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

Thomas M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom) Lisa Clive - Sanford C. Bernstein Ltd. Hassan Al-Wakeel - Barclays Capital Securities Ltd..

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 Fourth Quarter and Full Year 2017. 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 fiscal year 2017. As always, I'm forced to 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 and last night.

For further details concerning risks and uncertainties, please refer to these documents, as well as to our SEC filings. This call is limited to 60 minutes. It turned out to be a good approach in our recent calls to limit the number of questions to two.

I would like to thank you for the cooperation in the previous calls and it will be great if we could continue with this approach also this time. With us today is Rice Powell, our CEO and Chairman of the Management Board. Rice will give you a business update and go through some of the highlights of the year.

Also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and also explain the outlook in more detail. I will now hand over to Rice. The floor is yours..

Thank you, Dominik. Good morning, good afternoon, everyone, depending on where you are and what time zone you are in. Before I begin my prepared remarks on slide 4, I would like to first (01:58) employees for a great performance in 2017.

It was a difficult year, as you all know, number of hurricanes, natural disasters, earthquakes that we worked our way through. And I do appreciate all the effort that our employees put into taking care of patients and delivering good care, as well as selling products and coordinating care around the world for our patients.

My remarks will be brief today. You'll probably understand soon enough that I have a cold. I apologize in advance. I'll be blowing my nose and sneezing. I feel bad about that, but I can't help it. But also, as we've been out now with our information since late last night, there is clearly some questions people have on our guidance for 2018.

And Mike is going to make sure that he walks you through that in a way that we can, hopefully, clear up some confusion that we've been hearing about over the course of the last couple hours today. Now, looking at slide 4, my headline is the FMC growth story continues. We've had good underlying patient growth.

We are now over 320,000 patients that we're treating in our own centers. We've performed 48 million treatments, and that was done by 114,000 employees supporting our patients in more than 3,750 clinics. So the growth story does continue, as I said earlier.

We feel that we've delivered on the targets that we had given you for the year with our 9% constant currency revenue growth, and then the net income growth of 7% on an adjusted basis, we believe we've done exactly what we told you we were going to do.

If you would join me on slide 5 and we take a look at our quality outcomes, again, I think our headline there is that we continue to operate at a very high level and we are bringing good clinical outcomes to our patients.

Looking at the key metrics that I focus on, our dose of dialysis, you can see that we're in a very high performing area with stability from one quarter year-over-year to the next.

Our hemoglobins, at 10 to 12 grams per deciliter, are in a very tight range and we feel good using the current products that we have, that we're using for our drug dosing and we think this will continue in a tight band as we go through into the new year.

And then lastly, I would comment on our hospital day, as you see, a very consistent performance, a little improvement in EMEA, which is always a good thing, but we feel good about what we're trying to do to affect change in driving down hospital days saving payers and health systems the expense of more than 10 days on average in the U.S., for instance, and the other regions as we've laid them out for you.

If you join me on slide 6, and I'll talk about some of the highlights that we've seen. We continue to operate at the highest level with our quality, as I said earlier. We delivered on our targets, as we promised you that we would have.

Now, we have some special items that impacted 2017, but I think if we put them in perspective, it's not as onerous as it may sound. The VA Agreement we told you about in the first quarter, how we were going to treat that over the course of 2017, and I think we've been very clear about that.

We talked with you in Q3 about the natural disasters and the fact that we would be handling them in a certain way, as a result of the expense that we have had in trying to take care of our patients and our employees during those difficult times.

We talked off and on about tax reform throughout the year, not knowing if we would get it done and, to our surprise, it did get done.

And obviously, you saw the ad hoc release that we put out at the very end of the year talking about the non-cash contribution that we would see in 2017, and we'll talk more about the actual P&L impact that we'll see of that later in 2018 and beyond. The one surprise that has come to you has been where we are with this FCPA charge.

And what I'd like to say is simply that we've updated you throughout the past years. If you recall, we first highlighted in our SEC filings that we were notifying the U.S. government of some issues that we were working on and this goes back to 2012. So we've kept you updated through our filings on that. Our recent discussions with the U.S.

government have become more detailed and resolution focused. Therefore, we thought it was the appropriate time for us to put a charge together and this charge encompasses legal costs, potential fine or disgorgement as we continue to discuss things with the U.S. government, and then the potential impairment of certain assets, should it come to that.

I know you'll probably have questions on this. There's not a lot more that I can say with you, but I want to just to make sure we gave you as much color as we could on this new impact that you had not heard about prior to last night.

We also told you back during our Capital Markets Day that we were going to be serious about looking at optimizing our portfolio and, obviously, we've done that. Just to remind you, probably the biggest piece of this optimization is our acquisition of NxStage. We continue to be in the Second Request with the Federal Trade Commission.

We're answering those questions and we're moving down the process, and we still believe that we should have this closed in the back half of 2018. And obviously, we made the acquisition of Cura, which gave us now a foothold in the international market for Care Coordination. And then lastly, we had the divestment of Shiel in the very last days of 2017.

We'll also talk today about the 21st consecutive dividend that we are proposing in the AGM. I have a slide on that, so I'll come back to that in a moment with a graphic for you to take a look at. I only have one slide today relative to full year 2017.

We believe the full year was solid performance, as I said earlier, 9% constant currency revenue, 7% net income on the guidance basis. This leads to earnings per share of €3.93. I'm pleased with the performance of our core business and Dialysis services and products.

Those of you that attended our Capital Markets Day commented back in June that we seemed extremely bullish on Care Coordination in those businesses in the back half of the year, and that bullishness proved to come true.

So they had a great performance in Care Coordination, top line growth of 33% year-on-year in constant currency, and it now sits at roughly 17%, Care Coordination at 17% of our total book of revenue.

We'll give you further color on where we believe revenue in 2018 for Care Coordination will be, as well as operating margins, I'll let Mike comment on that later in his presentation. Now, if we move to Q4, next couple of slides, I would just simply say here that, we think the underlying business does look good.

We, obviously, had high comparables from Q4 in 2016. It was a strong year. We've talked all year long about headwinds from foreign exchange, and that has proven to be the case in the fourth quarter as well.

We've talked about Care Coordination and the higher revenue from the BPCI program that we've seen and, yes, there was some catch-up from other quarters there. We feel very comfortable with what we're seeing in our ESCOs and the routineness of how we are recognizing revenue there as well.

And we've talked a lot of over the course of the year about the negative headwind we have with Vascular Access as a result of the cut in the Site 11 reimbursement that we took back during 2017, and it certainly impacted for the quarter, for the fourth quarter.

Now, if we look at our organic growth across all the regions in the quarter, you can see that everyone did contribute to this solid performance, 8% growth at constant currency, and then you can see the relative contributions. I don't think I'll go through each of these. They're all on the slide for you.

I think my last comment on this slide would simply be the regional splits, if you will, have been consistent in the fourth quarter with what we've seen in prior quarters in 2017.

Turning to slide 10, looking at our Health Care Services, we delivered strong 8% constant currency growth there in our service business, led by North America at 8% constant currency.

I'll comment that our revenue per treatment in the fourth quarter was $352, down about 1% compared to the year-over-year quarter, within flat to sequential quarter to Q3 of 2017. We feel good about the growth that we've seen in EMEA, driven predominantly by patient growth and their performance, and Asia-Pacific had good organic growth of 5%.

Also the Cura acquisition, which now gives us Care Coordination revenue for the first time that's large enough to really recognize as a result of this acquisition, performed well for us as in the fourth quarter and you can see there at €57 million. And last but not least, the organic growth that was delivered by Latin America was very strong at 19%.

I think maybe one of the best stories that we have coming out of fourth quarter 2017 is our products business, so let's take a minute and go through that. On our whole book of business, Health Care Products, you see that we had 8% constant currency growth for the entire book.

Then stripping out and looking just at Dialysis Products growth, we were at above-market rates of 7% constant currency. North America had a very, very strong performance in the fourth quarter at 9% constant currency, remembering we were at 6% in Q3 and we were basically flat, almost at 0% in Q2.

So we have seen a tremendous progression as we've moved through the quarters of 2017. Our largest product business, which is Europe, Middle East, and Africa, delivered 5% growth, predominantly sales of products for acute care, as well as PD in our machines in hemodialysis.

And Asia-Pacific was at 7% constant currency growth, with really an appropriate mix of products from dialyzers to hemo, other hemo ancillaries, and PD products. And Latin America performed well, again, at a constant currency basis of 13% in the third quarter up to 15% in the fourth quarter. My last slide is slide 12.

This will be the 21st consecutive dividend that we are proposing in our AGM of May 17. You can see that we are stepping up roughly about 10%. We're proposing €1.06. We were at €0.96 last year. And again, we believe that this proportional growth and step-up in the dividend fits with the way the year has unfolded for us in 2017.

And the company, as you well know, is 21 years old and this is our 21st consecutive dividend, and we're quite pleased with that. Those are the conclusion of my remarks. I'm delighted I didn't have to sneeze in the midst of that. I will now turn it over to Mike. Mike, please..

Thanks, Rice, and hello everybody. So I'm starting on chart 14, which is for the full fiscal year revenue and net income reconciliation. Rice has already outlined, our earnings were impacted by a few special items.

In addition to what we discussed in the last quarters about the agreement with the VA and the natural disaster costs, which affected the third and the fourth quarter, we had additional fourth quarter effects, as Rice described, from a €200 million charge related to the FCPA and we benefited from the adjustment to deferred taxes associated with the U.S.

tax reform, and those are laid out on the chart to prepare for the full P&L discussion. I would just say while we're on this chart, you may want to keep this in mind when I talk about the outlook a little bit later in my presentation.

We guided to net income on a constant currency basis, which is the €1.228 billion you see in dark blue in the middle of the chart on the bottom half of the graph.

The as reported figure is essentially the €1.228 billion less the currency effect, which gets you to a €1.280 billion and so, as a consequence, the adjustments that I just walked you through, VA, natural disasters, FCPA and tax reform, increased the base period earnings by €76 million.

So turning to chart 15 and we'll just start walking through the year. I'll focus on the right hand side of the chart, which is the adjusted figures. Revenues, as Rice indicated, 9% at constant currency, in line with our guidance.

Operating income increased €84 million to €2.493 billion, 5% at constant currency and represented a 40 basis point decline in margin from 14.5% to 14.1%. Net interest expense decreased by €12 million, 2% in constant currency.

This was driven by the repayment of senior notes at high interest rates in the back half of 2016 and in the third quarter of this year. Tax line excluding the special items, the tax rate increased by 50 basis points from 30.5% to 31%.

Our non-controlling interest was €272 million, down in comparison to last year by €4 million, an increase of about 1% in constant currency. Net income attributable to shareholders was up €60 million, an increase of 7% at constant currency, which was in our guidance range.

And the only reference I'll make to the left hand side of the chart is net income as reported was up 14% on a constant currency basis and reported earnings per share increased by 12%, or €0.43.

Turning to chart 16, and we've just provided for your convenience the same reconciliation for the fourth quarter, the high level reference to the items that I already indicated in the full year chart.

Continuing on chart 17 and looking at the fourth quarter, revenues increased by €13 million, or 8% constant currency; operating income decreased by €4 million, or if you look at it on a constant currency basis, it was an increase of 6%. This represents a 10 basis point decline in the margins from 16.5% to 16.4%.

As we always do, we'll come back later and talk about the margin performance in the fourth quarter shortly. Net interest expense decreased by €10 million. This was influenced by favorable foreign currency translation effects, coupled with the replacement of higher interest-bearing securities, as I mentioned, for the full year.

Tax rate in the fourth quarter was 32.3% compared to 30.5%. It's an increase of 180 basis points. It was driven by prior year and audit impacts, as well as the effect of our non-controlling interest. Non-controlling interest was €75 million.

On a constant currency basis, it was stable year-over-year, and net income for the fourth quarter was virtually unchanged to €362 million, but represents a 6% increase on a constant currency basis.

Once again, on the left hand side of the chart, reported net income was up €31 million, up 16% on a constant currency basis, and the reported earnings per share up 8%, or €0.09, for the quarter.

So walking through the regional margin profiles, I just commented a few minutes ago that when you looked at the quarter excluding natural disasters and the other special effects, margins declined 10 basis points to 16.4%. In the following charts, we look at the margin developments on a reported basis for the fourth quarter.

So we're looking at a margin in Q4 of 2018 of 11.7% versus 16.5% for last year. That's a 480 basis point decline in the margins. But as you know, most of that was a consequence of the FCPA charge, which hit our operating expense. So that was recorded in corporate and had a 440 basis point impact on the margin.

When you look at the contribution going around the world associated with the fourth quarter margin effect, what you see is a decrease in the margins from Asia-Pacific of 40 basis points, 30 basis points for EMEA, 10 basis points for Latin America, partly offset by an increase in the margins from North America of 40 basis points, as well as a favorable margin mix effect and an impact from foreign currency translation of a negative 20 basis points.

So, now going through the regions. In North America, operating income was up €20 million to €608 million for the quarter and reflects an 11% increase on a constant currency basis. In total, margins increased from 18.4% to 19.2%. Again, excluding natural disaster costs and VA, it increased from 18.4% to 19.5%.

Our Dialysis business margins decreased by 180 basis points from 23% to 21.2%. This was due to higher bad debt expense, higher personnel expenses, the impact of lower revenues from commercial payers, and higher costs from rent and insurance.

This was partially offset by gains from sale leaseback activities and a favorable effect on currency translation. In Care Coordination, as Rice indicated, year-over-year margins increased quite a bit is the best way to say that.

This was driven by the impact from higher revenues, including the acceleration of earnings recognized from the BPCI initiative, combined with increases in volume from our hospital-related physician services, lower bad debt expense in fiscal 2017, the gain from the Shiel transaction and lower costs in our cardiovascular/endovascular business.

This was partly offset by the impacts from revenues in our vascular service business, which we've reported on as a consequence of the reimbursement rate cut in fiscal 2017 and higher costs in our pharmacy services business. I'll come back and talk a little bit more about Care Coordination when I look at the outlook for 2018.

So turning to the next chart and looking at EMEA, operating income was down €10 million, or 8%. The margins decreased from 19% to 16.7%.

And again, consistent with what I've reported over the course of the year, this was driven by investments in our cardiopulmonary products business, the Xenios business we acquired, as well as foreign currency transaction losses.

In addition, we did have some costs related to the change in the management board announced for the region in the fourth quarter and higher overhead costs associated with medical device regulations and new initiatives. We did have one less Dialysis day in the quarter, which also partly accounted for this decline.

In Asia-Pacific, operating income was down €11 million, or 8% on a constant currency basis.

The operating margins decreased from 21.8% to 18.2%, primarily due to the costs related to building up our dialysis services and PD business in China, some unfavorable foreign currency transaction effects, a little bit of a mix effect with regard to newer acquisitions that are at lower margins than the overall margins in the region, and this was partly offset by favorable foreign currency translation effects in the quarter.

As we already outlined in the second quarter, with the advent of Cura as a Care Coordination activity, we took the opportunity to include some legacy Care Coordination activities in the Asian countries starting in the second quarter and we'll continue to include them in this category going forward.

With that said, our Care Coordination generated €57 million in revenues and €11 million in earnings in the quarter with a margin of 19.8%. This was driven by strong margins in the Cura business. Latin America operating income decreased by €3 million, with margins decreasing from 9.7% to 7.4%.

This was driven, again, as we saw in Q2 and Q3, unfavorable foreign currency transaction effects, some unfavorability in our manufacturing costs, largely driven by inflationary costs and foreign exchange effects, partly offset by increased reimbursement rates that mitigate some of the inflationary cost increases.

Turning to chart 20 and touching on our cash flows.

Looking at the right hand side of the chart and talking about the fiscal year operating cash flows, this was positively influenced by the VA, as we've discussed over the course of the year, and also the impact in 2016 of a discretionary contribution we made to our pension plan in the United States of €90 million, as well as the timing of other working capital items and partly offset by higher income tax payments.

This resulted in cash from operations of 12.3% for fiscal 2017 compared to 11.7% in 2016. In the fourth quarter, the left hand side of the chart, operating cash flows were impacted by an effect associated with DSOs. Our DSOs between Q3 and Q4 in fiscal 2017 remained unchanged. We had an improvement of two days in fiscal 2016.

So consequently that's a negative effect when you look at the impact of operating cash flows quarter-over-quarter, year-over-year. Looking at CapEx, it decreased by approximately €74 million and remains in the range of 5% of revenues. This resulted in strong free cash flows of just under €1.4 billion for the year.

Our net debt has decreased from €7.4 billion at the end of 2016 to €6.5 billion at the end of 2017. Leverage is at 2.1 times EBITDA, a decrease from 2.3 at the end of 2016. Turning to chart 21 and just commenting on our Global Efficiency Program, we announced the Phase II of our Global Efficiency Program at the Capital Markets Day last year.

The objectives, obviously, are to identify and realize further efficiency potential and enhance our overall competitiveness in 2018. The program has been designed to achieve sustained cost improvements in the range of €100 million to €200 million by 2020.

As I indicated in our CMD in June, the percentage figures in the first three columns are exit rates for sustained savings for each year. We are on track to achieve sustained savings of 10% for 2018.

However, when you consider the investments we're making in 2018 associated with the success of the program, I expect the net contribution to the earnings in 2018 will be a breakeven as it relates to GEP II.

Also, as a reminder in June, you should consider the percentages in 2018, 2019, and 2020 to relate to the €100 million target, with the possibility of an upside into the range possibly happening by 2020. But I also had indicated that this could be something we could see once we move in the period beyond 2020 to get to the €200 million.

Turning to chart 22 and looking at ROIC, you're seeing we continue to develop our return on invested capital along the lines that we committed to in the 2014 Capital Markets Day, with a further improvement in 2017 to 8.6%, consistent with our overall goal of an improvement of roughly 100 basis points off the 2013 base, putting us in the range of 8.5% to 9% in 2020.

So turning to my last slide and talking a little bit about the outlook for 2018. We're guiding to an increase in revenues of around 8% on a constant currency basis based on an adjusted 2017 revenue figure of €17.298 billion.

The only adjustment we're reflecting in that number is the fact that the new accounting standard with regard to revenue recognition, IRFS 15, has gone into effect January 1, 2018, so we thought it would be appropriate to show the adjusted base in terms of our top line.

In a word, IFRS 15 only impacts us with regard to the classification of bad debts, so there's a reduction in revenues and there's a corresponding reduction in bad debt expense in the P&L.

On the bottom line, we're guiding to an increase in net income of 13% to 15% on a constant currency basis, as we all know today, based on our reported 2017 net income figure of €1.280 billion. Honestly, we thought this would be the simplest and, hopefully, the best approach for 2018 as we were starting the year's guidance.

The targets include the recurring impacts from the U.S. tax reform, which we've ranged at €140 million to €160 million. The targets do not assume the consolidation of next stage. As Rice explained earlier, we're still in the process of obtaining regulatory approval. We're confirming our mid-term targets for 2020, excluding the recurring impact from U.S.

tax reform in the years 2018 to 2020. But we have given indication to you in terms of what we think the earnings impact of the tax reform will be for those years.

So it's worth noting here, based on some of the comments that I read this morning, that for the 2018 earnings outlook, folks had some difficulty peeling back the pieces to reconcile the guidance in a way that they found satisfactory. So I'll make a few comments.

The four adjustments we made in 2017, which we used to compare our actual performance in 2017 against our guidance, represented a €76 million positive impact on 2017's earnings. This is a 6% growth at constant currency when you look at 2018. And this was not captured in the 13% to 15% guidance we gave you, because we based that off reported earnings.

So now that you have that number, if you do the math, that would essentially take your 13% to 15%, plus the 6% from the increased base, up to an earnings increase of 19% to 21%, if you were to compare 2018 against what we were guiding to in 2017. If you then take the midpoint of the U.S.

tax reform guidance we provided, which is €150 million, and back that off the 19% to 21%, that would bring you to an expected constant currency growth rate in earnings of 7% to 9%, which is consistent with our mid-term outlook and does not represent a slowdown, as some have reported this morning. So with that, I will turn the call back to Dominik..

So, thank you, Mike, and thank you, Rice, for the presentation. I think a lot of the topics which were discussed earlier today are more clear now. Nevertheless, happy to open the Q&A for more insights now..

Thank you. The first question comes from the line of Thomas Jones of Berenberg. Please go ahead..

Good afternoon, Rice and Mike. Thanks for taking my questions. The first one I wanted to ask about was the other issue, which seemed to cause some concern this morning and that was around the organic growth rate in the U.S. or the North American Dialysis Care business.

It was relatively soft 1.4% in Q4 and has been sort of gradually trending down all year. Given the sort of commercial price renegotiations you made in the last year, one would think the pricing should be fairly visible.

So I would just kind of be interested to know what's behind the slowdown in that part of the business and particularly what the outlook might be, whether this is just a kind of one-off reset down and we should be expecting a more normal growth rate in 2018 or there is something else we should be considering.

And then the second question, again, one for Rice I'm afraid, sorry, just on the PATIENT Act and kind of what you're hearing in Washington and where you sit on that at the moment and what you think could potentially happen and when in 2018 would be helpful..

Thanks, Tom. Mike, you want to take number one and I'll come back with Tom on PATIENT Act update..

Sure.

Tom, I think what you're referring to is more the treatment growth, correct?.

No. It's organic revenue growth in the North American Dialysis Care business..

Right, which does show some pricing influence over the course of the year and a little bit of softness in treatment growth, if you look at the quarterly figures we've been reporting out against. When we look at 2018, I think that we're expecting to see some improvements in the organic growth in the U.S.

So the way I would answer your question is, when we think in terms of actual growth in 2018, the provider business or the service business we think would be in the range of 9% to 11%.

But I have to caution everybody on the phone that, what's happening beginning January of 2018 is calcimimetics are coming in to a reimbursement item for the services side of the business. So this is Sensipar and Parsabiv.

So we would anticipate to see an improvement in revenues associated with the fact that those patients will be managed now out of the clinic based on the prescriptions that the physicians write associated with the therapy that they want to provide. So that will give a bit of an uplift in fiscal 2018.

The underlying treatment growth, I think, we would expect to be in the 3% plus range and then, overall, I would expect revenue per treatment, excluding the Parsabiv, to be flat to slightly down..

And could I just dig a little bit more into the pricing side, we know what the Medicare rates for 2018 and it's just some weakness on the commercial side.

Is that a drop in like-for-like pricing or is this a mix effect? And if the latter, what details could you share on that for us?.

Yeah, I think this is mostly, we carefully manage through the process since 2017. As we had told folks, we had a number of contracts coming up for renewal. And we guided fairly conservatively revenue per treatment in 2017. You remember that I had said flat to maybe up 1%, and we started the year at a much higher revenue per treatment level.

So you saw over the course of 2017 a little bit of a decline in revenue per treatment. Now, when we're looking at 2018, we're seeing the carry-on effect associated with new contracts that we've put in place..

So while you are talking about flat to slightly down full year on full year, on a kind of absolute sequential basis, this should be a floor or have I misinterpreted that?.

Flat to slightly down is what I would say will happen to revenue per treatment, excluding the calcimimetics..

Sure. Is that full year 2018 versus full year 2017? But if I'm thinking full year 2018 versus the Q4 run rate, we kind of should be at a bottom now.

Is that correct?.

I think that's fair..

Yeah, I think you're right, Tom. I'd look at it that way..

Perfect. That's helpful. And then the PATIENT Act..

Yeah. So, Tom, I was in D.C. two weeks ago. We, as well as DaVita, are still working hard to try to educate people and push this forward. I think practically speaking that this is probably not a bill that gets pushed through on its own. I think it's got to get attached to something else.

So I think we've got some time here to figure out where they're going to try to attach this or what they're going to do with it, but we continue to find bipartisan support. We have more in the House today than we have in the Senate, but it doesn't mean we'll get there.

But I do think we've got to find the right vehicle to attach it to, to push it through. As I said, I don't think it goes in standalone. I think there's too much going on, they would want to attach it to something else..

Sure..

Tom, just to come to you, that 9% to 11% I gave you is worldwide services. North America would be a little bit less than that..

Sure. That's it. That's clear. Thank you very much..

Yeah..

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

Hi, there. Few questions. First, just on the run rate EBIT for Care Coordination, based on what we saw in Q4, Shiel was in there. I think my best guess is that was something in – the impact of that. I mean, EBIT level was in the 20s. The BPCI catch-up payments maybe could have been north of €10 million.

Is it roughly right to think about that in terms of the one-time items in that EBIT figure, in which case still you're at a margin of about 8%, which certainly has been a considerable improvement over last year? Second question, could you just give us an update on the California Union Ballot Initiatives? Are you going to need to spend money on that this year? Is that in your guidance? And then lastly, there's been quite a bit of activity in China in the past 12 months, including the renal hospital you purchased and then actually building a dialysis clinic in December.

And just correct me if I'm wrong, but I'm not aware that there is any increase in national reimbursement rates for dialysis.

So is this generally that you're finding you can strike deals with local governments to build out facilities in a way that could be sustainable and should we expect a lot more activity on this front in the next few years?.

Hey, Lisa. It's Rice. I'll let Mike speak to the run rate in kind of where we're targeting Care Coordination operating margins for 2018, and I'll come back and pick up the ballot initiative in California and talk a little about China.

Mike?.

Yeah, thanks. So, Lisa, there's a little bit going on in Care Coordination for fiscal 2018, so I'll answer your margin question and your EBIT question in a minute, but let me start in terms of just top line what's happening.

Because I just mentioned the calcimimetics moving into reimbursement as part of our services organization, Sensipar in 2017 and prior years was actually a prescription over-the-counter that was filled in our pharmacy. So, our pharmacy will see a reduction in revenues associated with that regulatory change.

And you'll also see, as we've been talking now for a while, we've been waiting for the introduction in the market of the generics for Renvela. So we're anticipating the pharmacies revenues will decline in fiscal 2018.

Overall worldwide, when I think about the Care Coordination revenues, I would say, I'd anticipate 2018 Care Coordination revenues globally will drop 4% to 6% on a constant currency basis. That effect will be accentuated a little bit in the U.S., because the pharmacy was a large piece of the total North American Care Coordination business.

However, despite the fact that we're seeing that adjustment, we also had Shiel in the base period for fiscal 2017. So the combined effect of the pharmacy and Shiel will result in that overall revenue decline.

When you look at the earnings, however, because of good cost management and the overall strong performance of the remaining businesses in Care Coordination, I am anticipating that the margins in 2018 will be for North America in the 7% to 9% range.

So, actually I give you a lot of credit in your model coming up with 8%, because that's the midpoint of 7% to 9%. That will be an improvement off 2017 despite the fact that we did have some one-offs in 2017..

Yeah..

You had the catch-ups of both the ESCOs and the BPCI. And in 2018 what I expect, with programs that reimburse on a retrospective basis, you always have a little bit of noise. But I think the kind of meaningful catch-ups that we've been reporting on for the last year or so won't recur.

You'll have little cleanups from now and then, but I think it's basically more earnings from those two programs as we go into 2018..

We think of them as being current, Lisa, so..

Okay. Can I just ask a follow-up question on that? Because you've had this big shift in reimbursement in vascular access, so I thought that that business was going to tick up nicely into 2018. And then also in ESCO, you massively expanded the program last year and I had assumed you weren't getting paid on those patients yet.

So I would assume that that would mean that your U.S. Care Coordination revenue would be up rather nicely on the back of those two things..

Yeah. I think that relative to the ESCOs, the thing I'm talking about with the ESCOs and the BPCI is the big catch-ups we had from the beginning of the program that got booked into fiscal 2017. The underlying organic growth of the ESCOs, we do anticipate will be up nicely.

That's why I indicated that when you take out Shiel and you consider the change in the pharmacy, the rest of what's in Care Coordination, which includes vascular and includes these NCP, is showing an improvement in revenues..

Yeah. So, Lisa, we're thinking we're going to be at about 40,000 patients in the ESCOs, just to give you a ballpark of that. But I think Mike's right. I mean there is some moving part here that we'll have to kind of sort through. We just don't have a good visibility on exactly how Parsabiv is going to play and how it's going to move.

So we're not hedging this, just we're not sure because it's early on in the process of trying to sort this out. And I don't know if Mike said it or not, but this is the first Part D. This is the first time we've seen something move out of oral into IV into the clinic.

We didn't get a lot of great guidance from CMS on this, so we're kind of feeling our way through that one..

Okay. Did you just say ESCO would get up to 40,000? I thought you were at 25,000 patients when you last gave us a number..

Yeah, we were somewhere around 26,400 I think, and I just talked to William today and we're right at about 40,000..

Oh wow. Okay. Thanks..

Yes. So on the California ballot initiatives, we do think this is real. We're going to have to get ourselves prepared to do some work here. What I would tell you is, as we've costed this out from the FMC standpoint, obviously as a industry we're looking at it and everybody is thinking about what they're going to do.

I'm not going to say it's directly in our guidance. But the way we scope it today, we think we've got enough firepower that we could deal with this. If that changes substantially, then we'll come back and let you know, but at this point we think it's a manageable situation for us on the ballot initiative. And you're spot on as far as China.

What we're seeing, particularly in the renal hospital and where we built the clinic, we are deep into the interior of China and we're finding that many of these provinces, if you will, or regions have some flexibility to do things differently than maybe what we've seen in Beijing and Shanghai and some of those areas.

So we're taking advantage of when the regional health authorities come to us and they want to see if we can work with them, if we can partner in some way, we're taking advantage of those opportunities. But it's not a huge, huge risk, if you will, at this point..

Okay. Thanks..

Sure..

Next question comes from the line of Hassan Al-Wakeel of Barclays. Please go ahead..

Thank you for taking my question. I have one. Just in terms of the product business in the U.S., you talk about higher sales of machine and PD products. Do you believe that you're gaining share in this market or do you think that the market is just stronger? Thank you..

Yeah, Hassan, it's Rice. I would tell you, I think it's general market strength. I mean, our shares in the hemo equipment side of the business are pretty consistent. In the PD side of business, and I was looking at our commentary from third quarter, we had a situation late in 2016 going early into 2017 that Baxter had some supply issues.

They couldn't get as much product out the door as they needed to. We were constrained. We couldn't help in that matter. So I think what we're seeing is now that everybody's kind of back and we've got capacity and the issues are behind each of us in terms of capacity, I think we're just seeing more people come into the program.

And I would say that we feel good about this as we survey patients, Hassan, we are still seeing younger people tell us they'd rather be at home. They'd like to be able to continue managing their lifestyle as they want to do it, not so much as it sometimes gets dictated, if you will, by three times a week in the clinic. So I think PD is growing.

I do think there's some catch-up of demand that we couldn't satisfy a year ago..

Thank you.

And so just a follow-up to that, I mean, do you think that we should continue to expect similar run rates into next year?.

I don't think PD will run as hot over the full course of this year as it did last year, because I think we've probably caught up to some of that pent-up demand. I think we're still going to see growth, but if I go back to third quarter, I think we had 20% growth in the North American book of business on PD.

I think it's similar to that in the fourth quarter, I'd have to check it. So I think it'll slow down some, but we're clearly going to continue to see growth there..

Excellent. Thank you very much..

I would just offer as a further commentary, because I've given some indications for services globally and for Care Coordination globally. So I would say that when you look at our products business globally, we'd expect growth to be around the 6% area..

Thank you..

Yeah..

There are no further questions at this time. I hand back to Dominik Heger for closing comments..

So thank you everyone for participating. I know you had a busy time in the previous weeks with other topics and, I guess, you are happy that two other companies are done now in the reporting side. So thank you for participating and hanging in with us, and looking forward to speak to you in Q1. Thank you..

Take care, folks. Thank you..

Thank you..

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