Oliver Maier - Head, IR & Corporate Communications Rice Powell - Chief Executive Officer and Chairman Mike Brosnan - Chief Financial Officer.

Patrick Wood - Citi Tom Jones - Berenberg Veronika Dubajova - Goldman Sachs David Adlington - JPMorgan Chris Cooper - Jefferies.

Great. Thank you very much, Patrick. We would like to welcome everyone to the Fresenius Medical Care Earnings Call for the Third Quarter and Nine Months of 2016.

I would like to start our call by mentioning our cautionary language that is actually in our Safe Harbor Statement, as well as in our presentation and all the material that we've distributed and provided today. So, for further details, please refer to these filings.

With us is Rice Powell, our CEO and Chairman, and Rice will give you a very quick general update and go through some of the highlights for the quarter. And we have Mike Brosnan, our Chief Financial Officer, who will cover with you the financials and the outlook in a bit more detail. So, that's it from my end. Rice, the floor is yours..

Thank you, Oliver. Welcome, everyone. We appreciate you joining us today while we discuss and review our Q3 earnings. We had a very strong performance in the quarter, and we are on track to deliver our fiscal year guidance for you.

Starting my prepared remarks, on Slide 5, I'd like to highlight that we had very strong revenue growth in the healthcare services segment of our business. We saw very good performance from Asia-Pacific and Latin America in both their revenue and their operating results.

Again, care coordination had very significant top line growth, good constant-currency growth, and organic growth, and sequentially in the quarter, Q3 over Q2, we improved the margin 60 basis points.

We are on track, as I said, to achieve the full year guidance, and let me make the point that through all three quarters of the year we have seen exemplary performance in North America. It's been a very good push by that segment in order to help us and we appreciate the work that's come out of North America.

Now, turning to slide six and taking a moment to look at our growth in all the segments as it relates to revenue, you can clearly see that 10% revenue growth in North America with a companion organic growth of 7%, and again, strong performance, as I recently just mentioned. Asia-Pacific is doing very well at 13% revenue growth organically up at 8%.

And you can see EMEA and Latin America, as well. Probably the one thing I would note on Slide 6, as you can see where traditionally North America has been around 69% to 70% of the revenue they've bumped up to 72%. And also, Asia-Pacific has ticked up as well in their percent of contribution to the revenue in the third quarter of the year.

If we turn our attention to Slide 7, on our quality outcomes, we continue to see stable and slightly improving performance on the key metrics that we measure each and every month and quarter. Now, let's take a moment and spend some time on Slide 8, our healthcare services strong revenue growth.

Again, as we stated earlier, $3.734 billion in the quarter, 10% constant currency growth, and an organic growth rate of 8%. We discussed care coordination, but since the numbers are so good, I'll mention it again, 29% growth in constant-currency and 24% organic growth.

Looking at EMEA, again good performance, both constant-currency and organically, and the same for Asia-Pacific and Latin America. We've highlighted the same market treatment growth for you. You see it in total, and in the individual regions.

And I would highlight for you in the deck, not to be covered today but on Slide 19, you'll find the nine-months view of these same data, but I'll let you look at that at your convenience. We also had a 5% increase in our dialysis treatments in the quarter, as well as in the number of patients that we are treating in the third quarter.

Again, that's 5% growth on both of those metrics. Now, turning to Slide 9 and my last slide, looking at our dialysis products in the quarter, $864 million; constant-currency growth of 5%. We had another strong performance in North America, with 7% constant-currency growth.

You can see Asia and Latin America both in very strong performance, 18% in Latin America; 12% with Asia. And then, we see EMEA with 1% negative constant currency growth. I will go ahead and save you a question and point out that we see the same similar two effects in this quarter that we saw in the previous quarter.

As you know, we had a sale of pharmaceutical assets to the Vifor joint venture, which contributes about 50% of this change. And then, additionally, we talked last time about Algeria and the fact that we had reimbursement drop from three times a week down to two. That has obviously affected our disposable supply business, predominantly our dialyzers.

That contributes to some of this negative 1%. And there are a few other odds and ends in the Middle Eastern part of EMEA. And with that, I will turn it over to Mike, and he will take you through the P&Ls and the other measures that you'd like to hear about. Mike, thank you..

All right. Thank you, Rice. Good afternoon, and good morning, everyone. So, I'm starting on chart 11 with the three-month and nine-month profit and loss statement. Revenues increased 9%, as Rice indicated, so I'll move to operating income. Our reported operating income increased by $56 million to $670 million, or 9%.

It was strong in North America, Asia, and Latin America, and the U.S. was impacted by higher personnel costs. Worldwide earnings were also influenced by an acceleration of costs related to our long-term incentive compensation program, or for later reference, our LTIP program. EBIT margins increased by 10 basis points from 14.5% to 14.6%.

As you know, we had some one-time effects in 2015.

Excluding these impacts, which were the loss of $26 million for the divestiture of our dialysis services business in Venezuela and the realized portion of a $7.6 million gain for the sale of our European marketing rights for Renal Pharmaceuticals into our joint venture EBIT increased from $632 million to $670 million, or roughly 6% in the third quarter.

We'll come back with more details on the margin performance in a few minutes. Our net interest expense remained virtually unchanged. Taxes, shows you a decrease in the effective tax rate, from 32.8% to 28.8%.

This decrease was largely driven by a lower tax expense as a result of some tax liabilities we were able to release due to audit settlements with tax authorities. And a favorable impact due to the non-tax deductible loss on the divestiture of our Venezuelan services operations last year.

In part, this was offset by a lower portion of tax-free income attributed to our non-controlling interest lines. Our non-controlling interest, again, this is a North American story. Broadly speaking, the non-controlling interest tracks the EBIT development at different rates for the dialysis and the care coordination business.

It is down in comparison to last year due to a difference in the cost report benefit attributable to our joint venture partners and an increase in our ownership of certain JVs. In line with these drivers, non-controlling interest for the quarter was $73 million. As you can see, net income attributable to our shareholders was up $71 million, or 27%.

Adjusted for the one-time effects that I mentioned for 2015, the increase is 17%. Moving to the right-hand side of the page and looking at the first nine months, revenues up 7% actual currency, 9% constant-currency, this is in line with our full-year guidance.

Operating income increased $186 million to $1.851 billion, an increase of 11% compared to last year. It was supported by the lower cost for healthcare supplies and savings from our global efficiency program, but was also impacted by personnel costs in the U.S. EBIT margin improved 60 basis points, from 13.4% in 2015 to 14% in 2016.

Again, I'll talk about margin for the quarter in a few moments. Net interest expense increased $4 million. This was, as has been the case in prior quarters this year, mostly driven by lower interest income as a result of a repayment of an interest-bearing note receivable from a provider in the U.S.

that was paid off in the fourth quarter of 2015 as the primary driver. Tax rate shows a decrease from 32.4% to 30.5% on a year-to-date basis, influenced by the same drivers that I mentioned for the third quarter. And net income attributable to our shareholders is up $142 million, or 20%.

Turning to chart 12 and the margin profile for the business, and looking at our segments, but before I go through the detail on the chart, again, a few minutes ago I indicated that margins improved in the single quarter 10 basis points to 14.6%.

The weighted contributions to this margin increase were increases in margin from Latin America of 60 basis points, Asia-Pacific the weighted increase is 20 basis points. We had lower margins in North America, which contributed 60 basis points, and lower margins in EMEA contributing 20 basis points.

The mix effect was a 20-basis point improvement, and corporate costs reduced the margins by 10 basis points. Moving to North America, operating income was up $21 million to $536 million. Margins decreased 90 basis points, from 17.1% to 16.2%.

They were influenced by the dialysis business, impacted by higher personnel costs and by the LTIP acceleration that I'd mentioned previously. Our care coordination business showed strong top line growth and comparatively lower margins to the care.

More specifically, our dialysis business margins were down 30 basis points, from 19.1% to 18.8%, largely due to the personnel costs, the cost impact that I already mentioned with regard to the long-term incentive comp plan, partly offset by lower costs for healthcare supplies and a higher volume of treatments with our commercial payers.

Care coordination earnings were down $2 million, or 5%. As Rice mentioned, the year-over-year margins decreased from 6.8% to 5%, but the sequential margins improved and are consistent with our guidance. For EMEA, operating income was down $5 million, or 4%.

Margins decreased 120 basis points, from the 19.7% you see in gray to the 18.5% in the same color. If you adjust the margin for the one-time gain associated with the sale of the European marketing rights, the adjusted margin is flat at 18.5%.

Effectively, you had favorable foreign exchange effects offset by an unfavorable impact from manufacturing cost and a higher bad debt expense. In Asia-Pacific, the earnings were up $17 million, or 25%. That's 20% at constant-currency, and margins increased 190 basis points, from 17.9% to 19.8%.

And this was largely due to the positive impacts associated with business growth, with a foreign currency tailwind also contributing to the gain. Latin America was up $28 million from a loss of $8 million to earnings of $20 million, with margins increasing from a loss of 4.7% to positive margins of 10.5%.

Prior year operating income was negatively impacted by the divestiture of the services business in Venezuela. If you adjust for that effect, you get to the margin figure in yellow of 10.3%, and you see a 20 basis point improvement in the region.

Our corporate costs increased by $5 million to $96 million in total, with an impact of negative 10 basis points.

This was shared with an increase in our R&D spending, driven by our projects, a slightly higher overhead in our manufacturing operations, influenced by, again, the LTIP acceleration and lower expenses associated with our compliance investigation.

Turning to chart 13 and briefly touching on cash flows, Q3 2016 was primarily driven by $100 million discretionary contribution we made into the pension plan in the United States.

In addition, the cash flows for the nine months were affected by the timing of other working capital items, higher income tax payments in 2016 compared to 2015 due to a tax refund we received in the prior year.

These effects were partly offset by increased earnings, reduced inventory levels, and in particular the reduced inventory levels due to lower levels of ESAs in the current period. The result in cash from operations is 9.5% as a percentage of revenue for the quarter compared to 11.4% for the prior nine-month period.

Excluding the contribution to the pension fund, the ratios would be 11.7% and 10.6%, respectively. CapEx for the quarter increased slightly, representing about 5% of revenues.

Combined with acquisition activities in the third quarter, which was a net $37 million, our debt has increased from $9.1 billion at the end of June - excuse me, decreased from $9.1 billion at the end of June to $8.9 billion at the end of September.

Leverage is about 20 basis points lower year-over-year, and our leverage is well within our guidance for fiscal 2016. Turning to my last page to talk about our outlook, I would say at this point, as you can see, we're confirming our outlook for the year.

I would say at this point we've provided our expectations for 2016 to you eight times in the last 21 months. Rice and I are very happy that the next time we comment on 2016, it will be to report the actual to you.

Nevertheless, as I've said, we're guiding to an increase in revenues of 7% to 10% in constant-currency, an increase in net income of 15% to 20%, and the guidance we're providing considers what we know today and reflects our expectations for the operating results of the Company.

As a reminder, the performance also continues to exclude the impact of acquisitions closed in 2015 and anticipated for 2016, and includes the savings from our global efficiency program. Thank you, and back to you, Oliver..

Great. Thank you, Mike. Thank you, Rice, for the presentation. I think, Patrick, we can now open up the lines for questions. Thank you..

And our first question today comes from the line of Patrick Wood of Citi. Please go ahead..

Perfect, thank you very much for taking my questions everybody. I have three if I may. The first would be on the care coordination business, obviously very strong growth there.

It would be great to hear sort of what's been driving that, has that really been Sound Physicians/Cogent and NCP that have been the core drivers there? The second would be on the cost savings, obviously GEP and Massera [ph] sort of coming to the close of those by the end of this year.

As you look out, going forward, do you think there are any other opportunities to take a look at the cost base and have an assessment there, going forward? Finally, I have to ask, but appreciate it's very difficult for you guys to comment on, CMS's RFI.

I think probably everyone's comfortable with the AKS patient number that you guys had disclosed previously. But, I guess my question here is has the discussions associated with the RFI impacted in any way the kinds of discussions that you're having with your commercial partners in terms of renegotiating commercial contracts at the moment? Thank you..

Thank you, Patrick, its Rice. Mike you want to take number one, and I’ll take two and three..

Sure, happy to. Patrick, on number one, I think as we've indicated in the past, actually, in the care coordination grouping, we continue to see strong performance more or less across the board amongst the assets we have in that portfolio.

In Q3 I guess I would just in particular comment that we continue to see good growth in the pharmacy, cardiovascular, and vascular access services - that's NTPN, our vascular access business and our health plan would be the three I think that stand out for the quarter..

Patrick, relative to the global efficiency program in Massera, so let's go with Massera first. As you know, every quarter I used to tell you how many patients that we had now with multiple doses. We were at about 130,000 patients at the end of Q2. We sit here today at about 131 to 132, so we've had the majority of the conversion take place.

I think there'll be some movement in and out perhaps as we go through further quarters. With our GEP program, we are on track for that. We should exit 2016 at a $300 million savings rate. And we do have projects that look into outer years.

As I've said before, some of these projects that are built around efficiency in our clinics, in our supply chain, things of that nature, will take a little longer. We're pushing harder. I don't want to say we picked all the low-hanging fruit, but we pick those trees pretty hard.

But, we're going to continue to push on that, and I think we'd have to get a little more clarity. Perhaps when we give guidance for ‘17, we can give you some sense of what may be going on with GEP.

But, the whole mental process and the effort of being more efficient and looking at all of the types of things that we could find, we'll continue to do that. And your last question, the RFI, here's what I think we can do.

Let's not speculate, because I really can't begin to think about what may or may not happen, but let's go back to the facts, as you said, and I appreciate that you brought it up. We've been very clear about the fact we don't steer patients. We don't have a practice or policy that would allow us to do that, and our employees don't do it.

We're very transparent in our RFI. We laid everything out for you. I appreciate the fact that you recognize that. We today have not had any walk-across or blowback or impact from what's been happening with other companies, or other providers, in any discussion that we've had with our insurers.

Our communications have continued to be good, the relationships strong, and we'll take it from there.

But, at this point, we just think we need to keep doing what we're doing and keep our discipline, but I appreciate the fact that you recognize we were the only company that was transparent enough to list exactly what we had to make it clear for you folks and investors that they had nothing to fear from us in that regard..

That’s very helpful. It’s not gone unnoticed. Thanks guys..

And our next question comes from the line of Tom Jones with Berenberg. Please go ahead..

Good afternoon, Rice. I had a couple of questions actually. The first is just to follow up on comments that Mike made about personnel costs, ticking out particularly in the U.S. in Q3. I noticed from your recruitment website, you've got pushing up towards 4,000 vacancies in the U.S. at the moment. That seems to be a little higher than usual.

I just wondered if you could give us some general commentary on recruitment costs and general wage costs within your clinic business in the U.S. And I know if you go back three or four years, the nurse shortage was something that came up on pretty much every call, but we haven't heard an awful lot about it of late.

I just wonder whether that's something that has started to rear its head again. The second question, just on the Latin American business, just kind of wondering how you managed to produce 30% organic growth in that area from memory, I can't remember any bit of FMC ever growing organically at that rate. So, just wondering how you achieved that.

And then, finally, a bit of a technical question. Your friends in Deerfield have launched a new dialyzer which seems to be aimed at patients that require clearance of molecules more at the high molecular weight end of the spectrum. To me, that looks like something that might compete with the HDF offering that you have.

I'm just wondering if I'm reading that right and how you see that landscape evolving in that particular bit of the dialyzer business and whether that's anything we should pay any great attention to..

Sure Tom. Mike, if you want to take one and two, then I’ll do some technical thinking and come back to Tom on number three..

Sure, sure, Tom. Yes, I think, I guess I would say, in terms of a long-term systemic issue, I wouldn't take the labor increases in North America that way. I think that you can see the vacancies are up a bit. In addition to that, I would say as you know, with what we've undertaken to do clinically in North America, it's been a very busy year for us.

We're doing a lot of training. We're doing a lot of adjustment to the protocols. And that has certain inefficiency and a certain drag on the labor cost. So, I wouldn't say this is going to turn around in three months' time, but as we look into next year, I think we'd probably see this right itself..

Perfect..

Okay. Number two, in terms of Latin America, I think that we're also pleased to see that Latin America turned around a bit from second quarter last year. Some of it is just managing the operating costs, but we also did get a reimbursement increase in Argentina that was bigger than we expected, and it was also retroactive..

Yes. Tom, the other thing I'd add there is, as we've looked at our base of clinic assets in Brazil, we are consolidating some there. We're closing some clinics, moving patients into other spaces, then, just transferring from one location to the other. So, we're really trying to stay out in front of whatever may happen.

As you know, in that part of the world, it can be fairly crazy from time to time, so we're just trying to be as proactive as we can..

Perfect..

I saw the material on the Baxter dialyzers, and I'd say a couple things, Tom, and it's kind of a regional answer I'll give you. When you look at international regions, we do very well with our hemodiafiltration. My hat will be off to Baxter. This dialyzer can give them the same kind of clearance that we get with hemodiafiltration.

I don't see how that's possible, but there are a lot better technical people out there than me. But, I think that's going to be a real stretch.

Now, when you revert that to the U.S., where hemodiafiltration really hasn't been approved because the FDA's not sure how they think about that process, it's more of a direct dialyzer-to-dialyzer competition, because you really now don't have the influence of the diafiltration piece of this. So, we'll see where this goes.

We're going to do some more study. We'll get our hands on some of these dialyzers and take a look at them, and we'll see where it goes. But, as I always say, we'll meet those guys on the streets, and we'll see how that competition goes..

And just maybe to put some context in it for us without getting too specific, maybe for the whole market rather than your business, what percentage of dialyzers get used in the HDF setting versus the traditional HD setting?.

Well, if you take it on a global basis, I'm guessing here, and I may have to come back and correct myself the next time we talk, but it's probably going to be maybe a third or something like that. In many parts of international, it's a premium therapy that gets done. The U.S.

is such a huge market and single use really keeps the traditional dialyzer percentage at a much greater place, if you will..

Perfect. That’s very helpful..

Sure..

Our next question comes from the line of Veronika Dubajova of Goldman Sachs. Please go ahead..

Good afternoon gentlemen. Thank you for taking my questions. I have three please. My first one is on the guidance for the full year. I think, Mike, a quarter ago you made some comments around some probability or drivers that would influence whether you end up in the low or the upper half of the guidance.

It'd be great to get an update on those and how you're thinking about in particular the contribution from BPCI into the fourth quarter? My second question is for Rice on the same market growth rate in the U.S., good to see a modest pickup from the second quarter.

But, maybe you can give us an update on some of the activities that you're undertaking and how we should be thinking about same market growth into the fourth quarter and into 2017? And my last question is just on managed care contracts in the U.S. From memory, I think you have a couple of that are due to be renegotiated as we enter into ‘17.

Can you give us a preview on what kind of conversations you're having at this stage with those payers, and how we should be thinking more broadly about the commercial rate development over the next couple years? Thank you..

Okay, Mike why don’t you go ahead, you want to take one and I’ll take two and three..

Sure, hi, Veronika.

Yes, I would say no change to my commentary from last quarter, where for the benefit of the rest of the folks on the call, I just commented that the government investigation, which at the beginning of the year we were hopeful would be wrapped up this year, it's basically just taking the government longer to get through their review.

And unless you close down a review, you generally tend to see a continuation of legal costs. So, the decline in spending is not happening as rapidly as we had hoped.

And secondly, I commented that everyone was working very hard and very collaboratively with regard to the data sets that we need from the government in order to be able to make estimates with regard to our savings under the BPCI shared savings program.

So, the combination of those two things as we looked at guidance for the back half, if they were to conspire against us, would put us in the lower half of the range. So, that has not changed at all. I would say in particular, folks continue to work very hard on data sets on BPCI.

I appreciate, for all of you on the phone, relative to Q4, you might think of it as a bit of a nail-biter, given that we're sitting here at the end of October.

But, it is what it is, and we still remain confident that we're going to achieve savings in the multi-year program, but the particular timing of that in terms of whether or not it crosses a finish line for the start in Q4, we'll have to see..

So, Veronica, as far as the same market growth at 3.3, we have ticked up a little bit. I think my commentary would be the bulk of this is we're still working through, as I had told you, acute contracts that aren't working for us.

We will get out of those, and then we come back around and either re-sign at a better position, or we end up in another geography with new contracts. That won't reverse itself in a quarter. It's going to take some time for that. But, I would say this on same market growth.

When you look at this number, my degree of comfort or nervousness gets pushed into looking at, okay, where are we overall in the performance in North America, what am I seeing on the number of commercial treatments, what am I seeing with revenue per treatment, that sort of thing.

And when you look at the kind of body of work these guys have turned out over the quarter or the nine months in this quarter, I'm pretty comfortable. They're doing what they need to do. I applaud the fact that they're not going to stay in bad, acute contracts, and it's a lot of work to go out and re-sign them.

But, we're going to continue to look at the overall picture and weigh these various pieces of it. And I would also say, if you get to Slide 19, you can see that, for the nine months, they're at 3.7%. So, we're going to give them the time to work through what they're doing, but I think we'll be fine..

Veronica, let me also just come back, because you mentioned specifically BPCI. And I think what goes hand-in-hand in that is the other program that we're engaged in with CMS, the ESCO program.

And I think I would comment, just given the efforts and the focus we have on that program, that we were able to recognize very modest revenues in the third quarter related to the ESCO program associated with the first nine months of that program. So, it's the beginning, but I think it's a strong positive that we do have good data sets coming in.

We are in a position where we were able to make some estimates for the first time this quarter and just had very modest revenue in the quarter associated with that program..

Then lastly, with our payers and where, are we, as we've discussed many times, we've got the three big contracts. We're discussing, or in some early discussions, with one of those. The other two come early next year. It's fourth quarter coming up. That's when we talk to the independent regional guys.

What I would say, and obviously I'm not sitting in these discussions, but they seem to be going as we thought they would early on. We're going to approach this as we always have. We'll see where it goes. We know what we're capable of offering to people.

But, there's nothing - because if it's kind of buried into your question - there's nothing in this RFI and this walk-across, and all of those things that people are worried about, we're just not seeing that today. It doesn't mean it won't come, and if it does, we'll deal with it.

But, at this point, we're continuing in our relationships with the private payers as we have all year, and it's been solid. It's been respectful, and it's been okay for us..

Thank you for that color, Rice. My question really had both the RFI in it, but more conceptually I think from memory, when you last renegotiated contracts, you did have to make some pricing concessions. And I just was curious if you had any expectation for that as you think about the three renewals.

And then, just if I can squeeze a very final question really quickly, is just the equity income, Mike, was quite high this quarter, so if you can comment on that, and that will be it for me. Thank you..

Sure. I think it's up $20 million year-over-year, and that's, I think, probably a reasonable run rate, given all the activities we had over the course of the last 12 months on Massera. So, that's what I would say, yes..

Great. Thank you, both..

Our next question comes from the line of David Adlington of JPMorgan. Please go ahead..

Thanks guys. Most of my questions have been answered.

Maybe just following up on the personnel costs and as an adjunct to that the LTIP, how much of those costs, are one-off, or are there some ongoing costs there? And then, also just to follow up on the $100 million pension contribution, why did you make that now, and how is the overall funding of that part now? Thank you..

Okay. Those sound like they’re both for me. On the personnel costs, I guess maybe the best way to comment relative to North America in total, is because obviously personnel costs you have to look at in a couple of ways.

We're a provider organization, largely, around the world, and in particular in North America, and any provider organization needs to manage their total cost picture to address the fact that employees expect increases, and I think over the years, we've managed that very well in a steady-state environment.

So, that will continue, we believe, in the years to come. In terms of the increment associated with training and maybe a few more vacancies we might normally have, I'm not really prepared to tease that out.

But, I think probably underlying your question, the biggest question is how to think of the acceleration we've had in the vesting for the long-term incentive compensation program. And two comments I'll make. One is obviously we've had a program for the last 20 years.

What we did in Q3 is we noted that, given the ready-for-retirement designation, we had a larger number of people than we had originally anticipated that qualified in that sense. So, as a consequence, from an accounting point of view, you need to accelerate the recognition of that expense into the current period.

It doesn't change at all the expense we recognize over the four-year vesting period for the entire program. So, effectively, what you'd see is acceleration into Q3, and then you'll see a small benefit teased out over the course of the next three years or so.

That effect, if I look specifically at North America, which is where the majority of that cost resides, if you think of it in terms of the delivered EBIT for the quarter in North America, I think we were showing a delivered EBIT growth rate of about 6%.

And if I adjust for the incremental cost of the LTIP for North America in the third quarter, it would put us at about 11%. So, it had about a 400 basis point effect on the earnings for North America..

And David, the other thing I would say is we're talking a lot about North America. I want to give perspective that we've got 108,000 employees. About 65,000 of them are in the U.S., so it does get a bigger portion. This does affect some of the other regions, too. I just don't want anybody to think, well, it's only one region that's getting the LTIP.

It really spreads out over the globe. It's just there's a higher concentration. And keeping in mind that a lot of these people, when we formed the Company 20 years ago, were already on board with the predecessor company, so that's why we've got such a retirement more ready age, if you will, in that region.

And then, Mike, the pension payment?.

Yes, the pension payment. The reason for doing it now, David, is we did have a relatively large unfunded position in the U.S. pension plan.

And as some of you may know if you're into the details of how one element of pension expense is when you have an underfunded plan, you have an increase in the premium you need to pay to the pension benefit guaranty Corp associated with the size of your underfunded position.

So, when we looked at the economics, we just made the determination that we could have a modest savings in pension expense by avoiding the incremental charge associated with an underfunded position, and so we made the payment. We're over 80% funded now in the U.S. pension liability.

The unfunded obligation after the $100 million contribution is a little over $100 million..

That’s very clear. Thank you very much..

Yes, sure..

And our next question comes from the line of Chris Cooper of Jefferies. Please go ahead..

Questions I suppose three please. Just firstly, looking at the increase in cost per treatment during the quarter, and solving for the fact that you're now running with around about 50,000 more patients on Massera than you were last year, backing that out, the increase in other expenses appears to be very meaningful.

I mean, to what extent is this, the personnel expenses that you've already highlighted, and how much is due to other dynamics playing out there? Secondly, on care coordination, clearly revenue growth is very strong, and the margin is now ticking up in the right direction.

In that context, I'd just be keen to hear your latest thoughts on how you're feeling about the $5 billion sales and $3 billion investment targets that you'd established for this business back in ‘14. And then, just lastly, a housekeeping question.

Given you've had a meaningful benefit on your tax rate during the quarter, can you just provide some sense of how sustainable that is going into the fourth quarter, and maybe to what extent that was just a one-off for the third? Thank you..

So, on the cost per treatment, what I was saying, Chris, is we'll see some moderation, I think, and some improvement in that in the fourth quarter. Some of what Mike has spoken about does affect what you saw in third quarter. And then Mike, you want to hit the care coordination with revenue growth and margin..

Yes, if I could, just because I know from some of the reports that came out before the call, some folks were struggling with what I'd call the normal personnel costs associated with the provider side of the business, the vacancies that Tom mentioned earlier, etcetera, the training that I mentioned.

Those costs are in the cost per treatment calculation. The acceleration of the LTIP expense is not just, to clearly have a demarcation there in terms of what you want to attribute to the increase in cost per treatment.

So, in addition to the personnel costs that Rice mentioned, we do see a slight increase in some of the administrative expenses, a little bit of an increase in bad debt, and housekeeping and property costs. So, I'd say it's mostly the labor piece, but not all.

On the care coordination, sorry, can you repeat your question?.

Yes, my question was broadly just given that things, I mean, the top line is developing very well, I think we can all agree. The margin is going back in the right direction in the third quarter, certainly better than it was earlier in the year.

I'm just keen to hear what your latest thoughts are about where that business is in relation to the targets that you'd first established back at the Capital Markets Day in 2014..

Okay, sorry Chris, I just blinked for a second but I came back I mean, as you started talking. Yes, I think we had said $5 billion in revenues, and I think we had also commented that we expect it to grow between 25% and 35% this year. And I think we still feel pretty good about both of those two indications.

In terms of the capital side of care coordination, we've never broken out, if you will, in ‘14, ‘15, and ‘16 the exact split between our acquisition spend and our CapEx.

But, what we had indicated is we view the care coordination side of the business as CapEx-light, and I would say we haven't spent - we still have money we could spend with regard to potential acquisitions in care coordination to top off what we've already accomplished.

So, given that, I think that supports the $5 billion revenue projection, and we have dry powder, if you will, on the acquisition and capital spend $3 billion that I gave you 2.5 years ago..

Yes. Chris, I would tell you, Mike and I talked about $2.5 billion of revenue in this year. I think we're tracking to that. And if you just look organically at how we're producing, we would be $3.7 billion, $3.9 billion or $4 billion without acquisition. So, we think this is within our scope of achievement.

And then, Mike, he was asking about tax rate sustainability..

Yes, tax rates. Well, in the second quarter, I dropped the expected tax rate for the current year from 32%, 33%, to 31%, 32%, just to give you kind of an order of magnitude indication.

So, we're not going to be talking about ‘17 in this call, but I'd expect a tick-up in the tax rate in 2017 just because, while the release of tax liabilities is not a one-time event, it happens every time you resolve a fiscal year, or a group fiscal year with taxing authorities. Typically that gets spaced out over a year or two's time.

So, I'd expect normalization, a slight tick-up. Not ready to comment specifically about ‘17, but I think if you looked at my guidance for the year of 32%, 33%, that's kind of, I'd say, the norm for us when you look at us over a number of years..

Got it. That’s all very helpful. Thanks a lot..

Okay..

Yes..

Patrick, are there any more questions, any further questions in the lineup?.

There are no further questions at the moment..

Okay, great. Thank you so much..

Thanks, everyone..

Thank you..

Take care, guys, bye-bye..