Despite the absence of the China Critical Care sales, our first quarter development not only increased, but also better reflects more sustainable improvements in performance. This is, in particular, visible when compared sequentially to the fourth quarter of 2023 with 1.3%. We see a clear inflection point in margin improvement. Also the extent of development might vary quarter-by-quarter. We also expect for the full year, a very visible step-up of the Care Enablement margin compared to 2023 with clear progress towards our 2025 target margin day.

Operator, Operator

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

Richard Felton, Analyst

Thank you very much. So, two questions from me, please. The first one on Care Enablement margins. So, obviously, strong sequential improvement. But my question is how sustainable do you think that improvement is now? So, obviously, last year, you had a strong start in Q1 and then margins faded slightly throughout the year. Is there anything that you can call out in terms of sort of phasing for CE margins this year? Or can we expect further improvements from the solid base in Q1. That's the first question. Then my second one is on the Q1 number for U.S. treatment volumes. Obviously, it was a relatively subdued start to the year. Are you able to share any additional color or quantifications on the drivers of that between excess mortality, missed treatments, and new starts? Thank you.

Helen Giza, CEO

Hi Richard, this is Helen. I'll take those two. So, on Care Enablement margins, as you can probably tell from my tone here, we're really excited to see the inflection point. We had said that we expected the Care Enablement margin to at least double from last year. And of course, what you see here is quite a decent step-up. We do expect there will be a little bit of phasing as we go through the quarters. And as we know, value-based pricing in procurement, excuse me, in China will come in at the back half of the year. But at the same time, we also expect to have further FME25 contributions and the impact from price. So, I think overall, that 6% might be an aggressive proxy for the year, but definitely trending toward that direction, but with some fluctuations probably through the quarters. On your second question, yes, look, we all know. We are watching. I think the world is watching the U.S. treatment volume growth. And obviously, while Q1 came in line with our expectations, it is obviously still hovering around that flat piece. We did have a flu season that was a little bit stronger than we had thought. That did result in higher mortality and missed treatments in January. I think also for us, with our regional footprint, bad weather in the first six weeks of the year also impacted those missed treatments. The positive sign that we're signaling here is referral trends are better Q4 to Q1. And then I think outside the external factors, if you will, about kind of the flu season and weather obviously, the operational double down here and pulling apart our end-to-end processes to improve our operational capabilities is well underway. Of course, we know these things take some time, but confident in the overall plan here that we'll get this within the range that we have obviously guided to.

Victoria Lambert, Analyst

Thanks for taking my question. Just the first one for me is, where was clinic utilization tracking in Q1? DaVita commented that they were tracking, I think it was 67% during the quarter. So it would just be good to see the comparison is between both of you. And then I saw that there was a divestiture from your Turkish clinics business. Could you give some color how big that divestment is and what other geographies you may be looking to exit this year? Thank you.

Helen Giza, CEO

Hi Victoria. I'll address the first question, and then Martin and I will tackle the second one together. Regarding our utilization, it is quite similar to DaVita's. They mentioned 58% during their call, and we are also in that high 50s range. While it’s not where we all hoped to be, it remains a key area of focus for us. The operational turnaround efforts we're making will certainly contribute to improvements in this area. Additionally, the reduction of clinic capacity by a third since the end of last year is significant for us. Martin, would you like to discuss the figures related to the Turkey divestiture while I cover the overall situation regarding the other divestitures?

Martin Fischer, CFO

Yes, we have recently divested Turkey. It's a smaller-sized business that we closed in April. The volume is in the low double-digit range, which is relevant for us. We expect the effects of the divestiture to appear in Q2. Additionally, we signed off on the remainder of our Latin America operations in April and the first quarter as well. However, in the first quarter, the impact from divestitures was negligible, and it will be reflected in the second quarter.

Helen Giza, CEO

Sorry, regarding your broader question about what else is included, we have made significant progress with Argentina and NCP regarding the loans listed in Q1, with many of those also transitioning to Q2 announcements and closures. We have signed approximately $1 billion in revenues from those divestments. I believe most of what we had planned is now finalized. There are still a few items we are addressing related to other country operations, but we can't discuss that until it's publicly announced, along with a few smaller assets still in consideration. We have maintained a consistent approach to our portfolio optimization strategy. As stated in our press release, we anticipate generating around €650 million from signed agreements in 2024, adding to the €135 million we secured last year. Everything is on schedule and progressing well, with a lot of activity over the past few months.

James Vane-Tempest, Analyst

Hi, thanks for taking my questions and two, if I can, please. If I can just come back to the same-store you mentioned, I think it was minus 0.7% or minus 0.3% adjusting to the acute clinics. There seems to be a different trajectory to DaVita, who I imagine also had to deal with weather and flue things. So, I guess what are the key differences between them in your business? And did I hear correctly, you're also reiterating the 0.5 to 2% volume rate target for 2024 if I didn't see that in the slides. And then my second question is just on the intersegment business. I mean the margins were positive here. So I was just kind of curious this contribute to the Care Enablement margins? And should we expect a positive margin for the eliminations in full year 2024? Thank you.

Helen Giza, CEO

Hi James, I'll address the first question. Yes, our clinic footprint does vary. There is a noticeable difference between our competitors' performance in same-market treatment growth and ours. We faced significant challenges on the East Coast. The flu season should be similar, although the weather can differ. We have some operational improvements underway, particularly in our processes and addressing clinic constraints, as well as navigating challenging labor markets. We confirm our growth target of 0.5% to 2%, which I discussed with Ed, and we anticipate this will increase over the year. In terms of patient metrics, we are focusing on the patient funnel and referral trends, admissions, and new patient starts, all of which are essential for our incoming flow. Operationally, we need to ensure we can accommodate and serve these patients in our clinics, and that's an ongoing effort. Regarding the intersegment business, there have been no changes in intercompany pricing or practices. It's important to clarify that this is not related to transfer pricing or internal maneuvers. The advancements in Care Enablement are closely tied to our operational transformation programs. As I have mentioned, progress is on the way; it just takes time. We are starting to see an upward trend, especially on the manufacturing side, which was noticeable in the first quarter along with the continued pricing adjustments.

Martin Fischer, CFO

Also perhaps to add on the intersegment, it does not roll up into Care Enablement. It rolls up together on the corporate piece. So what you see in the Care Enablement numbers is a true Care Enablement operational performance improvement.

Veronika Dubajova, Analyst

Hello everyone, and good afternoon. Thank you for taking my questions. I will focus on two predictable topics. The first is to revisit the growth in market treatment. Helen, could you clarify your expectations for the growth cadence as we progress through Q2, Q3, and Q4? Do you anticipate being in the 0.5% to 2% range in the second quarter, or will we need to wait until Q3 or Q4 for that? Additionally, could you address any impact from the number of days in Q1? Please remind us if that is factored into the minus 0.7, as I forgot to ask Dominik about it earlier. My second question pertains to your expectations for revenue per treatment. I understand you typically don't comment on this, but excluding the same market, it seems revenue per treatment in Q1 was quite healthy. Was there anything unusual? Also, could you provide an update on Medicare Advantage trends and whether that has been a significant driver? Thank you.

Helen Giza, CEO

Thank you, Veronika. The growth in same-market treatment is expected, and we anticipate that it will increase over the quarters, with stronger performance in the second half. I have a range in mind, and we are managing our guidance accordingly. The initiatives we are implementing may take several weeks or months to fully realize, which is why we expect gradual ramp-up rather than a significant leap as you suggested for Q2. Additionally, while there is an extra dialysis day in the quarter, we adjust for this when calculating same-market treatment growth, so it has already been accounted for as a negative adjustment. Regarding your question on revenue per treatment, we are pleased with the progress we’re making on that front, specifically in terms of reimbursement, pricing, and mix. The Medicare Advantage mix is growing; I initially hoped to reach 35%, but now we’re over 40% and approaching mid-40% levels. The commercial mix is strong and we see slight improvement, along with the contracting benefits. Overall, I'm very happy with the progress on revenue per treatment.

Graham Doyle, Analyst

Hi guys. Thanks for taking my questions. Just first one on GLP-1, which hasn't been asked it's been a while, but we're obviously still waiting to get more information from the flow data. But I was wondering in terms of what you have internally, do you have any data that indicates where you're treating a patient who's currently taking GLP-1 that it actually does translate into longer times on dialysis, i.e., lower mortality overall, therefore, benefit to you guys? So that would be question number one. And question two is, as you continue this great delivery and you're seeing the balance sheet deleverage. What are your thoughts in terms of what you might do with that extra balance sheet room, maybe not the next sort of six to 12 months, but beyond that, particularly as you've obviously retrenched from some international markets that lease flex for things like, say, by one of your peers clearly does? Thank you very much.

Helen Giza, CEO

If I can just unmute myself, sorry about that. Hi Graham. Yes, we have good data on our patients taking GLP-1s. I would mention two things. First, those patients haven't been on it long enough for us to determine how it affects extended time on dialysis; we have about a year's worth of experience. Secondly, we've noticed a high dropout rate among patients on GLP-1s, with many discontinuing quickly. There is a study on GLP-1 drugs in dialysis patients, but the results aren't expected until 2027. Later this month, we will have the anticipated data from another study, and everything we've seen so far aligns with our expectations. Now, I’ll have Martin discuss the current capital allocation and deleveraging plan, and then I’ll share my thoughts on the overall strategy for capital allocation.

Martin Fischer, CFO

Yes. So, Graham, we have well-articulated 2025 plan. So, until then, it is all about execution. It is about making sure that we continue to execute on our divestment plans. And we will continue to deploy capital to deleverage also kind of to make sure that we do what we can do from our side to keep the investment. There is a 3.5% own implied on applied range that we have. And I think with the 3.2%, we are well-positioned there in and there's still some room for us to optimize. Having said that, capital allocation follows strategy and with that, I think I hand the strategy part of the question to Helen.

Helen Giza, CEO

Yes. Thank you. Graham, I think we feel really good about the capital allocation plans we have in place. And obviously, the combination of the divestments, the improving cash flow, improved operating performance is getting us to a natural delever. We've been asked the question a lot, it's 3 to 3.5 times where you're going to stick or are you going to change it? I think that answer depends on kind of our outlook. Obviously, I'm working with the leadership team pretty hard now on the strategy beyond 2025 and what those capital needs are. Obviously, we have HDF launch, clearly, sitting in our strategy wheelhouse as well as continued home and value-based care. I think we'll be continuing to work that internally. And when we can deliver the strategy, we'll also deliver the capital allocation plan with that. So, we're probably thinking next year for a Capital Markets Day on most of this. But now the focus is on strong cash flow generation, improving the profitability, delevering with the cash that we have and building headroom, particularly in this kind of volatile financial market that we're in. I think we all feel good about the current plan.

Lisa Clive, Analyst

Hi there. Can you just comment on the VBP in dialysis products in China? Is that going to be consumables and machines? And also, if you could just give us rough estimate of what your Care Enablement sales in China are and assuming that, that gets cut in half, perhaps what the profit impact would be as well? Thank you.

Helen Giza, CEO

Hi Lisa. Yes, for that business in China, it's consumables. I don't think we've shared our separate revenue figures regarding the China business specifically. We have factored in an expected impact for VBP into our guidance outlook based on what we're observing with tenders and so on. We anticipate that this will have a back half impact, which, along with the Care Enablement margin in Q1, could result in some phasing through the quarters. Overall, what we've seen and the success we've had with VBP in China appears to be maintaining its momentum. I feel we're on a good track there.

Lisa Clive, Analyst

And just a follow-up question. Could you give us a rough idea of what your market share is in China consumables? I mean I think globally, you're like in the 40%, 50% range in most markets, if I'm correct on that. Just wondering if China is different?

Helen Giza, CEO

Lisa, I don't have that market share number to hand. Why don’t I have Dominik follow back up with you there. I mean you're right in terms of being the clear leader in the HD product, but let me see if we can snag that market share and get back to you.

Robert Davies, Analyst

Good morning, everyone. I appreciate the opportunity to ask my questions. First, could you provide an update on labor inflation trends this year? Are they decreasing as you initially anticipated heading into 2024? Secondly, regarding your outlook, I know you mentioned a medium-term margin target. Given the current normalized growth rates and the influences of excess mortality along with moving past COVID comparisons, I would like more insight into your expectations for midterm growth potential for the business. Lastly, could you share how home dialysis is performing and what percentage it currently represents of your overall activity? Thank you.

Helen Giza, CEO

Martin, would you like to take this question first and I’ll follow up with the next two? Regarding labor inflation, we are currently on the right track. Our guidance incorporates certain assumptions, including a 5% inflation rate balanced out by efficiencies, resulting in a net adjustment to 3%. We have observed this in our first quarter, and it aligns with what we anticipated regarding expected challenges. We are optimistic that we will see further easing as anticipated throughout 2024. In response to your inquiry about growth outlook, we maintain our belief that the fundamental drivers of this business remain solid. Factors such as population growth, an aging demographic, and rising instances of diseases continue to stand firm alongside the limited options for dialysis and low rates of transplantation. We are still confident that, considering our neutral outlook on GLPs, we will achieve a market growth return of 2% to 3% by the end of 2025, aligning with pre-COVID levels. So, we are reaffirming this. Regarding home dialysis, it has been a source of frustration due to its stagnation, primarily linked to our staff’s training capacity. However, we have seen a slight increase, still around low 16%. It appears that we are beginning to see an inflection point with more patients entering training. We hope this will lead to net patient gains, which is a critical metric for us, indicating that we are making progress. We all wish for a quicker pace, and while we have an ambitious goal in mind, this outcome is progressing alongside our operational improvements in clinic efficiencies.

Hugo Solvet, Analyst

Thanks Dominik. Hi guys. Thanks for taking my questions. I have two. Maybe, Helen, first, you mentioned the strong trends in terms of referral strong, just curious what's the lag here takes to same treatment market growth? And I didn't catch your earlier answer on the answer of the Veronika's question. Would you expect as soon as Q2 to be at or above 0.5% for same market treatment growth? Second, a follow-up on hemodialysis. Curious to get your thoughts and views on the improving access to on dialysis act, maybe the likelihood to go through and the feedback that you're getting from your teams in Washington? Thank you.

Helen Giza, CEO

Okay. I’ll address these points in reverse order. Regarding the Dialysis Act, we support the developments happening there, but we don’t anticipate any additional impact on us beyond what we already have accounted for. As I recall, it was budget neutral from CMS, which might reduce the chances of it moving forward. However, I don’t think it alters our home plans. Concerning same market treatment growth, I won’t speculate on the Q2 number. I’m aware of the initiatives underway and can observe the patient funnel. We expect an increase, but I won’t provide a specific estimate at this moment. We will have an update in Q2. Regarding your first question about the time it takes for referrals to convert into patients, the referral needs to be scheduled in our clinic to ensure that patients receive their treatments, contributing to growth. This process does take time because of the number of patients and treatments, and each additional patient adds slowly to our numbers. Nevertheless, we are optimistic and confident in the team's efforts, as we are improving processes comprehensively. I believe these improvements will lead to tangible growth.

Unidentified Analyst, Analyst

Hi, good afternoon. Thanks for taking my call. My call is on behalf of David Adlington. I had two, please. Firstly, can you please quantify how much of a benefit the BBC was in Q1? And how should we be thinking about that for the rest of the year? And then second one is just a follow-up on the labor inflation. Could you comment on how much your agency costs have reduced year-on-year? And can you take these agency costs down further?

Helen Giza, CEO

Thanks for the question. I will address both of those. The BBC business experiences fluctuations based on claims and experience. For Q1, we observed a low double-digit positive impact, which indicates the earnings contribution during that quarter was in low double-digits, measured in euros. How this evolves throughout the year will depend on the contracts and revenue flow. Regarding your inquiry about labor, the surge in the temporary labor market that I described as chaotic during the summer of 2022 has subsided. Our reliance on contract labor has decreased significantly year-over-year and quarter-over-quarter, and we are using it selectively. We ensure tight control over its use in certain areas where it's essential, such as high-demand metro locations or constrained clinics requiring temporary labor, but overall usage and rates have significantly reduced.

Oliver Metzger, Analyst

Yes, good afternoon. Thank you for taking my questions. My first question is regarding labor. Recent data indicates that the U.S. economy is stronger than expected, along with some positive labor statistics. Can you provide more insight into the current labor shortage situation? Also, reflecting on the challenges faced two years ago, if the situation were to quickly deteriorate again, have you learned anything that would allow you to mitigate the impact compared to those past experiences? My second question pertains to the upcoming summer. Do you have any indications about the bundled rate increase for next year? I assume you are in frequent contact with CMS and the government. Is there any early information on what next year's bundled rate might look like? Additionally, how has your experience with this year's weak bundled price increase affected commercial plans? What is the timeline for the impact you expect, and do you anticipate an immediate effect on PMS prices followed by a slower adjustment in commercial prices? Any clarity on this would be very helpful. Thank you.

Helen Giza, CEO

Thank you, Oliver, for those questions. Yes, I think we're managing the labor trends by balancing merit increases and being selective about our labor costs, offset by labor efficiencies, which is crucial. I'm also pleased to report a reduction of 500 open positions in Q1. Currently, we have about 3,000 to 3,500 open positions, maintaining a similar ratio between nurses and PCTs. Our overall turnover is improving as well. Furthermore, approximately one-third of our recent hires are returning employees, which helps fill open positions with experienced staff who require less training. We’ve learned a lot from the summer of 2022 regarding our metrics, allowing us to detect issues earlier in clinics and utilize temporary labor more effectively. While the market might not reflect past conditions, we are still monitoring it closely. Regarding the PPS rate, MedPAC has suggested a 1.8% increase. I hope that following the recent inflation spikes, reimbursement rates will stabilize and past mechanisms will return. We haven’t prepared our guidance based on extreme increases, instead assuming moderate overall rate increases and being cautiously conservative until we have more information.

Operator, Operator

So, we have time for one last caller. Falko from Deutsche Bank.

Falko Friedrichs, Analyst

Thank you very much. Helen, I have two clarification questions on guidance, please. Firstly, on the same-store treatment growth guidance and specifically the upper end, the 2%. Can we still consider that as a realistic average growth rate for this year? Or should we rather view this as a potential exit rate? And then look at the lower end of 0.5% to 1% as a realistic average growth for this year? And then secondly, I was a little surprised that you confirmed your 2025 EBIT margin target again today. Is there actually still a realistic scenario in which you can get to a 14% margin next year? And if that's not the case, I'm just a little surprised that sort of you keep this type of aggressive hurdle here.

Helen Giza, CEO

Yes, I believe that's a valid question, and it's one we are currently addressing in light of the flat same market treatment growth in Q1. We have a guidance range in place, and I think it's reasonable to view that 2% as more of an exit rate rather than an average at this moment. As we move forward into the next quarter, we will refine or adjust our outlook as needed. Regarding your second question, I don't find it overly ambitious. We have established a range for our EBIT margin, and I have consistently indicated my intention to update that range by the first half of the year. That still remains my plan. I'm taking it one quarter at a time and am pleased with our progress. Our financials and bottom-line performance are clearly reflecting that. I understand there are concerns about what it will take to reach the upper end of those EBIT margins, but I believe the progress we're making will help to clarify that. For now, I won't be making any changes today, but it remains a priority for me, especially as we approach the end of 2025, which is only 18 months away. We will continue to provide clarity on how we're viewing those guidance ranges as the year progresses.

Operator, Operator

So, we have run out of time. Thank you, everyone, for this contribution. This is great for I know what you all have a busy day. Thank you very much. We'll appreciate that. And we'll meet you on the road and our latest next quarter. Thank you.

Helen Giza, CEO

Thanks everyone. Thanks for your continuing support. Take care.

Martin Fischer, CFO

Take care.