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

Patrick Wood - Citigroup Global Markets Ltd. Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom) Gary Lieberman - Wells Fargo Securities LLC Ian Douglas-Pennant - UBS Ltd. Lisa Clive - Sanford C. Bernstein Ltd. Michael K. Jüngling - Morgan Stanley & Co.

International Plc Ines Duarte Silva - Bank of America Merrill Lynch Veronika Dubajova - Goldman Sachs David James Adlington - JPMorgan Securities Plc.

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 First Quarter 2017. 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 first quarter 2017. I'll start out the call by mentioning our cautionary language that is in our Safe Harbor statement as well as in our presentation and in all the materials that we have distributed earlier today.

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

Also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. I'll now handover to Rice. The floor is yours..

Thank you, Dominik. Good morning and good afternoon to everyone. We have had an eventful start to the year, notwithstanding a number of moving parts and challenges, particularly in the U.S. market year-to-date. I'm very happy that we were able to deliver such strong first quarter performance and that we can discuss that with you today.

If you will, please do keep in mind that this is our first earnings call being done in euro under IFRS. Turning to slide 4. We've again had good underlying growth in our clinic base and our patient development. You can see those on the slide.

Our treatment growth was slightly weaker, primarily driven by the simple fact that we had one less dialysis day in the first quarter of the year. Moving to slide number 5. You all know that in January that we were able to reach an agreement with the U.S.

Departments of Veterans Affairs and Justice resolving reimbursement for services that we provided to veterans in our clinics during the timeframe of 2009 through 2011. Given that this is a special item and we did not include the impact of this item in our guidance for the year, we are showing you numbers including and excluding this VA agreement.

Throughout the remainder of the presentation, we have excluded the VA agreement and its impact when it comes to showing you the underlying performance. We hope there will be no doubt what the base operating piece of the business has done over the course of the year by doing it this way.

With that said, we've had an excellent start to the year, revenues growing 10% and net income growing 14% at constant currency. Mike will give you more detail, but let me say, we are fully on track to achieve the guidance that we've given you earlier in the year.

Looking at the regional revenue performance on slide 6, you can see that all the regions contributed to our outstanding performance in the first quarter.

North America showed solid organic revenue growth of 9%, and this is in the face of lots of speculation around significant commercial pricing pressure and the potential loss of patients due to premium assistance, et cetera and et cetera. And I'm happy to report through the first quarter people did their job. We've had great outstanding quarter.

Now this doesn't mean that we don't have challenges in the U.S. We're well aware of that. We are on uncertain ground in some cases, politically not knowing exactly where things are going to go. But we will deal with them as they come. But at this point we are very pleased that our folks have been able to continue to provide good service, good product.

We've had a very solid quarter in what has been some turbulence in the U.S. since the beginning of the year. Turning to the other regions, we have seen very good growth, driven primarily by very strong product business in Asia Pacific.

Good reimbursement experiences in Latin America; and the organic growth in the Europe, Middle East and Africa segment, was impacted by slower product growth. We have some new information to share with you on that and I'll do that in a future slide. If you would, please turn to slide 7. And you can see an overview of our Health Care Services business.

We had very strong organic growth in North America despite having one less dialysis day in the quarter as I've mentioned. This was driven by higher revenue per treatment of $356 compared to $348 in the first quarter of last year.

And again you can see extremely impressive growth in Care Coordination, 34% constant currency growth and organic growth at 27%. In Care Coordination, we were able to book revenues for the Bundled Payment for Care Initiative or BPCI for the very first time.

We are clearly one to two quarters earlier than we thought we would be in doing this, and we're pleased that we were able to accelerate. The booked revenues cover the period from April 1 of 2015 through June 30 of 2016.

And again, Latin America delivered very good growth as well, mainly driven by higher reimbursement, as I said, particularly in Argentina, Brazil and Chile. Now turning to slide 8 and taking a look at our quality outcomes.

You can see that we continue to operate at a very high level, very stable, and we're pleased that these critical – our key performance indicators are continuing to move in the right direction and they move in a very stable bandwidth if you will.

You'll notice that our hospitalization days are down a little bit in some of the international regions, which is a good thing, very consistent in the U.S. Hemoglobin management seems to be going well as well as our dose of dialysis and the other factors that we look at in clinical quality.

Turning to slide 9, let's move into the product side of the business. You may have noted that we've changed our reporting format slightly.

Given that we successfully closed the XENIOS acquisition last year, we are now booking revenues for the acute non-dialysis business, and as such we decided to rename the business area into Health Care Products and you'll see that in the first header on the slide. So let me make this as simple as I can.

We are trying to differentiate for you, between Dialysis Products, which as you know, we sell into three venues. We sell product into the in-center clinic business.

We sell home hemodialysis and paired to the old Dialysis Products that go into the home segment, and then we have a robust segment of Dialysis Products that go into the intensive care unit or the acute setting, always have, and that's what we've reported.

Now what we're simply doing, as a result of this acquisition and the fact that XENIOS' product line will go into the intensive care unit, but it's more in the cardiac space. If you recall this is extracorporeal therapy, it's membrane oxygenation. That's what we'll be doing there.

And for a number of years we've had a therapeutic apheresis product line that really wasn't in Dialysis, but it was so small we sort of left it there, but now we think it's time to break it out for you. So simply put, Dialysis Products will continue as what you know. But we'll also give you a view now of these non-dialysis products.

So hopefully this will be easier for you as we go forward and we see those new businesses grow. 8% growth, the overall products business performed very well. We had strong demand for products in Asia-Pacific, North America, and Latin America.

And in the case of Europe, Middle East, and Africa, as we've discussed on a previous call, we've had what I would consider some individual country issues. As you know in Algeria we lost a third of the treatments. And so that's impacted the product business there.

We've had what I would say is lumpy distribution of some tenders, particularly in Saudi Arabia. What is new and meaningful is we are now beginning to see some very strict competition, some pricing pressure in Western Europe in the in-center hemodialysis market.

In fact the pressure is enough – significant enough that we saw Baxter commented on this in their earnings call a couple of days ago. So, really this is fairly simple, it's FMC and FMC's fighting with Baxter, with B. Braun and other people.

We don't see that we're losing share, but we're clearly seeing some pricing pressure, and that's having some impact here. But we wanted to give you that fresh analysis as we've looked at Q1 and we expect this will go on for several quarters. Now turning to slide 10, on Friday, April 28, we successfully closed the Cura deal in Australia.

The 19 day hospitals are now in our book of business. They are now in our portfolio if you will. Now for your financial modeling purposes, let's just point out that the business will be consolidated as of the end of April. The contributions financially from this business are already included in the guidance that we have given you back in February.

My last slide, number 11, I'd like to conclude my prepared remarks, with just a couple additional highlights for you. We have performed very well this quarter. I'm happy to say that it was a full regional contribution in the growth. We saw a very strong performance from Fresenius Kidney Care in the U.S.

in particular, and we've seen good growth in the products businesses, as I've said, in three other regions. For almost a year now, you have been asking us about Bundled Payment for Care initiative revenues and when would they come. So now they're here. We've booked them. Mike will probably give you some additional color on that as we go forward.

I would also like to close and mention that we are now in the ramp-up phase of increasing the number of ESCO markets from 16 to 24, and this is developing along the path that we thought it would. We expect to have somewhere around 30,000 patients or so by latter part of the summer, and it looks to be on track for that.

So I just would remind you from a value-based health care system, we are the largest provider in the United States when you compare the Bundled Payment for Care and the ESCOs. So we are in this to stay. It's beginning to work. We've got more work to do.

But we're pleased that now we can tell you both of these pilots or new adventures, if you will, are beginning to work for us and bear some fruit. And with that, I'll turn it over to Mike..

Thank you, Rice, and hello everyone. So continuing on chart 13 showing the P&L, consistent with Rice's approach, on the left hand side you see the numbers including the agreement we reached with the VA. On the right hand side you see the operating P&L excluding that effect. And all my remarks will be to the right hand side of the page.

So revenues, as Rice indicated, up by 14%, 10% constant currency, which is in line with our guidance. Operating income increased €55 million to €497 million or about 11%, representing a 30-basis point decline in margins from 12.75% to 12.4%. I'll come back and talk more about the margin performance on a later slide.

Net interest expense decreased by €4 million, this was driven by the effect of the repayment of senior notes that took place in the middle of last year, which carried higher interest rates offset by higher comparative average debt levels in the first quarter of 2017.

Taxes, excluding the agreement with the VA, are at 32 – excuse me – 31.2%, down about 20 basis points. That is the usual effect associated with the tax free items included in profit before tax and also represents slightly lower tax payments, audit tax payments made in Q1 2017 versus Q1 2016.

Non-controlling interest for the quarter is €69 million, up in comparison to last year due to increased operating income of the joint ventures, partly offset by lower non-controlling interest in Care Coordination driven by the vascular business.

Net income attributable to shareholders is up €36 million or 17%, current currency 14%, constant currency, earnings per share is up €0.31.

So turning to chart 14 and this is just a very high level quick reference slide to guide you through the prior year, the constant currency growth, the impact of currencies in the current quarter and the impact of the VA agreement. So, hopefully, you'll find that helpful in terms of a big picture top and bottom line.

Turning to chart 15 and starting a discussion of the performance of our margin by region. As I indicated a few minutes ago, margins declined by 30 basis points to 12.4%. Before I go through each region, I typically give you the weighted contributions to that consolidated margin decline.

So that 30 basis points was driven by a decrease in margins from North America of 70 basis points, lower margins in EMEA of 30 basis points, an increase in margin from Asia Pacific contributing 40 basis points to the consolidated numbers, and lower corporate spending which contributed 20 basis points.

The difference of 10 basis points is just margin mix associated with the different regions around the world. So now looking at the chart, and in particular, starting with North America, margins decreased 100 basis points, from 14% to 13%.

More specifically, our Dialysis business, margins were stable at 16.5% despite one less dialysis day in the quarter on a comparative basis.

The higher revenues from commercial payers and lower cost for healthcare supplies, which was fully offset by higher personnel costs and including the typical seasonal effect of the first quarter to our fiscal results related to Social Security taxes and federal and state unemployment taxes.

Care Coordination, year-over-year margins decreased 230 basis points driven by a higher bad debt expense, specifically in share laboratories (15:15) and Sound Physicians on a comparative basis, the impact of lower revenues from the vascular service business and higher cost in our pharmacy services business.

This was partly offset by a favorable effect, as Rice indicated, from the recognition of revenues under the BPCI pilot in the first quarter, and I'll talk more specifically about that in our outlook section. For EMEA, margins decreased 190 basis points from 20.6% to 18.7%, driven by an unfavorable impact from acquisitions.

This is essentially absorbing the cost of the acquisition in the first quarter, as well as anticipated development expense specifically in the XENIOS acquisition that we will address over the course of fiscal 2017.

EMEA also had one less dialysis day and slightly higher overhead associated with additional infrastructure, some people in our compliance organization.

An unfavorable impact in foreign currency and a lower income from equity method investees associated with investments we are making with the rollout of some of the drugs coming from our Vifor Pharma joint venture.

And lastly, we had a favorable effect associated with manufacturing associated with higher volumes in the region of dialyzers and machines. Turning to chart 16 and looking at Asia-Pacific. Substantial increase in margins 420 basis points from 17.5% to 21.7%, this was largely due to favorable business growth, mainly in China.

Also a base effect in the prior year, which had costs associated with our change in the management board in that region, and a favorable impact from manufacturing.

Latin America, 110-basis point increase was driven by higher reimbursement rates in the region and a favorable effect from foreign currency, partially offset by higher costs for treatments and higher costs related to manufacturing, largely inflation-related.

And corporate costs are not on the page but they decreased by $7 million, which you can see in the supplemental information that we published with the earnings release. Turning to chart 17 and talking a little bit about cash flows.

Q1 operating cash flows were also positively influenced by the agreement with the Veterans Administration, and this was offset by the seasonality in our invoicing in North America. These results in cash from operations as a percentage of revenue of 3.7% for this year compared to 4.2% for the last year.

If you adjusted for the seasonality of invoicing and the Veterans Administration agreement, cash from operations would be just under 8% in the first quarter of this year and just over 8% in the first quarter of last year, so, comparable.

CapEx decreased by about $28 million in the first quarter and it's running consistently with our historical practice, in that regard. It's not on the page but we don't show acquisitions and divestitures but we invested about $160 million on a net basis, largely in dialysis clinics in the quarter.

Our net debt has increased from €7.4 billion at the end of 2016 to EUR 7.6 billion at the end of March. Leverage is unchanged at 2.3 times for the year. And then turning to my last slide and talking about the outlook and I'll comment on the outlook overall. And then I'll just provide a little bit of explanatory language around BPCI.

So as a reminder, the guidance is based on our IFRS revenues and net income for 2016. That's why it's included on the right-hand side of the page. And it excludes the positive effect associated with the VA agreement. We did have a strong first quarter, as we expected. And this supports our guidance for 2017.

Therefore, we are confirming the outlook for 2017, anticipating increases in revenue of 8% to 10%, constant currency, net income growth of 7% to 9%, constant currency.

So let me digress a little bit and just give you some perspective on the BPCI, both in terms of what we've recorded in the first quarter and what we considered for BPCI when we prepared our outlook for fiscal 2017. So we're sufficiently comfortable with the data coming in for the period from April 1, 2015 through June 30, 2016.

So that's five quarters to record the revenue at this point in time. So this takes us from the inception of the program to mid-2016. Keep in mind these were the early days of the program.

So we recorded revenues with the net payment reconciliation now the (20:47) NPRA savings achieved on a gains-only basis as opposed to those programs that might not be meeting the CMS benchmark. This resulted in NPRA savings in the range of 5% to 6% of the CMS targeted spend.

We shared these savings with our partners in the project, including (21:12) and others, and therefore, our portion of the NPRA savings for this period in the first quarter, there was recorded in the first quarter, is approximately 2% of the CMS targeted spend.

If these first five quarters had been measured on the total savings achieved, the total NPRA, gains and losses, the NPRA savings would have been around 1%. So while I'm talking about this for the quarter, let me comment on what we assumed in our guidance for fiscal 2017.

Our outlook for the year is based on an NPRA savings rate, still in the range of 5% to 6%. This includes the gains-only period that I just reviewed because this was considered for our full year guidance anticipating that we'd record the historical periods in the first or second quarter.

But it also anticipates that the savings rate will continue to improve as the program moves forward, away from the gains-only environment. The outlook also considers that our share of these gains will improve to a level between 2% and 3%. So with that, that's the conclusion of my comments, and I'll turn the call back to Dominik..

Thank you, Mike, thank you, Rice, for the great presentation. I think we can open the line for Q&A..

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. And our first question today comes from the line of Patrick Wood of Citi. Please go ahead..

Hi. Thank you very much. I have two, if I may, please. The first is on the BPCI side of things.

I hear on the savings rates, I was wondering if you could get a sense for roughly what that actually contributed in terms of revenues and linked to that, what do you think the Care Coordination margin maybe in Q1 would have been had you not recorded those BPCI revenues? So that's the first question.

And the second one is more around wages and on the Dialysis side.

There's obviously the Dialysis Patient Safety Act in California, I was wondering and I'm aware that some other states already have mandatory ratios on staffing, but I was wondering if that was something that you expected to expand over time or if you expect any kind of an impact from that over the long-term? Thank you..

Hey, Patrick, it's Rice. Mike, you want to take....

Sure..

the one-and-a-half? Because I think you have half question there. And I'll take California..

Yeah. On BPCI, I provided kind of that detailed commentary because we were not planning on disclosing specific dollar numbers each quarter as we progress through this thing. We think we've reached a milestone in terms of getting comfortable with the information coming from the government in getting both the finance folks and the actuaries satisfied.

Also, considered in our guidance for the year, so I don't think the particulars and a with or without for Care Coordination makes sense to us right now, because this program has been in the wings for quite a while and obviously, was always anticipated in the past in terms of getting to the point where it would be in the margin.

So, I'd kind of stop there, Patrick. I think the information I did provide gives folks a lot of context in terms of how to manage through the BPCI as we go forward..

Patrick, it's Rice. Specifically, as it relates to Dialysis and staffing in California, yes, there are seven or eight states currently that have patient ratios, staffing ratios that we have to maintain. This situation in California is not done yet. There is legislation. It's approved through one of the Houses, but hasn't gotten through the Senate yet.

And I would tell you we're pushing back as vigorously as we can, and that sounds bad because you would say, well geez, wouldn't you want to have patient ratios, et cetera. And that's fine. What we don't like is the penalty for haste, if you will, of what is in this legislation.

It is very draconian, if we in fact have an issue, and we miss a nurse for a period of time during the day because she had an accident, let's say, and couldn't get into the clinic and we didn't have staff. There is a huge penalty we pay for that. And we think that is just not right.

It's just not economically practical for us to suffer penalties under situations like that. So we're going to see where this goes. Obviously, if it passes, we're going to comply. We'll look at what it does to the operation and how do we adjust to deal with that. But it certainly can come up in other places and we'll just take it state-to-state.

I don't want – I'm not aware of any other legislation pending anywhere but that's kind of where we are at this point. We just – we are all for good patient care but not at the expense of a bunch of penalties for things that are just not normal or not fair, it's the way life sort of works in these situations..

That's very helpful. Thanks, guys..

Our next question comes from the line of Tom Jones of Berenberg. Please go ahead..

Hi, good morning. Good afternoon, Rice. And thanks for taking my questions. I hate to hop on it, but I wanted to ask a bit more about the Care Coordination business. There's obviously a lot of moving parts to the margins, and you've got the ESCO revenues this quarter, the pressure around your vascular access business, the bad debt.

I know you don't want to give specific numbers, but maybe it would help us to at least understand where you think the margins or which directions the margins in that business are going to travel over the next three quarters? And then perhaps, maybe on a three-year view, you could speculate in the way you think this business' margin should be able to get to.

And I guess it's just one of those things we might have to get used to, a little bit more volatility in the margin in that business than we're used to in the rest of the business. And then on a more positive note, I wondered if you can make some – at least qualitative comments about your improvements in the revenue for treatment.

I guess, Medicare rates are basically flat year-on-year. So how much of the jump that you saw was related to payor mix and how much of it was price increases? And on the subject of price increases, it's widely known you had two fairly large commercial contracts, are reaching out for renewal or in the process of renewal.

Just anything you can add on those would be helpful..

I'm going to let Mike answer your first question and maybe second as well (28:27) catch him up on contract status..

Hi, Tom. I appreciate the questions. I suspect most of the questions today would be about Care Coordination. The – well, maybe not numbers but just to specifically address what was in our press release because it did mention bad debt, and we got some questions this morning in terms of whether this is a knock-on effect from the fourth quarter.

So essentially on the bad debt, we did have a write-off in the labs (29:02) from some older receivables in the quarter, which we frankly did not expect. So that's a one-off in our view.

And then regarding Sound, this does not relate to what we did in the fourth quarter with regard to the receivables projects that weren't managed as closely as we might have liked.

But what we're seeing is there's a business model effect in the Sound bad debt numbers that relates to our acquisitions in the emergency medicine area that really started to ramp in the second quarter of last year. And it's just simply become more noticeable this quarter.

The EM business has a different patient base, and as a result, carries a higher level of bad debt expense relative to the patient encounters. So that's – so you see the bump, but it's related to the kind of the extension of the hospital space into the emergency medicine space. The – sorry, go ahead..

And the kind of general direction of travel for margins in the Care Coordination business in the short and perhaps long-term, maybe (30:14)..

Yes. I shied away in the year-end to provide specific guidance on the Care Coordination margins given that I got burnt a little bit last year by falling just short of my 3% to 5%. So I said at the time that we'd see improvement in the margins over the course of 2017. I do believe that's the case and that we will see improvement.

The – what I would say then in terms of the midterm is even though this has been a bumpy road for us, we still believe that Care Coordination will get to the margins we indicated in our Capital Markets Day, and we refresh that in the Meet the Manager as well as in many of the one-on-one meetings we continue to have with investors.

So, we expect between now and 2020 we will get to a gradual increase in the margins up to a high single digit figure by 2020..

Yeah, you know, Tom, there are not a lot of places where you go from €0 to €3 billion (31:22), with lower margin, and it goes exactly the way you want it. We're not happy with some of the bumps in the road, as Mike has said.

But all in all, we still think this makes sense and we're not backing off of trying to get to the margin profile we gave you guys back in 2014, and we'll, obviously, be happy to talk some more about that..

I'm going to do one follow-up, Tom. Just to put – knit together two other things that we mentioned earlier on the call. One is, Rice did mention the ramp up of the ESCOs, which is also part of the cost base that we're talking about when we look at Care Coordination.

And we're very excited about the ESCO program, generally, and the ramp, and we think, that's going to be a good program for us, generating profitability as we go forward. And we also mentioned the revenue effect in the vascular business, just due to the rate cut that went into place January 1 of this year.

We're working through our mitigation plan, but you're seeing kind of an outsized effect in the first quarter. As the year progresses, we think we will be able to mitigate some or most of that affect over the course of 2017..

And that's really running hard to convert those to ASCs. I think we've talked about that before. Yeah, and Tom, contract status, so as you know, we had one buttoned up in the late fourth quarter of last year. We have signed the second one in the first quarter of this year.

The third one is in process now, and what I'm told or what I expect is that we should probably wrap that one up sometime in the month of May. These are coming in within the zone that we thought. It applies to the guidance. I think, Mike had said that we sort of see this is rolling in the way we thought it would. So I would say, so far so good.

Two down, one to go. It's very close, and so we're feeling pretty good about how this is progressing..

Sure.

And would it be fair to take the Q1 increase in revenue particularly as a reasonable benchmark for the full year then?.

Well, I would love to say that, Tom, but I'm going to stand by my guidance for the year, which I had said revenue for treatment would be flat to up 1%. As Rice indicated, obviously, we're looking at the contracts, and we are very pleased with how they are developing.

But this KPI basically represents everything that's happening in the service business in the U.S. in a single figure. So you've got some beneficial effects, obviously, with what happens with regard to our commercial mix, our payor mix. But you've got a number of other rate and volume developments that get baked in.

So I'm sticking with the flat to up 1%, and we started the year strong..

Tom, let's characterize this as best we can. I think when everybody was looking or listening to some other the folks and it was doomsday, and the rates are terrible. Well, look, we see some compression. We're not hiding that. We know that's reality.

But all we're saying is the way we guided and what we've looked at, we're going to be within the realm of what we told you we were going to do. I think because they haven't seen this huge Armageddon that folks said was coming, let's just don't assume that our guidance is going to go up considerably because there's nothing going on there.

There is still some compression, but we are within the zone. We are within ranges of what we thought we were going to see..

Perfect..

Hopefully that's helpful..

That's very helpful. I'll stop pushing at that..

Thank you..

Our next question comes from the line of Gary Lieberman of Wells Fargo. Please go ahead..

Good morning. Thanks for taking my question.

I guess – will any of the policy changes that the new administration has announced affect BPCI in any way that you can tell?.

Hey Gary, it's Rice. Not at this point. Now, let me say this. I've been in D.C. a lot over the course of the first quarter. And we've talked to a lot of people. I would say to you that as best we can tell, particularly, Secretary Price, he likes value-based care. I think there's some pieces of that that from a patient's standpoint he has some concerns.

But in general, he thinks the program makes sense. So we have not gotten the feeling or an idea that something's going to impact this at this point in time. But obviously, in this particular political environment things change on the dime. If something comes up, we'll have to react to it and see what it means.

But at least in the early meetings, because we've asked value-based questions or how is this going. It has not come out to us that that they're looking at any radical change that would affect BPCI, as best that I can tell..

Okay. That's helpful. And then I guess, just going back to one of the earlier questions that was asked about breaking out the impact. You broke out the VA because it was for multiple periods. I mean BPCI revenues that you recognized in here is also for multiple periods.

So, wouldn't it be helpful to break it out just to have a better sense of kind of how it might evolve on more of a run-rate basis?.

Yeah, Mike?.

Yeah, the VA was an agreement we reached, so we booked it in a period that it was bookable based on having reached the agreement, and the BPCI is similar and that we've always been very transparent that we hadn't reached the criteria to be able to book anything under GAAP. And so we're booking in the first period where we've achieved that.

That's essentially what I've tried to do in terms of giving you a sense as to the 5% to 6% of gross savings and the 2% to 3% of net. And I think we've indicated – without getting into a lot of granularity about which piece of this revenue relates to which period. It is a very long tail cost savings program.

I mean, even at this point in time, we're basically three quarters back in terms of what we've recognized for revenues..

Okay. And then if I could sneak in one question on the Dialysis business. You mentioned the cost per treatment and how first quarter is typically a more expensive quarter. But just looking back, the sequential increase from fourth quarter to first quarter of 2017 was around 8% increase. And I look back at 2015 to 2016, it was under 3%.

So is there anything else going on in there?.

Well, Gary, the biggest piece, you might have seen or thought about or not is there's two less dialysis days in Q1 and Q4, which is a big contributor to the bump. You're spreading your fixed cost over two fewer dialysis days, that's the biggest driver..

Okay. That's helpful. Thanks very much..

You bet..

Our next question comes from the line of Ian Douglas-Pennant of UBS. Please go ahead..

Hi, thanks. It's Ian Douglas-Pennant at UBS. Again, I wanted to go back to Care Coordination and apologies in advance.

Just thinking about the profitability here and any conjunction with the revenue growth, at what point do you need to slow the – and I'm thinking about the organic revenue growth, at what point do you need to think about slowing the organic revenue growth? I don't know, whether you need to relook at some of the contracts that's been signed or whether you're being disciplined enough there and assess whether they are as profitable as you thought they were initially, or are you comfortable or it's just a lag effect and so we'll see that come through, because it does look like a multi-year trend now..

So, Ian, help me here, are you referring to Sound, in particular, or the whole book of Care Coordination businesses? Can you be a little clearer?.

I guess the question is more relevant to Sound..

Okay. Thanks, that's helpful. I think, what we would say in the case of Sound and the contracts that we have. We do look at those, they are not long-term deals. They generally will roll in a year, Mike, if I believe I remember that correctly. So we had a chance to look at them and reevaluate.

I think, at this point, we're not thinking about putting our foot on the brake in terms of revenue in that business. I think we're going to give it some more time to look and see how it develops. I think, we should be fine. So we have to look at that.

Mike, any more color?.

Yeah. I guess I'd add two things. One, relative to Sound, and in particular, relative to BPCI, because I know I gave you some numbers particularly with regard to gains-only and moving into pluses and minuses. As we progress in the BPCI program, we always have the option of dropping episodes of care or dropping locations.

So, in terms of your point about how do you manage in this environment, that's a lever we can pull as we – now, that we've gotten into revenue recognition, that's a lever we can pull to make sure that that drives to the kind of outcomes we were looking for.

And relative more broadly to Care Coronation, we've said in the past, both Rice and I, that we look at each one of these businesses and we ask ourselves that question routinely since we did our acquisitions in 2014 and that will continue. And if we need to make adjustments, we will.

But when you look at Q1 in particular, what we've talked about, it was the lab and vascular access and the pharmacy. And some of those have been in our adjacencies business even prior to the creation of Care Coordination. So you will occasionally get bumps in the road, particularly when you're dealing with reimbursement from the government.

And we'll work our way through that in vascular. And the pharmacies have been a very good business for us for many, many years, and we expect that's going to continue. So some of these bumps were granted there and others we'll be able to adjust the portfolio or adjust the program to make sure that we're driving to the outcomes we expect..

Well, Ian, Mike makes a good point. So I'd say it this way, we have two braking mechanisms in Sound. One is we have BPCI and the ability to drop certain DRGs or whatever. And then on the fee-for-service side, we can look at the contracts; they tend to roll on a yearly basis. So we've got ways to look at this, I would say, to tap the brake, if you will..

Okay, fine. That makes a lot of sense. Thank you. And just going back to the earlier question on revenue for treatment given that the strong number this quarter. What are the – and you said there were a few moving parts within that.

I mean, within the range that you gave there, what are the key moving parts or the key uncertainties that you think there are? What are you kind of most concerned about that might bring you above or below that revenue per treatment target that you've set for the full year?.

I'm smiling a little bit. I don't think I've ever gotten this many questions about a quarter that has a positive revenue per treatment development. But I should welcome the good news, I guess. Well, I think, it's the things that we always talk about.

It's where do you stand with regard to your commercial contracting, where do you stand with regard to your patient mix as two key drivers. And to what extent do you get even a modest bump in terms of the CMS reimbursement rate, which also happened in the first quarter of this year. Those are principally what drives the revenue recognition..

Okay. Fine. Great. Thanks very much..

Our next question comes from the line of Lisa Clive of Sanford Bernstein. Please go ahead..

Hi. Few questions. First, you commented on improved payor mix.

Can you just confirm the stability of your ACA patient base both on exchange, which I think you were pretty clearly about at Q4 that you had already seen the enrollment figures, but also off exchange or maybe a slightly different timeline? Your close competitor was hinting at a loss of patients outside the Medicaid-eligible population.

And I know Medicaid-eligible is not a big chunk of patients for you guys. So that wasn't really an issue for you to begin with. But because of all the question marks around premium support that there were some losses of patients. So I'm just trying to square the circle here, if indeed your patient count is very stable.

Second question, DaVita also announced an integrated care deal with Humana. But, interestingly, it also included not just the ESRD patients but CKD patients.

Could you comment on any initiatives you may have in place here and how we should think about that opportunity longer term? And then, third, on Care Coordination, I fully understand that you don't want to provide too much granularity on the business that has a lot of moving parts.

And in each specific business line, there is a lot of uncertainty on the exact pathway of revenues and profits. But it would just be very helpful if we could just think about the different buckets and the sizing of different buckets of these businesses.

Perhaps, just split between Sound, other non-dialysis, broadly sort of dialysis-related ancillary services and then, finally, integrated care. And I'm sure you won't give me what level of detail I would like, but I can at least plead..

Okay, Lisa. It's Rice. So let's see how we do this. Status of patients, yes, we've got that. So if we go and we look at our patient base from the end of September through the end of March, we've gone up 5 patients. So it's very stable.

If you remember, we told you September through January 31, we were down around 20 patients and now adding these two extra months, we've seen just a little bit of tick up. So it's extremely stable for us and....

And actually just a follow-up on that. You do have that level of granularity where you know, obviously, who is paying your bills into the various clinics. So you know exactly, which insurance company is covering them and then you have a sense of whether that's an EGHP plan or an ACA plan, et cetera..

It is not easy to get the information and I've been accused of torturing people to get it, which is probably true. But now that we have it, I'm just telling you, it's a stable book of business, Lisa. It's looking okay for us. And I know – I was an Indian giver, I told you I'd give you the medicated eligibles and then I didn't.

I'm not going to give them to you today but I will also tell you that's a pretty stable number. I'm looking at it and it hasn't moved much. So we are business as usual at this point in time. And then on your question on the Humana deal, you're right. I did look at their transcript. I think they are doing CKD and dialysis.

Our position on that or our deal with Humana is just dialysis only. We're not swimming upstream into CKD in that particular case. And then as far as your question on, can we give you anything a little more granular on the Care Coordination businesses, let me do this. Come to Frankfurt, June 8, CMD, we'll try to give you some clarity on some of this.

We may not give you as much as you want but we'll try to give you some sense of how we see this playing out and obviously, we'll talk about midterm or what we're doing there. We're not just ready to go chapter and verse on all this yet. There is just still some things that we are not exactly sure how they're going to play out.

But we'll see if we can give you a little bit better sense of where we're going on this, okay?.

Okay. Appreciate it. And one last question. You used to – in your 20-Fs report that the proportion of patients that were Medicare and Medicaid, which I think in 2014 was 77%. I haven't seen – I don't think you actually disclosed those numbers for 2015 and 2016.

But it would just be really helpful to get an idea of what proportion are Medicare, Medicaid, what proportion are Medicare Advantage, and then what proportion are pure private. DaVita just yesterday said that they are pure private, so obviously, that's EGHP and any ACA plans and COBRA, et cetera, was about 11%.

I'm just wondering whether you're in that same ballpark..

Yeah. I cannot tell you if we still put it or we stopped putting it in the 20-F, but let me do this just so you don't go home empty handed. The number that DaVita gave you for pure private is a number that we could understand and get a sense of that. How about we leave it like that. That's not a foreign number to us..

Yeah. The – just for clarity on the 20-F, the Medicare, Medicaid split revenue sourcing was a U.S. GAAP requirement and not an IFRS requirement. So that's why it's not in the queue.

It was historically reported in all the prior periods, but it's just changed because it's not required under this accounting standard to describe the character of revenues in that way. We have other disclosures that we think provide some transparency, just not the same way. Just so you know..

Hopefully that helps, Lisa..

Yeah. Thank you..

We weren't withholding information. (49:39).

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

Hi, good afternoon. And I have three questions. Firstly, on North America, on the Dialysis margin do you think you can maintain a year-over-year EBIT margin increase over cost inflation and less cost savings to drive an inflection point later on this year? Question number two, on BPCI.

For the revenues that you've recorded, have you received the cash? And if not, how does the cash recognition work for BPCI? And question number three is on (50:21) for quite some time. I was hoping to get some indication on what your experience is.

And also, when we can get some news with Vifor Pharma on a potential deal that you can use in your own clinics? Thank you..

Hey, Michael.

Mike, if you want to take Michael's one and two and I'll come back on the (50:46), okay?.

Yeah. I mean on margins, we provide guidance on global margins, which is probably where I'd stay. We indicated globally that we'd be able to maintain our margins in 2017 versus 2016. I think, Q1 we're at stable margins on the Dialysis Services business in the U.S, we're pretty happy with that.

On the cash, the short answer is, yes, we are receiving cash as well from the government with regard to the savings. The revenues are on the accrual basis, but we did receive a substantial check relative to the revenues in comparison to the revenues that we booked..

Michael, very quick, yes, we are doing a lot on the Phase III clinical work. I really, by design, don't know what they're saying. I mean most of our agreements on this is that we are silent on what we see. We report back to the pharmaceutical company. They then decide how they want to progress with that data, what they want to do with it.

So I really can't tell you what's going on there from a clinical standpoint. In terms of approval anticipation and then where could we take that. Personal opinion, again, is I still think it's an 2018 approval.

I think, I don't believe we talked about this last quarter but one of the things that has happened is the factory in Kansas where they produced this product, the FDA was in there. They've gotten a warning letter. They've got some issues that they – Pfizer need to clean up.

So I really don't know – have no inside knowledge as to how bad are those issues, or are easy or whatever the case may be. But generally, when you're in approval process, and if they're in the factory where that product comes from and there is an issue, it can slow your approval. But I still think it's probably 2018.

I won't venture to guess if it's the beginning of 2018, middle, end. I just don't know yet. We'll have to see where that goes. And obviously, Pfizer is going to be extremely confidential about what they are doing in their factory as we would as well. So I just don't think we're going to know much more until they want to tell us something..

And then on the Capital Markets Day, could you comment, very high level on the topics that you will focus on?.

So okay. You see in the agenda which is out there. So we will have a workshop on the product and service business. We will have a workshop on value-based care. And we will have a medical workshop harnessing some latest developments, and of course, we will have an update on where do we stand in our 2020 journey..

And is cost savings a material focus at the CMD? It's hard to work out from the various topics on the agenda whether the cost savings, specifically, is an important part of the agenda..

You see it is worth coming to find out..

We will talk about cost savings. We promised you guys that we'd give you a sense of GEP too, and where that's going. People are working on that, Michael. So it'll be in the agenda. We're not exactly sure where we'll put it. But we are not going to send you home without talking about it, rest assured..

Okay. Thank you..

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

Hi, thank you for taking my questions. I just have two quick ones left.

The first one is could you, excluding all the additional dialysis days and excluding all the efficiencies coming from Mircera (54:29) et cetera, could you just comment what is the underlying cost inflation that you are seeing in dialysis in North America? Or you should prefer what is the normalized inflation that you expect for the full year? And then my second question is just on EMEA – on the EMEA EBIT margin.

The differential that we see year-on-year this quarter, is this indicative of what, how we should think about the margin versus the rest of the year? Or are there other moving parts in the next three quarters that we should be thinking about?.

Thank you, Ines.

Mike?.

Yes. I'm afraid I might disappoint you, Ines. I would love if I could run the business with a normalized inflation rate and not have to deal with any of the outliers, but we do.

So the best I can do is the guidance I provided on cost per treatment, which was approximately 1% for the year, and that's the favorable and the unfavorable things, considering all the actions we take to make sure that we're managing the total cost effectively.

And I think that's the best guidance I can give you, and it prevents you from having to resort. Because your next question would be, okay, well then what are the effects of all the things that you're doing. So I'll stick with what I've said in the past.

On EMEA, if I – you're asking for – if I heard you correctly, a prognostication of the margins for EMEA over the course of the year. And we typically don't go to that level because then we'd be doing it for all the regions.

I think, maybe, if I just take the one point I made with regard to some of the investments we're making and the acquisition we closed in EMEA, I indicated that we're going to be in development on some products in that company and that that would have a dilutive effect.

So I think, if I look at just that fact, alone, that would probably put some pressure on the margins in EMEA over the course of the rest of the year..

Yeah, Ines, the acquisition of XENIOS is global. But the sales process and the ready market sits in Europe. So that's where we're going to see some of the development costs hit and some of the getting this underway and getting it going. So they're going to have – as Mike said, they are going to have a little bit of a bump in the road with that.

So I think you probably see some depression on that margin through the end of the year..

Thank you. Let me just – sorry, just follow-up on the first question real quick. What I was asking is more what kind of inflation you think you should see in this business? I think, in the past, you've talked about 2%, 3% cost inflation.

So let's not focus on 2017 but just, in general, what do you think is a suitable cost inflation for the dialysis treatment in North America?.

What I would say, Ines, is that that range we've given you of 2% to 3%, I think it's fair. What we generally do is budget at 1% and then we hope to bring it in a little lower than that if we can. But obviously, people expect raises and we need to do that. So I think, that's probably the best way to answer it, it's kind of in that range..

Perfect. Thank you..

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

Good afternoon gentlemen and thank you for squeezing me in towards the end. I have a couple of questions, please. The first one is just on the cost development in Care Coordination. Mike, if I look obviously, last year we started the year with a quarterly cost running around €500 million (58:30).

Q1, the cost in the quarter was almost €700 million (58:35) for the Care Coordination business. Now I appreciate there are some one offs in there.

But is this the appropriate run rate you think for the business looking at the rest of the year? And I guess if you can just give us some detail on what has driven the significant growth in the cost base in Care Coordination over the past five quarters specifically, that would be really helpful I think for us as we wrestle with where the margin might or might not go? So that's my first question.

And then my second question is just to confirm that in spite of cost per treatment being up 3% this quarter you're still sticking with the plus 1% for the full year. And I guess if you can maybe just give us a sense on what may alleviate the growth as we move throughout the rest of the year? Thank you..

Hi Veronika. With regard to the cost base, it's a complicated question because you've got pretty extraordinary revenue growth and we're obviously investing in the business to achieve that, which includes both organic as well as acquisition growth in the five quarters.

So I would say where we have had things happening, Care Coordination, that we view as one offs or episodic or something that would be outside the national run rate, we pointed that out.

And with regards to the rest of it, we'd actually be trying to do an autopsy on several different businesses in terms of investments we're making and acquisitions we've performed. So, I'm not really sure I can do that kind of on the fly on the call.

But I think you should take some comfort in the fact that where we have had these one offs, we're pretty open about it, pretty transparent and fairly detailed in terms of what the underlying root cause is..

Yeah. And Veronika, look, we've also tried to signal as we've gotten good news, ESCOs are going and expanding we've been pretty clear to say. We're spending for that. We've got infrastructure to build for that not from a clinic sense, but from the care navigation team and the interventions that need to go on.

So we've tried to give you a sense of what ramps to the business growth versus the one-offs, as Mike said. So if you kind of go back and think about that I think we've tried to give you a fair assumption of how this kind of plays out..

And, I think, you asked a question on cost per treatment. And I think I'm done on the call today talking about revenue and cost per treatment. I think, I've answered it..

But to confirm, you are sticking with the 1% for the full year that you had guided to before?.

Sorry. I thought I said that in my prepared remarks. Yes..

And apologies if I missed that. Okay. And can I just follow-up on Care Coordination, I wasn't really trying to ask. I think what's very difficult for us to understand is even the individual buckets that you have within Care Coordination.

So, we don't have a huge amount of visibility into how each of them has grown individually both from a profit and a revenue perspective.

So maybe, just taking a step back, the question really is, and I think this would be really helpful for everyone on the call, is just to get an understanding of the growth that you've seen organically in the business, what's been the most significant driver of that? And as you think about the margin compression that we witnessed in Care Coordination, even excluding the one-offs, which part of the business is most responsible for that? Just because for all of us right now, it's bit of a random number generator..

Go ahead, Mike..

Yeah. Just thinking about how to answer your question because you're talking about one quarter and when you talk about margin progression in Care Coordination, you're talking about three years where we've had a variety of different growth rates.

I mean, Rice pointed out we had a bump in health plan – Fresenius Health Services when we did the first 8 ESCOs and now again when we do the next 24. We've had ramps in our pharmacy business over the course of the last several years.

Obviously, the largest part of Care Coordination, as everyone knows is Sound Physicians, which has had substantial organic growth. We've continued to invest in that business with other acquisitions. So acquisition generated growth. And now we've got the BPCI, which we've been investing in since mid 2015 and finally getting to some revenue recognition.

So with that as a backdrop, when you look in particular, at the quarter, I think that – and I think I've said this before, the biggest historical growth engines in Care Coordination have been the pharmacy and Sound.

But the Fresenius Health Plans with the sub cap arrangements, the ESCOs, and the Medicare Advantage special needs plan are now driving significant growth in terms of the top line. And when you look at – and I think I mentioned all the one-offs.

I think I'd mentioned the impact in Q1 relative to profitability, both in terms of the one-offs on the bad debt in (01:03:57) as well as the systemic business model in Sound on emergency medicine as well as the vascular access rate cut that we're working through our mitigation plan.

So in the quarter, those are the drivers, and I've given you the big revenue drivers. But then more holistically, when you look at the whole period of time, we've had a number of these businesses that have driven substantial revenue growth in their time..

Yeah, I mean, if you think about this as five team members in that bucket of business. And my words, not yours, I know, we don't really see a dog in there. There's not one that we can point to and say that's the bad one. We've had ups and downs in all of them but they all contribute.

If you go back a year ago, Veronika, maybe, and look at the transcript, there was a period where we laid out for you, guys, what we thought the revenue opportunities were. We never really talked about margin. But people were trying to get a sense of what these growers could be and we try to give you a sense of that.

But I think, we just don't want to open up this kimono right now. Because then everybody is going to focus on the one that they like or they don't like. And I don't think that's productive for us. So we are trying to give you as much as we can. But we did give you a sense, Mike, I think you were telling me it was one year ago I did that.

We talked a little bit about revenue and what the sizes of those businesses could be but we never really got into margin on it..

I mean, it's nine different businesses. And I think what we tried to do by creating this space is give you the kind of transparency we thought you would want on the core business, which is the lion share of the company.

So we've got nine businesses generating €3 billion (01:05:46) in revenue, and it's problematic to kind of go through all that and provide all that detail..

Yeah, we tried to go the other way by breaking out the regions, products, service, all of that. So you can see it was great clarity on what's going on. I just don't think, at this moment in time, right now, we are really in a place to do that on the Care Coordination side..

Okay. Understood. Thanks guys..

Yes..

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

Afternoon, guys. Most of my questions have been asked. Not necessarily answered, but they have been asked. Just in terms of two follow-ups really, one is just the one less dialysis day is the U.S.

and would I be right in assuming that's probably about a €30 million impact on your profitability? And second, just on recognition of BPCI revenues, are you going to be recognizing revenues now every quarter, or will it just continue to be lumpy quarter-to-quarter? Thanks..

We expect to recognize BPCI revenues every quarter now. So that's become a routine part of the P&L..

Yeah. As it is with the ESCOs, and those plans – the health plan, we would think that would be routine, David. And just give us a moment, we're checking on your first question. Somebody reach for a calculator that tells you something there.

Top or bottom line on the one less dialysis day?.

I'd say both, please. (01:07:49).

And we wanted clarification because the best you were going to get is top line. Yeah, we're stumbling around a little bit here. But my rule of thumb has always been on top line about $15 million per day, has been my rule of thumb..

So you are close..

All right. Thanks, guys..

That's dollars, by the way. Not euros. But that would be about €30 million..

Thank you, David..

There are no further questions at this time. I would like to hand it back to Mr. Dominik to please close the call..

So thank you very much, everybody, for the questions, and the lively participation today. Also, we discussed it already, nevertheless, I would like to take the opportunity to highlight that we will have our Capital Markets Day, I think everyone got the message, it's worth coming now and to get some more information.

We hope that you all join the event and have registered already or will register soon. And then we are looking forward to seeing and talking to you soon. Thank you..

Thanks, folks..

Thank you..

Appreciate the interest. 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..