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

Veronika Dubajova - Goldman Sachs International Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom) Ian Douglas-Pennant - UBS Ltd. 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 Ed Ridley-Day - Redburn (Europe) Ltd. Gunnar Romer - Deutsche Bank AG Oliver Metzger - Commerzbank AG.

Ladies and gentlemen, thank you for standing by. My name is Jasmine, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care Earnings Call on the Second 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, Jasmine. We would like to welcome all of you to the Fresenius Medical earnings call for the second quarter 2017. I will 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. For organizational reasons, this call is limited in time as we actually need to leave for the airport to see many of you in London tomorrow.

Given the time restrictions, we kindly ask you to limit your questions to two questions without any sub-questions. We will answer only the first two questions, this way we would like to ensure that all of you have a fair chance to ask at least those two questions. We trust that you understand this.

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..

foreign currency transaction; losses, and Mike will be happy to take you through that with some detail. We've got some higher bad debt expenses and we can answer those questions you have on that, that really sits in the Care Coordination side of the house.

And then we've got higher personnel expenses which a number of you had anticipated based on what you've written this morning and we're happy to talk about that as well, although we think it's fairly uneventful at this particular point in time. Now, turning to slide 7, our top line growth, all of the regions performed well here.

I'm not going to go through a lot of detail. I'd like to make the majority of my remarks on the next slide. But I would just point out, we've seen a little bit of a shift.

When you look at the contribution from the regions, North America, fairly consistently at 72% but we've really seen a pickup in Asia at 9% and a little bit of a decline in EMEA at 15%, and Latin America is fairly stable at where they typically are, but we'll take you through that.

You see the organic growth rates that we've got here and we'll talk about those on here in the next few moments. Now, turning to slide eight, and focusing on the quarter in Health Care Services revenue.

I think, obviously, the key point when you look at the global enterprise, 9% constant currency growth, good organic growth, and our same market growth at about 3%. Obviously, the Care Coordination book of business, particularly in the U.S., is growing quite strong at 29%.

And for the first time, you see Care Coordination for Asia-Pacific, obviously, the vast majority of that is the Cura deal in Australia, but we also have now put a few odds and ends of Care Coordination business in Korea, Taiwan, a few places like that, into this category now. So, you can see it as we track it and it continues to grow.

Specifically, beyond Care Coordination, our North America revenue per treatment at $351, slightly down from prior year at $352. Not a lot of movement there. And in fact, if we didn't round, you would find that it's fairly small in terms of differences in pennies on the dollar, if you will.

Cost per treatment, even though we're talking about revenue, you want to know that – you've seen it already – cost per treatment move very little in the quarter, year-over-year as well. Looking at basically $283 in the current quarter we just finished versus $282 in the prior year. So, we feel good about that.

Now, specifically, in Care Coordination, we have continued to book revenues for the Bundled Payments for Care Initiative (sic) [Bundled Payments for Care Improvement initiative]. So, this is our second quarter in doing that. The revenues that we've booked primarily cover the third quarter of 2016 and a little bit of catch-up in some previous periods.

When you look at the ESCOs, we've now booked four consecutive quarters. That's working fairly well for us. And I'm happy to report that we are now sitting with a patient census in our ESCOs of 26,000 patients as of the end of June. Keeping in mind, there was Phase 1 and now we're into Phase 2.

And as we had projected to you back at the Capital Markets Day, we think a full year of patient census somewhere in the range of 28,000 to 30,000, give or take, we'll see where that ends up, but we are progressing nicely there. My hats are off to Asia-Pacific, they've had a very good quarter.

Not only the combination of new Care Coordination with Cura, but also in their core business, as you see, they're doing quite well, so we feel good about that. Now, looking at EMEA, their growth really is in line with their patient growth, so we think we're okay there.

We're going to talk more about what I think was a fairly exciting products quarter later down the road. So, we won't mix that with Health Care Services, but we do see some good things going on there. In Latin America, we have very strong growth, driven by higher reimbursement and we mentioned this to you in the prior quarter.

Argentina, Brazil and Chile is where we've seen a pickup in the reimbursement rates in Latin America, and that's working well for us. Turning to slide nine, and looking at the quality outcomes. We continue to operate at a high level of stability. Some movement, but nothing that is statistically significant.

And again, typically I like to point out, at least for me, personally, we look at the dose of dialysis and as you go across the regions and you look at the difference between Q2 and Q1, it's a very stable performance as it is for albumins and hospital days as well. So, we continue to see our clinical quality doing well and being stable.

Happy to take any questions on that, should someone have them later in today's session. Now, moving to slide 10, and looking at the Dialysis product side of the house. Let's first go with our largest product business, the largest region is EMEA at 41%.

You can see that EMEA had constant currency growth in the second quarter of 6%, and that's up in the prior quarter of 1%. How did we do that? A couple of things that happened as we had hoped they would, we saw more product sales into Russia than we felt like we missed some in Q1 and they picked up and beyond in Q2.

We've got some tender business that we're now shipping and fulfilling that we had hoped would have happened sooner but it is coming to fruition, so we're seeing that happen as well. And across the product mix, it really is nicely done in the areas of machines and hemo disposables and some acute business growth as well.

So, pretty much everything is hitting on all cylinders here. We are still seeing extreme competition in hemodialysis in-center piece of this. We do think it will continue but we're holding our own, but that is still a very hard-fought battle by our sales folks on a month-to-month basis.

When you then look at Asia-Pacific, very good performance with the folks in Asia when you see second quarter at 15% constant currency growth, up from the sequential quarter of 8% and this is really sales of all products. Everything is selling well in the bag, if you will. And so, they're making great progress, particularly in China.

We're seeing good progress there. Now, if we go to North America, it's kind of hard to say there's good demand when you see a zero in constant currency there but let's take a minute and let's break that down. I have been in this position before. So, the real miss in the quarter for the North American team is hemo equipment.

We clearly saw softness in the independent and smaller chain market. People just held on to their money, they didn't put their money out for capital equipment. We've seen this from quarter-to-quarter in the years and it will come back. We think people generally want to spend their capital budget that they have.

We're seeing the large customers continuing to buy at a very equitable rate, if you will. So, we're not worried about this. We think it will come back. What you don't see on the slide that I think is worth mentioning is if you look at the product disposable business in North America, we had 7% growth.

So, above-market growth in the disposable side of the house. Now, breaking that down further, hemo disposables grew at 5.6%, which is very strong, and our PD growth was at 18%. So, we see lots of good news on the product side.

Yes, we're disappointed on the machine side in North America, but we've seen this happen before and we believe that will come back.

And lastly, Latin America at 10% constant currency growth in the second quarter, up from first quarter at 6% and that's predominantly driven by dialyzers and then hemo solutions and some other hemo disposables like blood lines and things of that nature. So, a good story, an evolving story on the product business and we're very comfortable with that.

Turning to slide 11, and my last slide, I think that the highlights that we've listed for you – I'm not going to read them – I think they speak for themselves. Again, I would point out, we continue to feel good about these value-based programs we're continuing to develop.

I think the last point I would leave with you before I turn it over to Mike is simply that we have put the first half of the year behind us. When we close this call, it will be done. And we're moving on to the back half of the year. We feel confident about what we're going to need to get done in the back half of the year.

We're going to continue to execute on our 2020 strategy and we know what we need to do and we're going to go do that. And with that, Mike, I'll turn it over to you..

Thanks, Rice. I'll follow Rice's discussions on chart 13, focusing on the back half of the year first. And all my commentary will be on the right-hand side of the page which excludes the impact of the VA agreement. So, our revenues that Rice detailed are up by 9% constant currency, which is in line with our guidance.

Our operating income increased €76 million to €1.144 billion. That's 7% currency and 5% constant currency and that reflects a 70-basis-point decline in margins from 13.5% to 12.8%, a 60-basis-point decline if you look at it on a constant-currency basis.

Net interest increased by €2 million, but if you look at it on a constant currency, it actually declined by €2 million. And this reduction was driven by the benefit of repaying some senior notes last year which carried higher interest rates than our average and that was partly offset by higher comparable average debt levels in fiscal 2017.

Taxes, only a slight decrease of 10 basis points from 31.2% to 31.1%. Our non-controlling interest was €136 million, up in comparison to last year, not surprisingly due to an increase in the operating income of the joint ventures and, to a lesser extent, some physician buy-ins in the joint ventures with dialysis clinics in North America.

This was partly offset by lower non-controlling interest in Care Coordination, driven by the vascular business. And net income was up €46 million or an increase of 10% current, or 8% constant currency. And again, in line with our guidance.

Turning to chart 14, and 14 is just to give you a very high level of reference slide to guide you through the developments in the first half regarding our constant-currency growth, our currency translation effects in the six months and the impact of the VA agreement, both in terms of revenue and net income.

Chart 15, if we turn to that, now talking about the second quarter. And again, I'll focus on the right-hand side of the page. Revenues increased 11% or 9% constant currency, also, again in line with our guidance.

Operating income increased €20 million to €591 million or 4% compared to last year, and this reflects 100-basis-point decline in margin from 14.2% to 13.2%. Net interest expense increased by €5 million. This was again driven by foreign currency translation and at constant currency, the increase was €3 million.

This again is a consequence of the same effects that I just mentioned for the half year. And the tax rate was down 20 basis points, no particular drivers in that rate reduction. Our non-controlling interest was €69 million, slightly above the prior year, and our net income was up €10 million or 4%, 2% on a constant-currency basis.

And on the left-hand side of the chart, you can see we're also at about 2% and constant currency was flat in terms of net income growth. So, chart 16 is, again, just a very high level reconciliation for revenue and earnings in terms of the big drivers for the quarter.

And I'll turn to chart 17 and start talking a little bit about the regional margin profile. So again, this is excluding the VA agreement. And as I mentioned a few moments ago, the margins worldwide declined 100 basis points to 13.2%. But at this point, I want to comment on a significant driver of this reduction in margins.

The currency translation effects account for 70 basis points of margin decline off the 100 basis points that I just mentioned a moment ago. And this is a consequence of the strengthening of the euro against many currencies and, in particular, for us, the U. S.

dollar, the Brazilian real, the Chinese yuan, the Russian ruble, and the Turkish lira, just to mention a few of the larger effects. As you know, not all of these currencies are economical to hedge, and for hedge positions, we do take, we do not routinely hedge the complete exposure.

That's consistent with our financial policy for as long as I have been with the company. So, the bottom line is when you look at the unfavorable currency transaction effects, it reduced our constant currency EAT growth by almost 7 percentage points in the second quarter. But for these effects, our earnings growth in the quarter would be around 9%.

So, typically, as I do before I go through each region on the chart, I generally give you the weighted effect of contributions to worldwide margins for the regions.

So, the 100 basis points that I mentioned, there was a decrease in margin from North America that contributed 80 basis points, EMEA was 40 basis points, Latin America was 10 basis points, corporate costs and the mixed effect of the company improved margins by 20 basis points each, and the effect of foreign currency translation, as you saw on chart 15, was a decrease of 10 basis points.

So, now looking at the chart in North America, operating income was up €14 million to €470 million or about 3%. And in total, margins decreased 110 basis points from 15.7% to 14.6%. This decline was driven by Care Coordination.

So, more specifically, when you look at our Dialysis business, the operating margins decreased by only 20 basis points from 18.4% to 18.2%.

The decrease was the result of higher personnel expenses and higher direct costs such as medical supplies and rent, partly offset by higher income, driven by a gain from a consent relating to pharmaceuticals, lower bad debt expense and lower costs for pharmaceuticals in the clinics.

And there was an unfavorable translation effect worth about 10 basis points for North America. For Care Coordination in North America, we were down about €8 million in earnings or 50%. The year-over-year margins decreased 210 basis points from 3.3% to 1.2%.

This was driven by higher bad debt expense related to our development of the emergency medicine acquisitions that Rice mentioned, and the impact from the lower revenue for vascular services, which we've discussed as a consequence of the rate reduction at the beginning of fiscal 2017, and higher costs for pharmacy services.

This decline was partly offset by the favorable impact from our hospital related physician services business, and that increase was driven by earnings recognition under the BPCI program as Rice mentioned. Also, partly offset by higher revenue related to our laboratory services business.

In EMEA, operating income was down 11 million or 9%, and the margins decreased 310 basis points from 20.7% to 17.6%. This was driven by foreign currency transaction effects and due to the investment in the Xenios acquisition that we indicated in the first quarter. Other than those two effects, the margins in EMEA were flat year-over-year.

Turning to chart 18, Asia-Pacific's earnings were up €11 million or 17%. Operating margin decreased 30 basis points from 19% to 18.7%. The decrease in margin, again, was primarily due to unfavorable impact from foreign currency transaction effects, and this is partly offset by favorability from business growth.

There was a prior-year base effect cost that we incurred in 2016 related to the change in the management board which, obviously, has a favorable effect to this year, and favorable results in terms of our manufacturing costs in the region. Translation effects were a negative 20 basis points in Asia.

And as Rice mentioned, with the advent of Cura as a Care Coordination activity in Asia-Pacific, we took the opportunity to include some legacy Care Coordination in other Asian countries and we'll include them in this category as we go forward. Turning to Latin America.

Latin America was down €2 million from €14 million to €12 million with margins decreasing from 9.3% to 6.8%.

250 basis points of this was also due to unfavorable impacts from foreign currency transactions, a follow-on translation effect as well for Latin America and this was partly offset by reimbursement rate increases that Rice mentioned that mitigated some of our inflationary cost increases.

Corporate cost decreased by €7 million due to lower costs associated with our compliance investigation. Turning to chart 19 and moving to cash flows, again, starting with the first half on the right-hand side of the chart.

Operating cash flow was positively influenced by the VA agreement, and also the seasonality of invoicing in the first half of the year. This resulted in cash from operations of 11.7% of revenues compared to 9.7% in 2016.

And as I did in the first quarter, if you adjust for the seasonality of invoicing in the VA agreements, cash from operations would have been 10.2% in the first half compared to 9.7% in 2016. So again, an increase in terms of cash as a percentage of our revenues for the first half of the year.

And then if you look on the left-hand side of the page, the second quarter, again, operating cash flow benefited from the seasonality in invoicing leading to a very impressive €883 million operating cash flow, representing just under 20% of revenues compared to 15% in the comparable period last year.

And on an adjusted basis for the same two effects, cash flow was still very strong at 14% in Q2 compared to 11.4% in the second quarter of last year. Our CapEx is consistent on a percentage of revenue basis, nothing extraordinary there. And our free cash flow is strong at just over €500 million.

Our net debt, which is our debt minus cash on our balance sheet, has decreased from €7.4 billion at the end of December to €7.3 billion at the end of June and our leverage has improved to 2.2 times debt-to-EBITDA, down from 2.3 at the end of 2016.

Turning to chart 20, as you no doubt saw, we refinanced our credit agreement after the close of the quarter. We topped it off a bit from current levels, but importantly, the amendment simplified the facility, it is now unsecured, and therefore, consistent with an investment-grade company structure.

As a consequence, we anticipate any future notes issued by the company would also carry an investment-grade rating consistent with our corporate rating. And my last chart, quite simply, we had a solid first half as we expected and this supports our guidance for 2017.

Therefore, we are confirming the outlook for 2017 with the indications of revenue growth of 8% to 10%, constant currency and net income at 7% to 9% excluding the Veterans Administration, as indicated at the bottom of the chart. So with that, I will turn the call back to Dominik.

Thank you, Mike, thank you, Rice for the great presentation. And I will open the line now for the two questions each of you. And hope we can make that work this time.

Okay?.

Thank you. The first question comes from the line of Veronika Dubajova of Goldman Sachs..

Good afternoon, gentlemen, and thank you for taking my question. They are both about North America. The first one is on the revenue per treatment development. Obviously, there was quite a substantial sequential decline in the revenue per treatment from Q1 to Q2.

And I was wondering, Rice, Mike, if you can give us a little bit of insight into what proportion of that was driven by mix? What proportion was driven by some of the new commercial contract rolling into the base? And third, was there anything else that happened here? And my second question is on Care Coordination.

Mike, if I look at your guidance, assuming it still holds that the margin will be better in – slightly better in 2017 than 2016, it does imply that you'd have to deliver about €60 million of EBIT for Care Coordination in the second half of the year versus the €8 million that you delivered in the first half.

Can you give us a bridge as to how you're going to get there and maybe talk about what some of the tailwinds will be for the second half? Thank you..

Sure, Veronika. In terms of revenue per treatment, just to highlight a couple of things. As Rice indicated, we're off about $1 year-over-year and the same is true of cost per treatment. And at that level, this literally is a rounding issue. So, we calculate this to the penny and we report in dollars.

So, literally, both of these are essentially flat year-over-year just as a starting point for the discussion. In terms of detailing out the revenue rate per treatment, I'd say a couple things, Veronika.

First, we had a lot of discussion last quarter about the fact that we were showing a pickup in revenue per treatment in Q1, and we affirmed a number of times that we were maintaining our guidance where revenue would grow 0 to 1%. And confirming our guidance, we still think that's the case.

So, I think there's no surprises in the development of our revenue per treatment in the second quarter and that's consistent with what we've been talking about in terms of both some of the activities like getting the contracts closed as well as other developments on the revenue per treatment side.

So, for the quarter, I would say there's a little bit of each of the things you've mentioned. A little bit of rate, maybe a little bit of mix.

And then, frankly, the dominant effect in the quarter is, as you go through each quarter in a health care company, you're constantly adjusting the revenue you're recognizing from treatments based on the insurance that patients present when they have their treatment done.

And you go through your receivables process and sometimes you've got some movement in terms of whether they actually had the coverage they indicated when they came into the clinic or whether it needs to be rebilled to a different insurance coverage at a different rate.

And now that there's a noise level of that in virtually every quarter, some quarters are bigger than others. So, when you look at that, particularly sequentially, you see that revenue effect in Q1 versus Q2. But I'd say it's very steady, very consistent with our guidance.

We're just a little over 1% when you look at the first half in revenue per treatment and we're confirming the range that I'd indicated to you back in February. In Care Coordination, I won't challenge your numbers, they sound reasonably correct. I think in Care Coordination, it's pretty simple. We did say we'd do better than 2.6%.

We've confirmed, and I expect we will do that. I think we're looking to see improvements in a number of the businesses inside Care Coordination.

But I think what I'd highlight relative to help you bridge the gap between first and second half, we indicated last year that we got to revenue recognition on the ESCOs, and that was a relatively modest program. When you think in terms of the back half of this year, you'll see the additional 18 ESCO sites kicking in in terms of revenue recognition.

In addition, we started revenue recognition on BPCI in the first quarter and we indicated we had booked through June of 2016.

And in the second quarter, we booked an additional quarter, so we're at Q3 2016, and I would also expect we'd see an acceleration there as we get into the back half of this year and those two things should help you bridge to the acceleration in margin in Care Coordination in the back half..

Fantastic. Thank you very much..

You bet..

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

Good afternoon. Thanks for taking my two questions. One is just on the vascular business. I just wonder whether you could give us an update on how you're thinking about that business. Things looked pretty bleak at the start of the year, although you put some measures in place.

But then we've subsequently seen the rate proposals for the rate under your new structure and they touched off a little bit better than we might have expected. So, some commentary around how that restructuring is progressing and how you see the outlook there will be helpful. And then just pick up on a comment in the release.

I wondered if you can give us a more detail on what you mean by consent agreement on pharma? Some color there would be useful too..

Okay, Tom, I'll take those. Thank you. So, yes, on the vascular side, I'd do it this way. From the conversion strategy going from (31:24) to the ASCs, we think we'll have about 40% of those facilities done at the end of 2017, and then we should be probably another 35% done at end of 2018. So we're kind of three-quarters of the way there.

The remaining facilities are in some states or all of these are in states we have to get approvals in, but a couple states are a little harder, a little slower than others, but let's leave it at roughly 75% of what we want to see converted should be done by end of next year. It will progress as we go through this year.

Now, let me remind you that that 60% increase that we saw in the ASC rates is draft or proposed. We hope that's going to hold. But it's not the final final, so we'll have to see where that goes. But we're continuing to work the plan as we had laid it out for you.

And then on the pharmacy side of this, on the consent side, this has really got to do with our joint venture activities. I think somebody asked me several quarters ago if we had determined exactly how we were going to distribute and move all of this product and I said at that point we had not. So, we've moved down the path.

We figured that out and as a result of some decisions we've made, there were some consent payment made. Not a real big deal but that's basically what it is. As you know, from history, we don't really get into the details of those contracts because they're with multiple folks, but that's the basic premise of what took place..

Okay.

And I know I shouldn't have a follow-up but is that a non-recurring cost or recurring cost?.

It's not going to be coming back, it's non-recurring..

Perfect. I'll leave it that..

Okay. Thanks, Tom..

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

Yeah. Thanks. Thanks for taking my question. I've just got a follow-up on Tom's answer just then on this consent agreement in pharma.

If it's related to the JV, is that also related to the increase in income from equity methods, investments this quarter? So, can we assume that it's something of the order of €7 million or €8 million of income from that? Or am I just completely off in the way that I'm thinking about that?.

No, no, go ahead, Mike..

Yeah, Ian. Just to elaborate on what Rice said, it is related to JV activity but it is – the agreements were actually between Vifor and the parent company KGaA. So, when you're looking at equity income or income from equity method investees, it is not included in that growth.

So, what I would tell you is when you're looking at the growth and I would specifically say if you look at the half year for equity method from investees, that's probably a good run rate to think of the back half of fiscal 2017. But it is not in that equity method of investee's figure..

Okay. So, what I'm really trying to get at is trying to gauge the rough size of it and the impact on the Dialysis margins in the quarter.

I mean, can I assume that it's negligible, and you're just mentioning it for completion? Or is it – are we looking €5 million, €10 million there?.

Ian, just put it this way, it wasn't a core buster or maker, if you will. It's not huge, if that helps. I'm not going to tie you down to dollar amounts but it's not a big thing..

Okay. Fine. And then my other question, if that's okay, is the bad debt expense in Care Coordination. Again, I'm assuming that's a lot smaller than it was last quarter. Should we expect further bad debt expenses in the second half of this year or have you fixed that debt issue? I didn't notice a footnote still on the release..

Yes. No. I commented on Q1 as well. That's really a consequence of the fact that we did some acquisitions and started moving into the emergency medicine space at Sound. And the patient profile, the census is very different in the emergency room than it is in terms of patient admits for the general population.

So, you tend to have a higher bad debt expense. So, you'll see that – until our acquisitions annualize out, you'll see an increase in Q3 and Q4 and then maybe by Q4, it will start to flatten out in terms of the year-over-year comparison..

Yeah, I mean, as you know, Ian, they're not going turn this people away, so it's a little bit – they come in, they get treated and we find out in the ER side of this, but we're not going to be able to collect it. The other issues on bad debt that we talked about some time ago (36:00), that's been cleared up..

Okay. Great. You should look and see whether you can write it off as a charitable donation in the community. Thank you..

Nice for an answer, not a question. Thank you..

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

Hi, there. Thank you for taking my questions, everyone. The first one is probably a dumb question, and apologies if you've already covered it, but the EMEA margin change year-on-year on Q2.

Could you give us a sort of sense of how much of that structurally was the FX side versus reimbursement and things like that half? The only reason I'm asking is because for the sort 300-ish that's delta, that seems quite a large amount for a margin change based on FX.

And equally, would you expect that to come back a little bit at the back end of the year? That would be helpful.

And the second one would be, just if you guys have any comments on the bipartisan letter that was sent through covering the CPA side of things? And whether you think that that's giving a direction in terms of politically where things are going on charitable premium assistance, so whether we shouldn't read too much into that?.

Sure, Patrick. Let me just answer one piece of your number one and we'll to let Mike answer the EMEA margin change in more detail. But we did see some reimbursement pressure on the service side of the business in EMEA. And that was we had some reductions in France, Poland, and UK. And you go ahead, Mike, on....

Yeah. No. Absolutely. Yeah. But the big effects, as I indicated, were the transaction losses in the investments in cardio. And I'd say I look at it as two-thirds, one-third between those two in terms of margin. And what I'd say about currency is when you're looking at EMEA, you're looking at a business that incorporates about 40 countries.

So, if you will, the complexity of that region is quite different than some of the other regions relative to the revenue and earnings..

Yeah. And Patrick, we're happy to see the bipartisan letter on charitable premium assistance. We felt good about that. We think it actually has some impact. Where we are, just quickly, we're still on a holding pattern of things as they were. We agreed with the government that they weren't going to do anything to try to upset the injunction.

They've said that they want to do some rulemaking in the fall and so we are meeting with folks, talking with people, offering our thoughts on how this goes forward, et cetera. So, we're working DC monthly, weekly, and we're still just carrying forward. I'd say there's no big change right now but rest assured, we're working it, going through it.

But we haven't seen any real change in direction one way or the other at this point..

Okay. Great to hear. Thanks for the answers, guys..

Sure..

Next question comes from the line of Lisa Clive of Bernstein. Please go ahead..

Hi. Good afternoon. First question on your products growth in the U.S., so you did mention through deferral of machine sales. I just want to check on that. Baxter had some pretty good growth in the quarter. Do you think you potentially lost any market share on the machine side of the business? I know you guys have like 90-plus-percent share.

So, I'm just wondering if Baxter is maybe trying to make a bit of a push into that market. Second question, you mentioned in the prepared statements this morning, acquisition activity, I believe it was in China or was that Asia-Pacific more broadly. If you could just give us an update on what your thoughts are.

And I know China is potentially a very interesting market but reimbursement is not quite there yet, so any update on that would be great. And then lastly, on the California bill that's sort of still hanging out there.

If it does pass, and you do have much more strenuous staff ratios which I know you deal with in several other states so this is nothing new.

But what in particular could you do to mitigate? Is there a straightforward way of shifting more patients to home dialysis? Would you keep centers open longer? Just trying to understand what are the sort of ways that you can mitigate something that could potentially increase your cost structure a bit in that state..

Sure. Lisa, so a couple of things. On the product side, it's not machines with Baxter. I can tell you exactly they took some dialyzer accounts. We haven't really seen anybody take machine share from us. And so, there are some dialyzer accounts out there that we swap from time to time and they took one back, but that's what it was and that one.

Let me answer number three, because that's – we're all perplexed. We didn't make any acquisitions in Asia-Pacific beyond the Cura deal which was April last year....

Okay..

...unless it's just been some clinics or things like that, very small. So, maybe we misspoke or whatever but it's just been small stuff that wouldn't hit the radar screen. The California bill, so it is in committee at this point in time.

Obviously, if it were to go through, the biggest issue that we see, because it has been redrafted and they took out some of the penalties and things that were in there that I complained bitterly about in the fourth quarter. What's still in there is they're asking for a 45-minute break for the staff after a dialysis treatment.

And the issue for us is that, that's going to impede care mainly because our shift structure of a Monday, Wednesday, Friday, let's say, Tuesday, Thursday, Saturday, two shifts a day, if we have to implement that 45-minute break, we're going to end up having to stop those shifts and we can't get them back.

So, it really is going to be a negative impact on capacity in what we do. So, we are talking to lots of folks about that and just making sure they understand the ins and outs of this proposal that sits in committee today.

Now, in the big scheme of things, what could you do? Sure, you could look at more patients moving at home and how you would do that? You would have to look at do you have marginal clinics, are you going to keep them, what's going to happen. So, we're looking at both. We're a lot more focused on trying to educate legislators.

We're getting good support from patients, we're getting support from some of our staff and physicians that guys, we can't just go in and start cutting off shifts and expect it's going to get better, in fact, it's going to get worse. So, stay tuned on that, Lisa. We're going to see where it goes.

But we're working that from a fact base and a data base, if you will..

Thanks so much..

You bet..

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

Yes, hi and thanks for taking my call, my questions. Firstly, on Care Coordination, when do you think you'll have a firmer grip on the doubtful debts? I think a discussion at CMD just recently indicated that the worst was behind us. Is that still the correct assumption? And question number two is on the 2017 net income growth guidance.

Given the change in FX and also the transactional margin exposure, what does your constant currency growth mean for reported growth in 2017? Thank you..

So, Michael, this will be strange. I'm going to take the first one because Mike has covered this a number of times. So, the doubtful debts we're talking about in Care Coordination, this is some acquisitions that were made in the Sound book of business in emergency medicine.

And so, some of them were done late last year and some of them were done early this year. So we've got to cycle through that to see where we get to a natural level. But the rest of the bad debt in that book of business is stable and we're kind of through that.

So, we're going to need a couple more quarters, I think, to average that out, if you will, or see where it's going to go. Mike, I'll turn over the net income guidance to you..

Yeah, Michael, I have to admit, I'm not quite sure I followed your question..

Yeah, could you re-ask that please, number two?.

Yeah. I was just curious, your net income gross guidance of let's call it 8% for the year.

What does it mean for reported growth? Meaning not in constant currency but on a reported basis?.

I thought you said quarter growth – okay, sorry, we misheard you. Well, we specifically didn't guide to that, so I'm not sure I'd want to guide to it now, particularly that currency is so volatile as we've just discussed in Q2.

But why don't we keep going and we'll come back and we'll take a closer look and we'll come back with something or come back with a demurrer..

We won't forget you, let us look at and see if we can come up with something for you. We're punching a calculator at the moment. Let's go to the next questions and we'll come back to Mike..

Sure..

So, we can take the next question, please..

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

Hi. Good afternoon, and thank you for taking my question. I essentially have one left. On the costing, the dialysis in North America, the cost per treatment, the inflation was still below around 1%.

So, my question is were there things that sort of offset the wage inflation? And should we expect the wage inflation to – the negative impact to annualize in the third quarter of 2017?.

Yes, Ines. It's Rice. So, we think the wage inflation is fairly stable. Unfortunately, we don't think it's going to wane, but where we're getting traction, and we talked about this a little bit last quarter, is the things that we're trying to countermeasure that with.

So, first thing is we've actually purchased fairly rigorous scheduling software and we're using it in the clinics and it's really helping us to be a lot more efficient in how we schedule things. We're learning that we spent too much time doing some jobs, if you will, or activities we shouldn't have.

And so, we're able to do this in a more effective or efficient way, if you will. That was one. Secondly, we've gotten down, we've cut our temp labor because that's always inefficient and expensive. So that has helped us.

And thirdly, we've realized that where we are hiring, if we can hire experienced staff versus bringing new staff in that requires more training and that we spend a lot more time with training and have to refresh, it does make a difference.

So, you may pay a little more for an experienced person coming in but then you don't spend nearly the amount of money on training. So, those are some of the things that we are working on.

It's going to continue to be work in the coming quarters but we hope that we can keep making enough progress that we can have some impact or some leverage against the inflation that's out there..

Thank you very much.

So, just to confirm, you don't think the negative impact you've been seeing from this wage inflation will decrease in the second half because you started seeing it last year?.

Yes. I think it's going to be there, particularly as I am saying is we're hiring more experienced people, we're going to have to work hard to avoid that inflation creeping up. But I don't think we're going to see it really tail off in a big way in the back half of this year..

Very clear. Thank you very much..

Michael, coming back to you, and I'll give you an indication, I guess, I wouldn't call it a guidance. But as we look at an indication for current currency earnings growth and, specifically, if I look at the rates that were prevailing at the end of the second quarter, I would say current currency probably would be in the 8% to 10% range..

That's helpful..

So, the next question comes from the line of Ed Ridley of Redburn. Please go ahead..

Hi. Good afternoon. Firstly, on the U.S., Rice, you kindly updated us both at the Capital Markets Day and earlier results this year on how many of the private counterparts you renegotiated with. Is it still three of the majors? Or have you concluded any further agreements? That would be my first question.

Just a follow-up on the European reimbursement, just so my understanding is clear. Mike, it still seems that you're saying that basically the bulk of the margin effect was transactional effects in Xenios.

Is that correct?.

Yes. Maybe if I take the second question first, Ed. Yes, the way I described the margin effect, I said it's essentially transaction losses and the investment we're making in Xenios. And beyond that, the margins were flat. As always, in every region, we've got pluses and minuses relative to the margin.

So, in effect, when you talk about that reimbursement pressure that Rice mentioned, we just mitigated that by managing the rest of the P&L in Europe..

On the payer side, as I said at the Capital Markets Day, Ed, so the three big ones are done. So, we've got some smaller ones that we'll probably end up getting done over the course of the back half of the year. Generally most of them get done fourth quarter, but some will be a little bit earlier than that.

But the big ones are done, as I'd indicated in the Capital Markets Day..

And to be – if you want to answer this, but in terms of the second quarter, did we see the full quarterly impact from those three or not?.

I don't think I'm going to answer that one for you. It gets a little ticklish for me if we do. So, let's just leave it at that..

Fair enough. Thanks..

You're welcome..

The next question comes from the line of Gunnar Romer of Deutsche Bank. Please go ahead..

Gunnar Romer, Deutsche Bank. Thanks for taking my questions. The first one on Care Coordination international, if you can just briefly update us on the integration of Cura? And also I think you are now recognizing some smaller activities in other countries.

Just out of curiosity what that is and whether you're pushing those for more growth going forward. And then second question would be on the pharmacy business. Maybe you can just update us on where you stand here given the pressures you're seeing, how you're working through that, and what we should expect for the second half..

Okay. So, Gunnar, in the Care Coordination international, the Cura integration is working well. We're pretty much on track with where we thought we would be.

I don't really know how to give you anything closer, maybe a better way to say this is we've got an integration think team of Cura management and our management in Australia, and they're working and meeting monthly, all the blocking and tackling you do for an integration. And at this point, we're hearing all of that is going smoothly. So, no issues.

Now, the other pieces of Care Coordination and I'm going to look at Mike, but I think I got this right. We have a little bit in Taiwan, it's a vascular access business and then we've got some in a couple of the other countries but it's really no more than like three countries they were in. So, it's not a real big contributor here..

Yes. Three or four countries, but consistent with what I've said about our activities in Asia, we're not going to go to the country level detail because we, frankly, don't want to signal to other folks interested in where we to go next where we already are.

But it's a number of countries in Asia where we've had some legacy Care Coordination activities..

And then on the pharmacy side, I'd say there's two things we continue to push back on what we call these direct and indirect fees that we're getting from the pharmacy benefit managers. And that's really kind of a door-to-door fight, but that has had some impact. I think as we've mentioned that previously.

And I think everybody, if you've watched, you've seen that one of our branded drugs, sevelamer, there's a generic coming out and that's going to have impact on us as well, but those are mainly the things that we're looking at..

Okay. Thanks..

Sure..

The next question comes from the line of Oliver Metzger, Commerzbank. Please go ahead..

Yes. Hi. Thanks a lot for taking my questions. The first one is on the product business. You gave already some explanation so it's definitely a nice acceleration of first half to the previous year.

So, would you describe a good performance rather as medical care specific, or do you see, in general, more accelerating market environment? And to my second question, very simple definition, so the European non-dialysis product are mainly Xenios, is this correct?.

Yeah, Oliver. So, the non-healthcare products, that is XENIOS, that's correct. And I think we've talked about this previously. That's membrane oxygenation. Predominantly, we see that in the cardiac space as well as it's becoming more prevalent in chronic obstructive pulmonary disorder or COPD. But that's what that is.

If I understand your question correctly, your first question, what I would say is acceleration that we're seeing in the growth, I think it's more – it's good products but we are seeing markets pick up, meaning that tenders that we won, they're now calling for products to be shipped and we're just getting into all of the spaces that we want to be in, if you will, selling our products.

So, I don't think it's any one thing in particular, but I do think we're seeing some of the problem spots from tenders in EMEA and things like that. Russia wasn't tender-related but they just didn't buy much in the first quarter. We're seeing those things pick up.

So, I would say it's a combination of what we're doing and what the markets are demanding..

Okay. Great. Thank you..

Sure..

So, thank you, everyone, for taking part in the call and for speaking with us. And we thank you for the discipline with the two questions. That was good. And we'll say goodbye..

All right, thank you. Thank you very much..

Take care. Bye-bye..

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