Dominik Heger - Fresenius Medical Care AG & Co. KGaA Rice Powell - Fresenius Medical Care AG & Co. KGaA Michael Brosnan - Fresenius Medical Care AG & Co. KGaA.

Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom) Veronika Dubajova - Goldman Sachs International Patrick Wood - Citigroup Global Markets Ltd. Lisa Clive - Sanford C. Bernstein Ltd. Michael K. Jüngling - Morgan Stanley & Co.

International Plc Ines Duarte Silva - Bank of America Merrill Lynch David James Adlington - JPMorgan Securities Plc Oliver Metzger - Commerzbank AG (Broker) Oliver Reinberg - Kepler Cheuvreux SA (Germany).

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Call on the Fourth Quarter and Full Year 2016. Throughout today's recorded presentation, all participants will be in a listen-only mode.

The presentation will be followed by a question-and-answer session. I would now like to turn the conference over to Dominik Heger, Head of Investor Relations. Please go ahead, sir..

Thank you, Patrick. We would like to welcome all of you to the Fresenius Medical Care earnings call for the fiscal year 2016. I would 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 today.

For further details concerning risks and uncertainties, please refer to these filings, including our SEC filings. With us today is Rice Powell, our CEO and Chairman, and Rice will give you a general business update and go through some of the highlights of the year.

Of course, also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. For the real work, I now handover to Rice. The floor is yours..

Thank you, Dominik. Good morning, good afternoon, everyone. Thank you for being with us today. If I may, before I start my prepared remarks, given we're going to be talking about the full year, I'd like to just offer a very warm thank you to the FMC employees for all their hard work and contributions over the course of 2016.

People worked very hard and they really delivered over this period and we appreciate it very much. Thank you. We've put for you slide number 4, I'm not going to comment on it, but it is a reference slide for you. This is where you can get a sense of the growth in clinics, patients, and treatments, et cetera.

I just mention it is there for you should you want to reference it as we go forward. I'll begin my prepared remarks on slide number 5. My headline for you is that 2016 has been a record year for us at Fresenius Medical Care. As I usually do, I'm not going to (2:20) read numbers off the slide to you. You've seen them.

You've had a couple of hours to look at this. I'll make the following comments that we had ambitious targets for 2016 and we've achieved them. We gave you this guidance back in February of 2015. Mike and I are delighted that we're through with this guidance, but we're also more pleased that we actually achieved the guidance.

We had very good performance in the Health Care Services segment of our business, particularly in North America, and we'll get into that in more detail in future slides. Care Coordination continues to deliver significant organic growth, plus 20% for us, and we'll highlight that as well.

Our Global Efficiency Program was a big contributor to our 80 basis point increase in EBIT margin, along with lower cost of healthcare supplies in the U.S., and we'll talk a little more about the GEP program as we go forward. And then lastly, we are proposing a dividend increase of about 20% to €0.96 for the AGM that will be held in May of this year.

And as you know, we are now looking at 20 years of increasing dividends over the course of the company's history and we're quite proud of that, and we hope people will be pleased with this dividend proposal. Moving to slide 6 and let's talk a little bit about our organic growth trend.

You can see that North America, Asia-Pacific and Latin America had good performance in the organic growth. We had a muted effect in Europe, Middle East, and Africa. I'll have some commentary on the drivers of that predominantly in the product business, and I'll speak to that in a few slides from now.

But again, we are pleased with the organic growth trend that we've seen in the full year, as well as in the quarter. And our revenue split, if you will, is pretty consistent with past quarters of 2016, when you see North America at roughly about 72% revenue contribution. Now looking at Health Care Services, you've seen this chart many times.

Let's just hit the highlights here of, for the total book of business $14.5 billion, constant currency growth at 9%, organic growth at 8%, and the same market treatment of 3.2%. And you can see how we break out the same market growth, as well as organic and growth in constant currencies across the regions.

And then you can see, we continue to break out Care Coordination for you at $2.3 billion, 23% constant currency growth, a nice performance there. Additionally, looking again at the full year view, we see the U.S. organic revenue per treatment up $5 a treatment at $351 versus $346 in the prior year.

Not on the slide, but I would simply speak to, we saw the right progression in our cost per treatment. We were down from $279 in the prior year to $278. So as we like to refer to it, it's a perfect storm of your cost per treatment going down and your revenue per treatment coming up, it makes us all pretty happy.

Now, turning to slide 8 and taking a moment to look at our consistent quality outcome. There's not a lot of movement here. I think we're very solid and operating at a high level. Typically, we try to focus on a couple of these.

I would say when you look at our albumins, they look solid across the year and the quarter, looking at phosphate as well, and our hospital days are very consistent across the various regions.

And as you know, in Latin America and Asia, part of why we're seeing such a difference in hospital days versus what we see in North America and EMEA as we don't have good data in some of the countries in those regions yet, but we aspire to get there at some point and we'll have the probably little more total picture somewhere down the road here as we look out.

And again, our hemoglobin management, whether it's the U.S. convention of 10 to 12 grams or the international convention of 10 to 13, you see nice consistent performance there. Now, moving to the product side of the business, looking at the full year, you can see that we were at $3.392 billion, 4% constant currency growth.

So I think I want to take a moment here. I've seen some of your preliminary reports. People had some questions about the product site, so I'd like to try to address that now if I can. And if I don't do a good enough job, I am sure you'll have more questions for me when we get to Q&A.

Looking at Asia-Pacific and Latin America, we see very strong performance, so let's go back and deal with the first two. In North America, if you will recall, we were at 6.5% in the third quarter. Pleased as we could be with that.

I made the comment to you then that I did not know if that would be sustainable through fourth quarter; turned out that it wasn't. I suspect that we probably sold some equipment and some disposables in the third quarter, particularly equipment, that didn't come around in the fourth quarter, if you will, that probably got pulled up into the year.

I would also say to you that we saw two things that I think contributed to this fourth quarter performance, and let me point out for you. The fourth quarter view of this slide is number 26 in your package. I won't pull it up and go through it, but I know that's what a lot of your questions came around.

So I'm just trying to address them at this point on the full year slide. I would also tell you, we saw a little price erosion in Venofer that had a contribution here, and as well as some of that equipment that I think we pulled up into third quarter.

I would also tell you that we had one of our – one of our customers we saw a little bit of a drop-off in their machine – in our machine business for sales to them. So that had some impact as well.

But I would also tell if you somebody will ask me, well, how big was it? It was in a very high single-digit number, so it's not a huge situation, but there again it is down year-over-year, no question. Now looking at EMEA and what has happened there.

We have talked about this before, some of this impact continues, but there are three basic things at a value of about $44 million. As you will recall, we sold the EMEA pharmaceutical business. We sent that to the Vifor JV, and the impact of that is around $20 million and we've commented on that before.

We've also had a situation where we have bought some of the polyclinics or the (8:57) here in Germany. Therefore, we had external customers moved to internal customers, so we've had some cannibalization of that revenue, and that's worth about $4 million.

And then lastly we touched on this and we're not out from under this issue yet, which is the fact that in Algeria, where we've had a very good product business, we saw reimbursement go from being paid three times a week down to two times a week.

So we've lost a third of that disposable business that we had been enjoying, and that's going to continue for a while, and that's worth about $20 million as well. So that gets you to the $44 million that definitely had an impact in EMEA when you look at that. Now slide 10, as I said earlier, just a little more color on our dividend.

We just gave you a view of the last four, five years of where we've been. Obviously, given the huge step-up in our earnings in 2016, we believe that the dividend proposal should mimic that, and that's what we're proposing, a 20% increase, which puts us at €0.96. And again, at this point it is proposed and has to be voted on at the AGM on May 11.

My last slide, and I pondered how do you categorize the year in three or four highlights, and I would probably say it this way. I believe we continue to improve the quality of life for our patients. We've had a very good year in our clinical outcomes around the world. We feel good about that.

We're proud and we're pleased that we've delivered on the targets both in revenue and profitable growth that we gave you. The GEP, or the Global Efficiency Program, has contributed for us as we exited 2016, as we predicted it would. And we continue to make progress in Care Coordination, not perfect.

We'll talk a little about some surprise issues that we came upon. But at the end of the day, in this value-based effort that's going on in the U.S., we continue to see progress.

Our health plan continued in the fourth quarter to be able to recognize some revenue in the ESCO value-based pilot that we're running, and we'll talk a little bit more about the hospitalist business in the BPCI later on. And with that, I'll close out my commentary and turn it over to Mike..

Okay. Thank you, Rice, and hello to everyone on the phone, and I would just reiterate Rice's thank you to the organization for a great quarter and a great year. Turning to chart 13, Rice already spoke to revenues, so I'll move to operating income. Our operating income increased $124 million to $786 million for the quarter, or 19%.

That reflects about 160 basis point improvement in the margin, with the quarter finishing at 16.8%. About 100 basis points of that margin performance relates to the special items that we've talked about in the fourth quarter of 2015. That was the GranuFlo settlement and the pharma gain.

Excluding these effects, our earnings went up $82 million, or 12%, and the margin improved 60 basis points.

I'll go through the margin performance in the individual regions, but overall when I look at the margin improvement, I would tell you it was driven principally by a reduction in our corporate costs, primarily legal and consulting spending, an improvement in North America and Asia-Pacific, and that was partly offset by margin decrease in EMEA and in Latin America.

Net interest expense increased by $10 million. This was due to lower interest income that I've been commenting on all year along. Taxes, the effective tax rate dropped from 31.4% to 30%, largely due, again, to these prior-year effects that I just mentioned.

Our non-controlling interest at $88 million broadly tracks to the EBIT development in North America, as we've told you before, when you split the performance between the Dialysis business and the Care Coordination business. And finally for the quarter, net income as reported was up $71 million, a 23% increase.

When you adjust for the special items of 2015, you are still seeing a very strong 12% increase in net income, and earnings per share increased 22% for $0.23 per share. Moving to the right-hand side of the page and looking at the full year.

Revenues, as Rice indicated, when you adjust for the basis upon which we provided guidance, which means we took out the benefit associated with acquisitions both 2015 and 2016, we grew at 7% constant currency, which was in line with our guidance.

Operating earnings increased $311 million to $2.6 billion and change, an increase of 13%, and our margin improved 80 basis points to finish the year at 14.7%. So for the year and considering the divestiture in Venezuela.

Adding that to the pharma gain and the settlement of GranuFlo in terms of special effects in 2015, our earnings increased $250 million, or 10%, and our margin improved 40 basis points. The weighted contributions of that 40 basis point increase was an increase in margin from North America, lower margin in EMEA.

There was no effect on margin associated with Asia and Latin America. I'll come back and provide more details on the margin and performance for the year for each of the regions in a moment. Net interest expense increased $15 million, again, mostly due to lower interest income.

And the tax rate showed a decrease from 32.1% to 30.6%, largely associated with the one-time effects from 2015. Net income to our shareholders was up $214 million, or 21%. Earnings per share increased 20%, which is the basis for our dividend increase. We guided 2016 against the benchmark of earnings after tax of $1.57 billion (15:30).

As I indicated before, this excluded the GranuFlo settlement and the favorable effect we had on earnings after tax for both our 2015 and 2016 acquisitions. So against this benchmark, we saw an increase of 16%, which was in line with our guidance. So now turning to chart 14 and talking little bit about the margin performance for each region.

For North America, our operating income was up $321 million to $2.1 billion, or an 18% increase. Margins increased 120 basis points to 16.4%. Without GranuFlo, the margins were up 70 basis points. They were positively influenced by the Dialysis business.

But, while Rice commented that our Care Coordination business showed good top-line growth, the margins were below expectation at 2.6%. Moving now just for a moment and talking about the Dialysis business. Margins in the Dialysis business were up 190 basis points, again – and that is without GranuFlo.

The major contributors were lower costs for health care supplies. That's largely the Mircera contribution. A higher commercial volume, the releases from bad debt reserves and lower legal spend, exclusive of GranuFlo.

This was partly offset by our personnel expense and the cost impact related to the long-term incentive plan grant vesting, which I explained to you in our third quarter call. Care Coordination earnings were down $38 million, or 39%.

Year-over-year margins decreased 260 basis points, from 5.2% to 2.6%, primarily driven by an unfavorable margin contribution from our hospitalist business, due to an increase in bad debt reserves.

In addition, we saw a small effect in physician practice services, and these effects were partly offset by favorable impacts from our vascular and cardiovascular specialty services business. Overall, at the beginning of the year I had guided to a top-line growth in the area of 25% to 35% and a margin of 3% to 5%, so we missed both.

I would offer, excluding the fourth quarter increase in our hospitalist bad debt reserve, which was driven by operational performance and not the market, our EBIT margin would have been 3.7%, so well within the range that we had indicated of 3% to 5%. Moving to EMEA, operating income was down $53 million, or 9%.

Margins without the renal sale decreased 130 basis points, and this decrease was driven by higher bad debt expense, taking a more conservative position, lower income from our Vifor JV due to pre-marketing costs associated with (18:39), and unfavorable foreign exchange effects Turning to chart 15 and looking at Asia-Pacific.

Asia was up $21 million and operating earnings was 7%. The operating margin has decreased 20 basis points to 19.6%. Our margins here were also influenced by unfavorable foreign exchange and the cost associated with the change in the management board position for Asia, which we've commented on over the course of the year.

This was partly offset by a reduction in some reserves associated with customs and duties in one country. Latin America's operating earnings were up $18 million to $66 million in total. Without the divestiture in Venezuela, margins declined 50 basis points to 9.2%.

This decrease was driven by higher bad debt expense, higher production costs, and foreign exchange and inflation. The decrease was partly offset by reimbursement increases in the region. So turning to chart 16 and taking a look at cash flow development.

On the left-hand side, for the fourth quarter operating cash flows were supported by strong earnings development in the quarter, coupled with favorable development of our trade accounts receivable and lower income tax payments. This resulted in a very impressive cash from operations of 18% compared to 12.6% in the fourth quarter of 2015.

On the right-hand side of the page, fiscal year 2016 also improved in comparison to 2015, largely as a result of a decrease in purchases of health care supplies due to our transition from Epo to Mircera, as well as increased earnings.

This was partly offset by unfavorable effects in our other working capital items and by the discretionary contribution to the pension plan we made in the U.S., which I discussed with you in the third quarter. The result is cash flow from operations as a percent of revenue 11.9% versus the 11.7% in fiscal 2015.

Two very strong years and we typically guide, as you know, to better than 10% as a percentage of revenue in our operating cash flows. CapEx was in line with expectations. Our debt came down to $8.6 billion at the end of the year.

Our leverage is down 40 basis points year-over-year and 20 basis points from our third quarter, ending the year at 2.4 times debt-to-EBITDA. Turning to my last slide, chart 17, and just making a few comments on our outlook. I'm sure you'll have some questions (21:37) in the Q&A and we can deal with those as they come up.

But just overall, you can see what we are indicating for guidance for 2017. I just remind folks that effective January 1 of this year our reporting is changing to the IFRS accounting standard euro currency base. On that premise, we're guiding to an increase in revenues of 8% to 10% on a constant currency basis.

And we've provided to the right what that revenue base is in IFRS and euros, since this will be the final year of our reporting under – 2016 will be our final year under U.S. GAAP and dollars.

So it's on a base of €16.570 billion revenues in euros and net income growth we're guiding to an increase of 7% to 9% constant currency, based on €1.144 billion.

The outlook excludes the effect of the agreement that – the settlement agreement we came to with the Veterans Administration, and those figures, which I believe we disclosed, were $95 million in revenues and $50 million after-tax.

Now in accordance with our change to IFRS in euro reporting, we have also refreshed our Vision for 2020, which we set out at our Capital Markets Day in 2014. Our original growth strategy aimed to increase revenues to US$28 billion by 2020 based on U.S. GAAP.

Converting this target to IFRS in euros, and if I were to use the exchange rates prevailing at the time of our Capital Markets Day in 2014, the revenue increase would be €21 billion by fiscal 2020.

Now we've updated that to the currency rates prevailing at the beginning of this year, so on that basis our target represents an expectation of about $24 billion in revenues by 2020.

At constant exchange rates, we continue to aim for an average annual revenue growth of approximately 10% and expected high single-digit average annual growth in net income attributable to shareholders.

So we believe we're very well on track to achieve the 2020 goals, both in terms of the guidance we're providing for fiscal 2017, as well as the refreshed growth rates we're indicating for our 2020 Vision. So thank you and I will turn the call back to you Dominik..

Thank you, Mike, thank you, Rice, for the presentation. I think we did a lot of detail. I hope we already pre-empted some of the questions. We are a little bit (24:35), so I would kindly ask you to limit it to two or three questions that will be great. So, Patrick, I think we can open the Q&A..

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. In the interest of time, please limit yourself to two questions and one follow-up only. And our first question today comes from the line of Tom Jones of Berenberg. Please go ahead..

Let's say good morning, whatever it is you. I had a couple of questions. The first is just around guidance and your thoughts on the steering rule.

I just wondered what your current thoughts around the steering rule are, whether that's (25:39) risk it might come back and to what extent have you baked something into your guidance for that rule resurfacing and making it to the point where it actually has an effect on anything? And then the second question was just around a tricky area, I guess.

Your comment on the commercial pricing. There was quite a jump in Q4, more than I would have expected was possible just from mix alone. So I wondered if you could make some comments about your commercial rates in Q4.

And then perhaps, to the extent you can talk about the outlook for 2017 – I know one of your competitors has been making some cautionary comments in that regard, and that can lead – don't want to prejudice any rate discussions that are coming up.

But I guess based on the rates that you've locked in for 2017 already, you might be able to comment a little bit more freely. So anything you can give us in that regard would be very helpful, I think..

Sure. Thanks, Tom. I think what we will do – we will do this is on the steering rule, I'll give you an update and, Mike, I'll let you comment on how that impacts guidance or does not. Mike will speak to Q4 for you on the commercial pricing, and I want to come back around on 2017 and sort of where we are in general with our commercial book, if you will.

So on the steering rule, I see that there are three options, Tom, and at this point in time we are in a place where the interim final rule is injuncted. Nothing has changed and we are carrying on business per normal. And I think there are three things that we can consider.

One is that the new administration coming in, this would be price and Cima (27:20). They could simply let this stay injuncted and do nothing with it. They had no ownership of the interim final rule that came out of the old administration, so we could sit on the books and be left alone as injuncted.

Secondly, they could decide that they could go to court to try to get the injunction removed. That would certainly be a possibility. And then thirdly, they could come back and re-issue this interim final rule, but following the administrative procedures policy, which would give us adequate time to meet and talk and comment on the issues with the rule.

So I think all three of those are viable options. I was in DC – I don't know – three weeks ago, and by that point price and company weren't even confirmed. So we've not had any real discussion on that at this point. And I will turn it over to Mike and let him tell you how we've looked at this in the guidance.

And, Mike, why don't you do the Q4 jump in revenue for treatment. I know you (28:20) answer and I'll come back on our outlook as compared to where kind of DaVita is on the commercial book in general..

Okay. Thanks, Rice. Hi, Tom. Yeah, relative to Q4, I would say, take the long view on revenue and cost per treatment. We did continue to see some improvement in commercial volumes, but I would agree that's not accounting for the entire change. You do, in the quarters, have your accounting true-ups relative to credits and things like that.

So I would view the bigger bump in Q4 just to be kind of clean-up for year end, and I wouldn't read into that in terms of an indicative rate for 2017.

For 2017, what I would say in terms of guidance on revenue per treatment is if you look at fiscal 2016, I would say that we'd anticipate revenues to be – revenue per treatment to be, let's say, flat to up 1%, and correspondingly, since we're on the topic, I would say with regard to cost per treatment in the U.S., probably something around 1% in terms of guiding to expectation for 2017..

Okay. And maybe if I just quickly circle back on the steering thing.

I mean, within your guidance, have you assumed any leakage of capitalized (29:44) over from commercial back into Medicare pursued the steering rule (29:49) or are you kind of just working on the status quo as it stands?.

Yeah, Tom, we're going with the status quo. We're as close to this as anybody else can be, and I can tell you that when we look from September 30 of last year through January 31 of this year, our patient base is the same. We've seen about a 20-patient movement and that's it. So we are – as you well know, we've discussed this. We don't steer.

We haven't had any of those issues. We're seeing things just move right along in a very steady fashion..

Perfect. That's very helpful. I'll get back in the queue..

Sure..

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

Thank you, gentlemen. Good afternoon from me as well. I have two questions. I think actually, Rice, you forgot to comment on the commercial contract renegotiations and what DaVita (30:49) I'm going to ask the same question and let you expand on that a little bit.

And just conceptually I think some of the commentary from DaVita has, obviously, been their view is – the difficulty that they're encountering is a feedback mechanism from "steering" today. So maybe you can give us a little bit more color on that. My second question is just on Care Coordination and BPCI.

I was hoping you can elaborate, one, just broadly speaking what your expectations for Care Coordination are as far as the 2017 guidance is concerned? And then specifically for BPCI revenue recognition, how far are we from a point of you being able to recognize any revenues here and whether you have assumed any contribution for 2017? Thank you..

Sure. And, Tom, you got off the phone before I could answer. So I'm glad you picked it back up, Veronika. I'll take number one. Mike, would you take number two....

Sure..

...for me? So, look, as you well know, we have three large contracts. We completed a negotiation for one of them in the latter days of last year, so it's done. We are negotiating one as we speak and we have one more that will get started here in not too far distant future.

We have had no issue or discussion about AKF premium assistance, any of those issues. We are giving you guidance that we believe we're going to contract and go forward as we have in the structure of multiyear with those types of caveats that we've talked about before. We simply – and I can only, and I will only, comment on FMC.

We are clear and concise in how we're going to go forward and not having any issue. I really can't speak to what might be troubling Kent in his organization at this particular point in time. But we're going on business as usual. Obviously, we still have more negotiation to do. But it feels and it looks like what we had thought it would be.

It continues to be positive and cordial at this point, so I would leave it at that. And let me turn it over to Mike. I think he can clearly give you some sense of Care Coordination guidance specifically along with BPCI as well..

Yeah. Thanks, Rice. Hi, Veronika.

Yeah, I would say, if I start with BPCI, and I appreciate you might be getting tired of me pushing this out to the next quarter and the next year, but one of these days it's going to come true, because what I have told you is we're confident that we are seeing savings in the program, particularly when you take the longer view associated with the four years we expect it will run.

Near-term, we've had the issues – some issues with just making sure that the data makes sense for the patients that we are responsible for and that continue to be the case in the fourth quarter 2016. So I would say Q2-Q3, this will hopefully be the last time I prognosticate and we'll start talking about what we've delivered in those quarters.

So with that in mind, I would say in terms of revenues, we expect 10% to 20% growth. We guide to a pretty broad range, because this is a big growth business for us, and so I think for 2017 particularly with BPCI is a variable, I'd probably peg revenues to 10% to 20%.

And on the margin side, on the margin side I would simply say that we anticipate we'll see improved margins in Care Coordination for 2017..

That's great. And if I can follow-up – and thank you both for the color – just really quickly on tax. And two questions, Mike. One, any guidance for 2017? And then more broadly speaking, are you able or willing to comment on how you are thinking about the Trump tax reform proposals and also the proposal that's under discussion in the House? Thank you..

Okay. Yeah, I would guide to 31% to 32% for an effective tax rate in 2017, and I'd say that guidance is status quo in terms of whatever happens in the U.S. More broadly – sorry, we're getting some background noise in the conference room here.

More broadly, I would say when you look at what's happening both in terms of the new administration, as well as what Congress may do on a variety of fronts, for 2017 we're looking at status quo, because it's very hard to predict at this point what might happen on any of these initiatives.

To answer your question in terms of tax, I think that there seems to be a sentiment that they would like to see a meaningful reduction in the tax burden to corporate. Hopefully, you can hear me over this background noise on the phone, Veronika. But....

Totally fine..

Okay. Great. So I think the sentiment is, they're looking for a meaningful reduction in corporate taxes. The devil will be in the details, because while they are talking about reducing the marginal tax rates, they are also talking about some pretty sweeping changes with regard to deductibility of capital, deductibility of interest expense.

So we'll have to take a wait-and-see in terms of which elements of this Congress likes and which elements of this the new administration wants to push forward..

That's great. Thank you..

Sure..

Our next question comes from the line of Patrick Wood of Citi. Please go ahead..

Perfect. Thank you very much. I have three, if I may, please. The first is a little bit more detail maybe on the cost per treatment side of things. Obviously, year-on-year – maybe this is just an accounting issue, but maybe year-on-year the growth seemed very, very low on the cost per treatment side, especially when compared to one of your peers.

I know that the nursing side is getting increasingly inflationary. I mean, we had HealthSource saying just earlier today to expect about 3% inflation on the cost base there. So I'm wondering if that's just Mircera and some accounting bits that are finally sort of rolling off in Q4 or is there anything else happening in there. That's the first one.

The second is on the pharmacy business. Again, one of your peers was talking about, they took a write-down in that business and discussing some of the changing regulatory landscape. Appreciate it's probably only about $600 million of revenues and maybe a 5% margin for you guys, but I'm curious if there's any impact on the pharmacy business.

And then the final one would be the open exchange, the enrolment period on the exchanges. How have the sign-ups been for exchange patients in your view going into 2017? That would be very helpful. Thank you..

Sure. Patrick, I think what we will do is, Mike will take cost per treatment and answer your question. I'll speak to – and the nursing inflation, if there is going to be there. I'll take the pharmacy business and the exchanges..

Okay. That's fine. So on the cost per treatment, I would just say broadly, we've said many times that as a service provider, particularly in our part of the world in dialysis, you always have to be vigilant about managing your costs.

So we spent a lot of time on it, thought it through, and we think that the numbers that I've expressed make sense for us in fiscal 2017, both in terms of what we need to do to be competitive within the workforce, as well as just managing other cost inputs in the P&L appropriately.

So I guess I wouldn't say appreciate – there are differences in terms of how the providers characterize the cost expectations for 2017. But we think that we can manage the business well and we think we can probably keep our total costs in that range of around 1%.

Rice?.

Thanks, Mike. And, Patrick, I would tell you that last quarter we talked about the fact we had a very high number of open positions. We've improved that by 300 or so. Temporary labor is down, as Mike said, we're pushing all the buttons that we need to push to kind of deliver what he's laid out for you.

On the pharmacy business, what I would say is that we don't see necessarily the headwinds that perhaps some other people are seeing.

What we know is that we are anticipating that RENVELA (39:22) will be coming off a branded status and going to generic, and that will have an impact, because obviously there are some persistency fees that we've been awarded through the brand manufacturer, if you will. But we factored that into the guidance that we've given you.

So from that standpoint, we're fairly comfortable with where we see our pharmacy will be profitable in 2017.

I am aware that we are hearing and seeing a little bit about some of the PBMs, pharmacy benefit managers, are charging what they call direct and indirect reimbursements, and it's really about trying to manage pharmacy behavior around compliance and those kind of things.

It turns out to be a cost to us, if you will, but we know what we believe that's going to be and how we're going to manage it and our guidance is still the guidance that we've given you. So we don't see any real headwind or something coming out, unless we're just missing something that would create an issue for us.

And then from an exchange standpoint and the sign-up, what I would say is a year ago we saw about 400 patients coming in that sign-up open enrolment period, we're not seeing it this time. So let me be clear.

We look at our book and we see consistency, not a lot of movement, but we don't see an incoming rate that was as robust as what happened last year, and that's probably driven from the fact that you've got some insurers that are not in the plans, they're not participating or playing, if you will.

But the current book for us today is steady as she goes..

That's fairly helpful. If I could just have one quick follow-up. What are the opportunities for an MSP extension do you think this year or next? Then that will be me done. Thank you..

Yeah, I would say that when I was in DC couple of weeks ago, it didn't really get discussed. I think we all would like to see that happen, but I also think that there are some other things that will probably take precedence to that. We certainly wouldn't say no.

But it's not the hottest topic going on at this particular point in time, at least in my discussions I'm having with people that we generally work with in DC. Look, we're not negative by any stretch. It's just not top of mind for us at this point in time..

Very helpful. Thank you..

And our next question comes from the line of Lisa Clive of Bernstein. Please go ahead..

Good afternoon. Three questions for you. First, specific question on premium support. You had given the figure that 1,600 patients have marketplace coverage. Could you comment on what number are Medicaid eligible, including both on and off-exchange? Second question, last month you announced you won 18 new ESCO mandates.

Given that the six you have right now, I think represents about 8,000 patients, is it safe to assume that you've now added another sort of 24,000 or so? And can we assume 100% of costs from those patients from when you started enrolment on January 1 and like the initial six ESCOs that you won't actually get paid for probably about 18 months? And then third and final question on the Care Coordination initiative with Cigna, roughly how many patients has that and could you just comment on how you see that developing over time?.

Yeah, Lisa, it's Rice. And I think Mike and I'll try to double team this. I'm not sure – run me through your premium support question again, because I'm drawing a blank on your numbers on the on and off exchange.

Can you just repeat that one for me?.

So you had a response to the CMS RFI that said 1,600 of your patients were on marketplace coverage. I understand you have another, say, 1,900 that are off-exchange, so 3,500 in total that are ACA plans. I'm just wondering of that, how many are actually Medicaid eligible..

Okay. I'm going to have to get back to you. I'm looking at Mike. I don't know right at this moment, but we will come back to you. I'm going to be in your part of the world tomorrow, and I'll try to connect with you. I've got to do some checking on that, Lisa, but I think we can try to find out for you..

Okay, great..

On the ESCOs, your numbers are very good, as always. We are anticipating that there will be 37 total locations. We're going to be in 24 of those, and I think your numbers were spot on as to these additional 18 should yield us somewhere around 20,000, 24,000 patients. And, yes, we would anticipate that's probably 18 months out to payment.

And I think Mike may have mentioned it, but I'll repeat it in that fourth quarter of this year, we did recognize revenue again in the health plan modest amounts, but we are seeing some bending of that cost curve. So we do think that the ESCO program is working for us. And let me, if I can make a comment.

I've had some people wonder because we're so big and primary in the ESCOs, are we not interested in what's going on on the capitated rate, and that's really not the case.

The patient act, which is out there and we're supporting that act, which would allow this shared savings program to move completely to a capitated rate, we would support that as well. We think there's lots of room and ability to do both, but it seemed earlier in the day we had some questions on that, so I wanted to be clear.

So, on the Care Coordination with Cigna, I don't know off the top of my head. I'm going to have to come back to you on the number of patients that are going to be involved in that.

As you know, the basic component, I'll focus more on that for today, is that we'll continue to get paid, on the one hand, for providing the treatment, the dialysis treatment, and the other set of payment that comes to us is really trying to bend the cost curve, make sure we manage these patients and keep them out of the ER and unnecessary hospitalizations.

But I will get back to the guys in the U.S., Lisa, and get a number on what we think that patient count is. I just don't know off the top of my head, but I'll come back to you on that (45:38)..

Okay. Thanks very much..

Sure.

Our next question comes from the line of Michael Jüngling of Morgan Stanley. Please go ahead..

Great. Thank you. I have three questions. Firstly, on the operating leverage, if I look at your guidance for 2017 in terms of constant currency sales growth and also an income growth, there is no operating leverage.

Can you give us a reason why we wouldn't see some leverage in 2017? Secondly, on the cost savings program, what is the potential for additional savings in 2017 from new programs or, if you like, a formal Global Efficiency Program part two? And question number three is on Care Coordination.

Is the bad debt expense in the fourth quarter around $26 million? And if so, what went wrong? Are customers unhappy with the services that you've provided? Thank you..

Sure, Michael. And I'll look to the other Michael.

You want to go ahead and answer these, Mike?.

I think in terms of operating leverage, we're guiding 8% to 10% top-line and 7% to 9% bottom-line constant currency, which I think is consistent with 2020. We expect we will see a slight increase in interest expense.

We're indicating a slight increase in the effective tax rate, so I think that contributes to your notion that there is no leverage in fiscal 2017. But I do – with that having been said, I do think that the commitment we're making on the bottom-line is actually a pretty strong commitment, given the operating environment we're managing.

We also, in terms of our non-controlling interest, see an increase in that, which you might not be factoring in when you think about the leverage question. In terms of cost savings on any new GEP, Rice and I do plan to talk about that at Capital Markets Day.

The way I would view guidance for 2017 is we've got a little bit of a carryover affect from the old GEP program, which came to a close at the end of 2016 and we are talking about some of the things we'd like to introduce for the next wave, so I view those as more or less of a wash for 2017 in the guidance.

And on the $26 million, I would say fairly specifically that $26 million in bad debt was due to poor execution on a couple of significant projects. And I say that because we don't see it as anything systemic in the business and we do not see it as an indication of what's happening in the marketplace.

In the middle of 2015, the business undertook two projects to consolidate the billing system, and at the same time to streamline the billing operations intra-state among its various legal entities. The work fell behind and the recovery wasn't really managed well, which results in an inability to collect on some of the affected areas.

So we think this provision should be sufficient to address any collection issues we have as a consequence of the two projects that I just discussed and fixing the execution is being addressed as we speak..

Mike, a quick follow-up on the Care Coordination question. I mean, is there risk also that you will need to have some restructuring charges in 2017? Because business has been growing very quickly and you've made some significant investments, but things always don't happen perfectly.

So is there a risk of some restructuring charges in 2017 for Care Coordination?.

Not that I'm anticipating, no..

We don't think so, Michael. We did drop the ball. We know that, but we don't think this is systemic in a way that we'd be considering anything like that. I think Mike nailed it quite on the head..

Okay. Thank you very much..

Sure..

Yeah..

Our next question comes from the line of Ines Silva of Bank of America. Please go ahead..

Hi. Good afternoon. Thank you very much for taking my question. So, my first one is just on the growth guidance for the top-line. Is there any assumption of non-organic growth, including debt? And my second question was if you could explain a little bit more the process for BPCI. I appreciate it's being delayed and you've given us the timeframe.

But could you just explain in what stage of the process you are? I mean, has the government committed to giving you any kind of amount or are you estimating any kind of amount and how does that work? I mean, are you going to have a firm commitment at some point in time to receive an amount or...? Thank you..

Sure, Ines. Mike, do you want to take one on the growth guidance top-line....

Sure..

...anything inorganic? And I'll speak to BPCI..

Okay. Yeah, I'll give you a couple of additional measure that might help you structure what you want to model for 2017.

To answer your question a bit more broadly, I would say worldwide in terms of organic growth, we're thinking in terms of 7.5% to 8.5%, and which implies that there is some inorganic or growth in the figures related to acquisitions, which I would put at about 1% to 1.5% for the range we've indicated, if that's helpful..

Ines, on BPCI, Mike gave you a pretty good indication of when we think we'll see some revenue recognition. The hold-up that we have now, and it's been the case last quarter as well, it is the attribution data with the physicians and where are they practicing, which hospitals, et cetera, and that is not going well.

The ability of the government to match that up and give it to us so that we can then look at it has not gone the way we want. So that's what's taking the time. Some of the other data issues we had earlier in the year have seemed to work themselves out, so that's our understanding of what we think the real hurdle is here in this case.

I think the other piece that you're referring to is that there's been a decision by Patrick Conway, who is the acting CMS Administrator at this point, that they came back to those of us participating in BPCI some time ago and said they were only going to have us have an upside opportunity for 2015, because the data transfer had gone so poorly and people have spent a lot of money and invested in being able to try to participate.

We are anticipating that we might get that same kind of decision for 2016, but it's not there yet. But we believe that's a very good possibility.

So we take that as they're trying to do everything they can do to work with us, but individual tax identification numbers for the physicians and the attributions of the work that they're doing is just not flowing as well as we would hope it would. And we've got to understand that before we're going to be able to do some revenue recognition..

Thank you. But if I can just follow-up.

Will there be a time where you will know exactly how much you will receive and when, or will that be more phased, and therefore you'll never get a notion of exactly how much it's going to be?.

I would say two things. This will come in stages, so we'll get better clarity as 2017 progresses, but then I would just, obviously, remind everybody that this is about what we can – how we can bend the cost curve. So at no point is there really a guarantee.

It's really how effectively we can execute against the principles of BPCI, so there will be some variability as – once you get to revenue recognition, there will be some variability quarter-to-quarter, year-to-year, in terms of what we actually achieve in terms of cost savings..

And look, what gives us some comfort with that, which may make you nervous, but where we have some comfort is when we look at our health plan and the ESCOs that we're participating in, we've had two quarters in a row now of being able to recognize revenue. It's not the same amount of money. It differs. There's some variability here.

But we do believe that we'll get to where we're in a place where BPCI will be very akin to what we're seeing in the ESCOs, although very different locations, if you will, and different things that you are doing, Ines, but we think we'll get there..

Thank you very much..

Sure..

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

Hi, guys. Thanks for taking my questions. Most of them have been asked already, besides I will fix on maybe first on the product side, maybe you could give us some further color on your expectations for this year in the particular regions and any areas you might be seeing some increased competition.

And then just a housekeeping question, I may have missed on the call earlier, and apologize if I did, but just wonder what your interest expectations were for this year. Thanks..

Okay. Patrick, I will take number one and Mike will talk about interest. We have, consistently for the last couple of years, said that when we look at the product book of business and we look globally at that, we think a growth rate in that 4% to 5% range makes sense. We clearly are doing better than that when you look at the Asia-Pacific region.

When you look at Latin America, they've actually done pretty well. So let's go back to the two other areas. When you look at North America, I will be pleased if we can run in a 2% to 4%, maybe 4.5% range.

Obviously, we're talking about three countries in North America, with one huge one as you well know, in that we are very well entrenched, high market shares. So we're going to kind of grow at the rate of whatever the market is growing.

When you look at EMEA, beyond the issues that we walked ourselves through, if we were to go take individual countries, we can show you that, yes, they are still seeing that 4% to 5% growth. It slows down in some of the more developed European markets, but if I look over in sort of Eastern Europe, we see a little bit higher level growth.

So I would still come back to saying on a global basis, we ought to be in that 4% to 5% range, I think, makes sense. And, Mike, David had a question on interest, kind of what we are thinking..

Yeah. In terms of interest, I would say, as I mentioned when I was talking to Michael, that I anticipate we will see a slight increase in our interest expense. And that's really driven from an assumption that we will see some increases in LIBOR over the course of 2017, so we made a modest assumption there.

It's just based on the yield curves that were published around the start of the year. And if it's helpful, because I think you know our portfolio is split between fixed and variable, so we're about 70% fixed, 30% variable, and we've got about a 75%, 25% split in terms of dollar and euro with the borrowing on the euro substantially cheaper.

If you look at our maturities, you can see that we've got a dollar bond coming due this year, which we are thinking we would refinance, so the planning assumption is that that would likely be refinanced in euros, and that helps us a bit in terms of managing our interest expense..

Great. Thank you..

Okay. We have time for two questions. If I could, Patrick, before you take one question, I want to give Lisa a piece of feedback. We did get a number for you, Lisa. With the Cigna project, we're probably estimating between 752 to 1,000 patients.

So just I got you that follow-up, but I'll work on the Medicaid eligible and come back to you maybe even tomorrow when I'm in London. Please, Patrick, let's go ahead with next questions..

Next question comes from the line of Oliver Metzger of Commerzbank. Please go ahead..

Yeah, hi. Thanks for taking my question. My first one is a strategic one on your international expansion of Care Coordination, which you recently started.

So just for understanding how you enter market, so is it (58:47) more important to become first you go to selective market or just through forced (58:54) expansion into eligible market? And my second question is just a modeling one on the current FX rates. Can you give us any projection how strong you expect the impact will be? Thank you very much..

Sure, Oliver. I'll take number one and Mike will try to help you on the modeling question. So when we think about Care Coordination, as we try to know, we have not closed this deal in Australia with Cura. But we anticipate closing that probably in second quarter – early second quarter we would guess.

But when we looked at the opportunity, we were in a market in Australia where we have very good penetration, pretty high market share as we bump up a little bit into antitrust issues just in the pure dialysis side.

So as we're looking at that market, which has a very good payer history, we stumbled across and began to think about these day hospitals or freestanding clinics, as we refer to them, and we looked at that. And if you think about our book of business, we run 3,600 freestanding clinics today. These facilities, there are 19 of them.

They are in Eastern Australia and Northeastern – I think Southeastern Australia, and they really do a number of things outplay (1:00:13) surgery focused, ophthalmic work, a little bit of orthopedic work.

They also were licensed such that in about half a dozen of these we will put dialysis equipment and we'll be able to do some treatments, so that will help us as well. And they also were licensed in such a way that we can do vascular access there as well.

So we view this – at Care Coordination, we view as a strength of ours to be able to manage freestanding facilities and get them on a similar operating velocity, if you will, and sort of drive consistency across those facilities. That's what led us to this asset. And, Mike, I'll turn it over to you on the modeling question and the FX rates..

Sure. Thanks. Thanks, Rice. Hi, Oliver. Yeah, in terms of the currency rates, I think we are moving to euro IFRS, and obviously the P&L will have a bit more volatility in it relative to the effective translation each period, and that's why we're guiding on a constant currency basis for both top and bottom line.

I think that the best way to look at this is in terms of being able to provide a basis for yourself, we actually used the ECB website and the historical files for the currency pairs. So that's the source we use and that we've used to develop our constant currency guidance.

And you can refer to that if you wanted to look at the base for the year of 2016, which is $1.1069 in terms of the dollar/euro currency pair. And as you go forward in each of the quarters, if you refer to that site for the constant currency comparisons on a quarter-over-quarter basis, that will be a pretty reliable source.

When you think about how to look at what's happening in terms of current currencies, as we looked at this, I would say the following in terms of a rule of thumb.

It will continue that the most important currency pair is dollar/euro, and when you look at any other individual currency pair, you're going to have a relatively inconsequential effect, both in terms of revenues and earnings.

So probably the best thing to do would be to look at the appreciation or depreciation of the dollar/euro currency pair, and take about two-thirds of that as a proxy for what impact that would have on our revenue growth and our earnings growth rates..

Okay. Great. Thank you..

Okay..

Okay. So we come to the last question..

Our last question today comes from the line of Oliver Reinberg of Kepler Cheuvreux. Please go ahead..

Yeah, thanks for squeezing me at the end. And three quick questions. One, to understand the guidance a bit better.

Can you talk about what kind of corporate costs you are going to assume? And does the guidance basically (1:03:13) based on the assumption that the costs for the compliance project will only keep you busy in the first half that you then basically get a settlement or would you also make a guidance that this will keep you busy for the full year? Secondly, on Care Coordination, you gave some kind of color why you missed on the kind of margin guidance.

But can you provide more details on the kind of initial expectation of 25% to 35% of revenue growth? What was the delta why you came in below that? I think BPCI cannot fully explain it, so any kind of color here would be appreciated.

And, Mike, I would push on that, not sure if I'm successful, but can you be more specific what kind of margin you have in mind for 2017? The improvement is probably clear, given the kind of bad debt effect, if you can give us kind of more quantified guidance that will be helpful.

And the last one, just in terms of housekeeping, income from equity was actually in Q4 much lower. How should we think about that in 2017? Thanks..

Okay. Let's see, Oliver. The corporate costs, I think broadly speaking, I'd expect corporate costs to be, including R&D by the way, to be roughly flat, maybe up just slightly in fiscal 2017.

And we are anticipating that we'll spend incrementally on R&D, so I think implicit in that corporate costs guidance is a reduction in other corporate spending, which would be largely attributable to lower legal spend. You are correct in your assumption that our guidance does not include any potential settlement and what that might entail.

That's very consistent with what we said over the course of 2016 as well. And beyond that, I think from our point of view, we're really kind of operating at the pace that the government wants to move forward out in terms of their review of our investigations in our compliance work.

We remain hopeful that we'll be able to bring this to a close soon, but we'll kind of keep you posted as we progress during the year.

With regard to BPCI, yeah, we guided very broadly in 2016, because it is a growth business, and the 25% to 35% guidance that we gave was different than the two-year guidance, in that that would've contemplated performance in each of the businesses, as well as acquisitions.

And we ended up having, as you can see from our guidance in 2016, less aggressive in terms of our acquisition growth. So that played a role in coming in at 23%. You know what I would tell you is, if BPCI had come through as we had anticipated, we would have been in the range.

So it's a little bit of acquisitions not being as aggressive as we'd originally thought a little bit of BPCI. And then as you looked at some of the operating initiatives we had in some of the component businesses, we had very good growth.

But we had a couple of initiatives that didn't play out as we had expected that might have put us at the top end of that range, if that's helpful. And in terms of the margins, you can push me in.

You're right, I'm not going to respond, just having been burned once in 2016, I think I'll just stick with I'm expecting improved margin performance in Care Coordination in fiscal 2017.

Income from equity method, I alluded to it a bit in my discussion of the EMEA margins in Q4, because we continue to be very pleased with the development of the joint venture with Vifor and what that has allowed us to do in terms of capturing the opportunity of new renal drugs around the world.

But as we do that, we will be in some markets where there is some development in premarket spend in the joint venture. And for 2017 I think that that should be reasonably balanced with growth of the business.

So I wouldn't indicate any dramatic change if I look at 2017 versus 2016 in terms of the income from equity method investees, if that's helpful..

All right. Thanks very much..

Yeah..

Okay. Then thank you very much, everybody. Thanks for detailed questions and your participation today. Please keep in mind, we will have the Capital Markets Day on the 8th of June and we would all like you to meet us there. And we look forward to seeing you soon and talk to you soon. Thank you..

Thank you very much..

Thank you. Take care. Bye-bye now..

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