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

Tom M. Jones - Joh. Berenberg, Gossler & Co. KG (United Kingdom) Ian Douglas-Pennant - UBS Ltd. Veronika Dubajova - Goldman Sachs International Michael K. Jüngling - Morgan Stanley & Co. International Plc Lisa Clive - Sanford C. Bernstein Ltd. Ed Ridley-Day - Redburn (Europe) Ltd.

Gunnar Romer - Deutsche Bank AG Hassan Al-Wakeel - Barclays Capital Securities Ltd..

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Call on the First Quarter 2018. 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.

And I would now like to turn the conference over to Dominik Heger, Head of Investor Relations. Please go ahead, sir..

Thank you, Emma. We would like to welcome all of you to the Fresenius Medical Care earnings call for the first quarter 2018. As always, I'm happy 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.

For further details concerning risks and uncertainties, please refer to these documents, as well as to our SEC filings. Given that there are three major earnings call of German healthcare companies today, I assume it is in your interest to limit the call to 60 minutes.

It turned out to be a good approach in our recent calls to limit the number of questions to two. Given the press releases we have issued over the last two weeks, I assume that there might be more questions than usual, and therefore, it would be fair to leave your colleagues also the opportunity to ask questions.

With us today is Rice Powell, our CEO and Chairman of the Management Board. Rice will give you a business update, go through some of the highlights of the quarter and a brief wrap-up of our Care Coordination approach in order to pre-empt some of the potential questions.

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

Thank you, Dominik. Good morning, good afternoon, everyone. We're delighted that you could be with us today. Mike and I are going to move through our prepared remarks very quickly in order to try to leave ample time for your questions. I know this is probably not as simple and straightforward a quarter as some others we've had.

And we really want to make sure we give you every opportunity to get your questions answered. I'd like to begin my prepared remarks on slide 4, which is the Q1 2018 on track for another record year.

Just a couple of comments on this particular slide, I am very happy and pleased with our highest Five-Star Quality Ratings award that we just received from CMS.

This means that our Five-Star Quality Ratings for Four-Star and Five-Star clinics that combination was the highest in the industry and so I'd like to give a nice warm congratulations and thank you to our caregivers in the United States for that achievement. Looking at our growth indicators, Clinics up 4%, Patients up 4% and our Treatments up 3%.

We routinely present this to you, so I won't make any further comment on it, but just to show you we continue to see growth in those areas. And then lastly, I would just make a comment on our net income growth on track.

I know from what I've read this morning, you'll have some questions on how do you do that when you've had your revenue come down and Mike and I will attempt to take you through that. But rest assured that we are comfortable and confident that we're going to achieve our net income guidance over the course of this year.

Turning to our quality outcomes for the clinical side of the business, I would say that we continue to see stable performance at a very high level.

You can take any one of these particular key clinical indicators and you can see where we are in a very stable position, a little bit of movement up or down, but nothing that really changes where we sit in our ability to drive high performance, good clinical outcomes, no matter what the region. And I'm pleased, and I'm proud of that.

So, we continue to continue on in a very stable environment. Now, looking to our highlights for the first quarter. I would say that when you look at what is on this slide, there is truly in my mind only one surprise that we've given you and that is the Sound divestiture.

And as we sit here today, it's a week-and-a-half old, but I know it was a surprise nonetheless, and we're going to spend some time talking about that in a couple of other slides here and certainly, we'll entertain your questions that you have on that topic.

I'm pleased that we've had a very strong start in the healthcare products area, 6% constant currency growth.

I'll detail that a little bit more, we'll focus primarily on the dialysis product side of this and I'll walk you through some ins and outs there to give you a better understanding of what I think is a consistently good performance now from one quarter to the next.

We told you in February that we were going to see a decline in our Care Coordination book of business, and we told you it was going to be in the pharmacy business. And it revolved around the fact that we had a branded drug going generic, and we were going to try to understand how best to manage calcimimetics, moving from Part D to Part B.

And that is ongoing. It's not over yet, but we're going to walk you through some detail on that and try to give you a sense of comfort about how we're looking at that piece of the business. But again, it shouldn't be a surprise. Mike and I tried very hard to highlight that for you in the February full year 2017 earnings call.

The VA agreement, I'm not going to say anything, we've talked about that enough, it does have an impact obviously, but we'll get to that. And then obviously, the divesture of Sound, I'll talk more about that at a later date. So I would say that should be the wrap-up of my comments for the highlights for the first quarter.

I'd like to now spend a little bit of time on organic growth for the first quarter.

What you see is that in the international markets, every region had good growth and good contribution, Asia 14% constant currency, revenue growth organic at 7%, you see EMEA and you see Latin America as well, all of them doing very well and obviously, we're going to spend more time.

When you look at North America, we've tried to lay out our material in such a way that you can see it, but a negative 5% constant currency growth and organic growth of only 1%.

But again, just to give you a sense of how this is playing out when you think about the IFRS 15 accounting change, that's about an €88 million impact and you know that the agreement was about €100 million.

So just to give you a little bit of scale and I think Mike's going to be in a place where he'll take you through that in some more detail, should you have questions.

Now, looking at healthcare services, I don't like putting a soft start into the year as my header, but I have to call it as I see it, in particular, when it comes to what we've seen in North America, but again, I think you understand those circumstances for why we're seeing it the way we are.

So we're seeing, let's highlight Care Coordination, 14% negative constant currency growth, organic growth is down about 9% and again that sits within the pharmacy business and the impacts that I've mentioned and then we'll talk some more about in detail.

Looking at EMEA, Asia-Pacific and Latin America, again, constant currency growth looks good in healthcare services and you can see the actual organic growth, particularly in Asia and Latin America, it looks strong and then, obviously, the acquisition we made in Australia with Cura, for the international, Care Coordination is continuing to work and progress nicely.

And then, our same-market growth at 2.3% for North America, I think it's around 2.4% for EMEA and Asia-Pacific is up around 4.2%. We mentioned to you for two quarters now that we are still working through terminating acute contracts in the U.S., because the pricing didn't fit what we wanted it to fit.

I guess, you could argue maybe we shouldn't have signed them in the first place, but we did. But we've turned them and we're moving on. We've got probably another quarter or two before we see that turnaround, but it does have a significant contribution to the drag that we're seeing.

But we still will tell you that we think we'll be back in the three territory before we exit the year, hopefully halfway through the year, we'll begin to see that come back. Now looking at products. I'd like to just for the moment focus on the dialysis products side of the equation. You can see 7% constant currency growth.

I will remind you that we were at 7% constant currency growth on the total book of business in the fourth quarter as well.

Looking at North America, with this 1% constant currency growth increase, of note, the renal pharmaceutical book of business in North America was up 38% in the quarter and that's predominately on the strength of Velphoro, our phosphate binder. We're seeing great progression with that product. Our PD book of business in the U.S. is up 18%.

So we continue to see good growth. We were at 20% in the fourth quarter. So we continue to see our PD book of business in the U.S. growing significantly. Now, when we take a moment and we think about particularly hemo equipment, the overall quarter for U.S.

products or North American products in the fourth quarter was 9% constant currency and the big contributor there beyond the PD was home hemo equipment.

Not unusual, those of you that have covered us for a number of years, you clearly know that when we see huge machine sales in the third quarter and fourth quarter, as we did, it's not unusual to see that tail off in the first quarter. So I'm relaxed, it will come back. There's a little bit of noise in there because of IFRS 15, but not much.

It's really more about people aren't buying at the moment, but they'll come back around, as you know we see that sort of pattern. So I feel very good about the start into the products business.

And as you will remember, Mike had indicated to you we thought for this year, we would be at about 6% growth in products and well, we're there in the first quarter, so we feel good about that. Now I'd like to take a little bit of a detour and talk some about strategy and particularly about Sound.

In this first slide that I have here, you've seen this before. Yes, it's a capital markets slide. We've updated it a little bit. The message I'm trying to get across to you is we've made this journey and we're still on it. From a fee for service world, now we've moved in 2011 to a Bundled Payment.

Now we're in a shared savings program, which fits under value-based care and ultimately, we want to get to a capitated program and that's why we're such big supporters of the Patient Act, because it really gets us to the place that we think is a sweet spot for us and for the industry.

Now a little bit of history, 2014, we became the majority shareholder in Sound. Why? Because as we told you quite honestly and openly, we lost track of our dialysis patients many times when they're hospitalized, we didn't know which hospital they were in, we didn't know why they were there and we certainly didn't know when they were coming back.

And we felt that was a weakness for us, a blind spot, if you will, as we move down this path of value-based care, moving from volume to value.

Many of you ask, why did you have to be the majority shareholder in Sound? Couldn't you have just partnered or made a little less of an investment? We said no, because we felt like we should have control of the asset, we should be able to work, make changes, invest, whatever we wanted to do without getting too tied up with a whole bunch of partners.

Now maybe that means we don't play well with others. I don't think that's what it means, but you can infer that if you like. But sitting here today now, having been able to have this business, get a much better understanding of the in-patient experience for our dialysis patients in the hospital, I'm glad we did what we did.

We were able to turn this asset, divest it at a very nice profit and yet, we don't lose the knowledge of what we gained. What we learned with Sound and our ability to help manage more effectively and efficiently, patients moving through – dialysis patients moving through the hospital. We're not going to forget that.

And we don't really think that we would have ever been in a position to develop the clinical interventions that we've been able to develop with our healthcare plan and in our clinic, had we not had the experience and understood where we perhaps weren't communicating as well with hospitals as we should.

Now I say all of that, keeping in mind that Sound did not have contracts or control every one of the 4,600 acute care hospitals in the U.S.

They had a nice book of business, but we were having to take this knowledge and use it with other hospitalist groups or other health systems that had their own hospitalist program, but we believed and we feel that we came to a point that we had gotten the value that we need, the understanding that we needed.

We firmly believe that the period of time where we have been the largest value-based care provider in U.S., opened doors and gave us a chance to have some dialog in Washington that we might not have had in other circumstances. So we feel good about this experience and where we're going. But please hear me. We are not changing our strategy.

We are continuing to move down the path from volume to value. We see the culmination of that coming over the next couple of years and I'll speak to that more in a moment. But we are continuing down the path that we said, albeit a little differently without having Sound.

Now if you move to the next slide, there are eight businesses on this slide that make up Care Coordination. And now we've gone to seven. Sound will be leaving us, okay.

But the thing I just want to continue to highlight is that through these businesses, we're in a position to try to improve clinical outcomes while driving down or bending the cost curve. And Sound helped us to do that. They helped us get to a component of that which was hospitalization for dialysis patients that was essential and important for us.

Knowing full well that the majority of Sound's business was acute hospital episodes of a general nature and not just focused on dialysis, but we got value out of that relationship. They've helped us with that one component, but now it is time for us to move on. We have to look at the horizon. If we just stare at our feet, we're going to trip and fall.

And what I mean by that is, we know the Patients Act will become a reality. We will move our health plan into capitated arrangements at some point, don't know exactly when, but that's going to come. We have the Cures Act and Medicare Advantage coming in this January of 2021.

Those are all sitting on horizon and we need to be operating ourselves looking at that horizon, so we are in the very best place to act when that time comes. So what I'm saying to you is, we are not running away from Care Coordination. We're not taking a left turn on Care Coordination.

In fact, we're running harder, but more focused on that path from volume to value.

And we think when we look out at the horizon, at least, through 2021 and Medicare Advantage coming into our world at a much bigger way and then where we go beyond that, we think our focus on trying to continue to find the right clinical interventions for dialysis patients, being able to bend that cost curve is what's going to be key and critical to our success.

And we think it should have every ounce of focus that we can put on it, not to say Sound was a distraction, it's not, but it was a focus requirement that we needed for a while, but I don't think it is critical to the mission as critical today as where we're going. Hopefully, that helps. But let me say it again, our strategy hasn't changed.

Have we refined it? Sure. Tell me who doesn't refine their strategy. If they're going to be successful, they have to adjust and adapt. And that's all we've done here. In conclusion, a lot of stuff went on in Q1. A lot of big movements, don't let that noise distract you from the underlying performance that we have given you in Q1.

We are working our plan, we are confident that we're going to deliver the net income growth. We're going to continue with the core Care Coordination strategy. And yes, we have two things we have to do and that all revolves around closing NxStage and closing Sound, and we'll get those things done.

And that's the conclusion of my remarks and I'll turn it over to Mike..

Thanks, Rice. Good morning, good afternoon, everyone. So, I'll continue with chart 14. And rather than a P&L, I'm just giving you a series of reconciliation charts to give you a sense as to how the quarter progressed. So, on chart 14, I'll go through revenues. And you see the 2017 and 2018 reported revenues with the major elements in between.

Rice already mentioned that we have the implementation of IFRS 15 this year. So, what we've done is, we've reflected the €139 million to adjust the base period on a consistent basis with IFRS 15. In addition, we've adjusted for the VA agreement, which you are all very familiar with. This gets you to a base of €4.309 billion.

And then you can easily see the 4% business growth that we had or €185 million on a constant currency basis. That was made up of about 3% acquisition growth, 2% same-market growth and a little bit of leakage of around 1% for sold or closed clinics around the world.

Last, you can see the currency headwinds that we are seeing in 2018 with the €518 million on the top line, to get down to the reported revenues of €3.976 billion. So turning to chart 15 and looking at net income. Here we're showing you two views.

View at the top of the chart is the published approach to guidance that we gave you in February, which was net income would grow 13% to 15% on a constant currency basis based off of 2017's reported earnings of a €1.280 billion. The view on the bottom of the chart formalizes what we discussed in our last call.

This considers the 2017 base earnings of €1.204 billion. In this case, our reported earnings are adjusted for special items in both years that we don't think represent the underlying operational performance of the business.

So for 2017, just as a reminder, those adjustments were the veterans administration agreement, which you see in the first quarter and then, later on in the year, as we report out subsequent quarters, you'll see the natural disasters, the FCPA charge and the effect of tax reform as special items in the base.

It was clear in February that you needed both the reported guidance and what we have now been calling the more operational guidance to make sense out of what was happening in the business, given all the variables that we saw in 2017 and that we anticipated with tax reform in 2018.

So going back to the top of the chart, you can see the business growth of €16 million to get to earnings growth on a constant currency basis of 5%. This growth rate is not surprising given what was in the base period for the quarter last year. Following on with currency at €32 million and a €13 million adjustment related to Sound's equity program.

Just one comment on that equity program, this valuation adjustment was influenced in the quarter by the fact that Sound was being sold. So, we've kept this adjustment outside of our operational results. When the sale closes, we'll consider this charge and any other similar charges as part of the cost of the sale.

On the bottom of the chart, we show the relevant Q1 adjustment to the base period, which, as I mentioned, was the VA agreement. And then, looking at the business growth for the quarter of €22 million, this brings you to €270 million of net income or an 8% growth rate on a constant currency basis.

And this is very much in line with the guidance we provided, the operational guidance we provided in this view of 7% to 9% growth for the year. What follows are similar FX effects for the business, the Sound valuation adjustment and the net effect of tax reform in the first quarter of 2018. So turning to chart 16 and looking at the underlying margins.

So these are the global margins and in the first quarter, again, last year, we had the VA agreement, which had a very significant positive effect on the margins, about 190 basis points. This was partially offset by the effect from the implementation of IFRS 15.

And so therefore, adjusting for both of these effects, the margins of Q1 2017 would be about 12.8%. And then, when you look at the operating margins for the first quarter of 2018, reported was 12.5%, adjusting for the initial Sound valuation impact, it also shows a 12.8% on an adjusted basis.

So we're looking at the operating performance of the business year over year being very stable just under 35%. So turning to chart 17 and looking at the underlying margins of the regions, I would go through starting with North America. North America, the operating income was down on a reported basis €164 million to €362 million for Q1 2018.

That's about a 21% decline on a constant currency basis. The total margins for North America decreased 2.5 percentage points from 15.6% to 13.1%. Excluding IFRS 15 and the VA agreement and the Sound valuations, those three items, margins decreased only 10 basis points from 13.6% to 13.5%.

In our dialysis business, the operating margins decreased by 4.2 percentage points from 19.6% to 15.4%.

Again, excluding the IFRS adjustment and the VA agreement, as well as the dilutive effects that we're seeing in calcimimetics in 2018, they're dilutive, because revenue is increasing associated with the reimbursement from the government for calcimimetics on what effectively is a breakeven at the margin line.

So that dilutive effect is worth another 60 basis points. So consequently, operationally, we're looking at about 110-basis point decline in fiscal 2018 from 17.1% in the prior year to 16% in 2018.

This decline was due to higher implicit pricing concessions, that is a new terminology under IFRS, essentially, the result of having to bifurcate what we used to call bad debt into true bad debt associated credit risk and bad debt that is associated with the portion of a payment that even at the time you're providing the service, you know there's a very low likelihood of collection and this very often is a portion of the self-pay elements inherent in reimbursement schemes in North America.

So shorthand, it's called implicit pricing concessions and it pretty much relates to these self-pay elements. There was also in the first quarter, on a comparative basis, lower revenue from commercial payers. We had a slight net cost associated with the calcimimetic program.

We had increased property and other occupancy related costs, higher costs for medical supplies, some increased rate (00:26:45) costs and those were partially offset by lower personnel expenses in the first quarter and a favorable effect associated with foreign currency translation.

So I'll just comment on a revenue per treatment basis here for North America, and in particular, the dialysis business. Adjusted for the VA agreement and the implementation of IFRS 15, revenue per treatment, as we reported to you, increased by $6 from $342 a treatment to $348. The cost per treatment increased by $12 from $276 to $288.

So if I put this in the context of our guidance, it's worth noting that for the year on revenue per treatment, we guided, excluding calcimimetics, that we would be flat to slightly down. We still believe this is the case. In the first quarter, you're seeing an increase of $6, including calcimimetics.

The drug was worth about $11 per treatment in the first quarter. So, adjusting for this, we're down about $5 per treatment in revenues. This was a combination of lower commercial rates, higher implicit pricing, as I mentioned a few minutes ago and these were offset by a number of other inputs.

As I indicated in February, we would start with a comparison against a very high base for the prior year and that this would mitigate over as the year progresses. So, that is still the case as we look at the full year expectations for revenue per treatment.

On the cost per treatment side, we also guided, excluding calcimimetics, to flat to up slightly in terms of cost. When you look at the quarter, we're tracking to this. We were up $12 in the quarter on cost, $11 of that due to calcimimetics. That puts us at about a $1 increase in cost per treatment year over year.

So moving to Care Coordination in North America, the reported margins improved from a loss of 10 basis points to a positive 2.6%. Adjusted for the implementation of IFRS 15, which had a de minimis effect on the margins, about a $50 million effect on revenues, as Rice commented.

And more importantly, the Sound valuation impact, the margin improvement – the margin for 2017 would be 5.1%, which is about a 5.2% improvement year over year. This was largely driven by the favorable impact from pharmacy services.

In addition, we did see lower bad debt expense in Care Coordination We had a benefit from a lower charge in the first quarter with regard to subsidiary share-based compensation.

We saw increased earnings related to the ESCOs as a consequence of the expansion of that program and that was partly offset by lower earnings from BPCI, which, not surprisingly was due to the fact that our initial quarter where we recognized revenues under the BPCI program was Q1 2017, and now we're recognizing revenues on a current basis from BPCI, so that was a slight negative, the earnings year over year.

So 5.1% margin in Care Coordination. For all the reasons I've indicated, we also continue to believe that our Care Coordination margins will achieve what I guided for back in February. So turning to chart 18, looking at the remaining regional performance, EMEA operating income down €5 million or 5%, 4% on constant currency.

The margins 18.7% down to 17.1%, driven principally by unfavorable foreign currency transaction effects, some unfavorable impacts for manufacturing, which were partly offset by additional dialysis day in the region. Asia-Pacific income was down about €8 million, 4% at constant currency.

The operating margins decreased 2.7 percentage points from 21.7% to 19%, still incredibly robust margins in this region.

The decrease was again primarily due to the impacts of foreign currency transaction losses, as well as some delayed product sales, which we would anticipate we would recover, partially offset by some favorable currency translation effects. Care Coordination operating margins in the Asia-Pacific region improved from 12.7% to 13.7%.

This is clearly the result of the Cura acquisition and the good operating performance we're having in that business.

Latin America operating income was flat, margins increasing slightly from 8.1% to 8.3% and that not surprisingly, is largely related to currency translation, some inflation improvements and some improvements in revenues and some inflation impacts on the cost side of the business.

So turning to chart 19 and looking at cash flows, last year's operating cash flows were positively influenced by the VA agreement just under €200 million. Also, just as we did in the first quarter of last year, there was some seasonality in our invoicing, which impacts cash flows in the first quarter of 2018.

If you adjust for these elements, the cash flows year over year would be 8% of revenues in Q1 2018 compared to 6.4% in Q1 2017. Lastly, in addition, cash flows in 2017 were impacted by a delay in some tax payments that we made in the U.S. So we had an unusual decline in Q1 2017 related to just our Q4 tax payments.

All of these things influence our DSOs. DSOs increased from 75 days at December 2017 to 85 days at the end of the first quarter. This does not concern us as it is simply seasonality associated with invoicing. Keep in mind also that DSOs are impacted by the implementation of IFRS 15 with an effect of about eight days in the quarter.

Looking at CapEx, nothing remarkable to comment on and free cash flow is a derivative of what we just discussed. So turning to my last slide, the outlook, just a couple of words with regard to 2018.

We already confirmed in our announcement that our guidance with regard to our net income growth target and we indicated that the adjustment to our revenue guidance was essentially due to the reduction in dosing of calcimimetic drugs, occurring a little bit faster in 2018 than we had anticipated.

So as a consequence, our guidance now for revenues is 5% to 7% on a constant currency basis, based on an adjusted 2017 revenues for the IFRS 15 implementation, as shown on the chart.

The increase over reported 2017 net income is 13% to 15% on a constant currency basis, again confirming and we've now added to this chart the increase on the more operational guidance of 7% to 9% for the adjusted 2017 earnings. And this would be without tax reform in 2018 as well.

The targets overall, including the 2020 targets, do not include the effects from NxStage or the Sound Physicians divestiture. In addition, the 2020 mid-term targets also exclude the recurring impact from the U.S. tax reform for years 2018 through 2020. So that concludes my remarks and I'll turn the call back to Dominik..

So thank you, Mike and thank you, Rice, for the presentation. I think we might have already pre-empted some of the most pressing questions, I hope. Nevertheless, I'm happy to open the Q&A for more insights now..

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. First question comes from the line of Tom Jones with Berenberg. Please go ahead..

Well, good afternoon, thank you for taking my questions. I had two for Rice and then a very quick one for Mike, if that's all right. Rice, my first question, Rice, just trying to get a bit of a better handle on what's going on with calcimimetics and why the dosing is changing as rapidly as it is.

I remember discussing with you and Ben back in the days when Part D was going to come into the bundle. There was some discussion about what you might be able to do with the dialysate fiddling around with the phosphate binder therapy and a few other things.

So I'm just trying to kind of understand, I get the pricing and the reimbursement aspect of it, but I'm still a little bit lost as to why we're seeing such significant changes in the dosing of this calcimimetics. So that will be helpful clarification for us. The second question for you.

Now that if we look at it conceptually, Sound and NxStage Medical is effectively an asset swap, the cash inflow, cash outflow are roughly the same. That's going to leave your balance sheet fairly under-levered, well down towards the bottom end of your comfort zone really.

Now that you've perhaps got less opportunity to do integrated care stuff, because you seem to be focusing down more specifically on dialysis patients, that avenue may be a bit less attractive for you.

How should we now be thinking about capital deployment? I'm sure there's some opportunities elsewhere outside North America that you can continue to pursue, but your level of leverage and your EBITDA generation suggests that you're going to have to spend an awful lot to keep your balance sheet running efficiently unless you start doing other things like giving more back to shareholders or buybacks, et cetera, et cetera..

I can take those, Tom.

Do you want to go ahead and get your other question out in front of Mike or no?.

Oh, yeah, yeah, no, okay, yeah, just a quick one. Just for clarification that €48 million impact from U.S.

tax reform that you highlighted in your helpful reconciliation slide, is that the entire benefit or how much of that is just a sort of temporary one-off related to deferred tax asset liability revaluations? And how much of it is the ongoing benefit from a sustainably lower tax rate, that's just what I was trying to tease out there?.

Yeah, go ahead..

Yeah, I'll go ahead. So, Tom, on the calcimimetics, let me see if I can – how best to do this. What I would say is, as we have moved from an environment where physicians are prescribing and patients may or may not be taking their meds at home to where now, in our clinic base, we are responsible for this product.

We are much more sophisticated than we've ever been. And so, we are looking at algorithms. We are looking at patients that have been on the drug. Should they stay on the drug? What should the dosing regimen be in the clinic? And it's moving quicker than we had imagined it would have.

The ideas that you and I and Ben talked way back when – around could you really do something effective by changing dialysate bath and some of those sorts of things? We are not going to jump into that right at the moment until we really kind of get the sense of where the medical community within our physician office, medical office is going to kind of shake out on that.

We don't want to start playing around things and put more variables into the algorithms that they are running. And Ben was a lot better scientist than me. I'm not sure that I can really push that until the docs are ready to sit and talk about it.

But I think that, as you can imagine, it's just going to take some time, when you've not been responsible for these, and all of a sudden, you have to be spot on, you have to know what you're doing because we're dropping bills. We want to make sure we've got this in the most rigorous way that we possibly can.

So, we're moving at this pretty quickly, but I do personally think it's going to be another quarter or two before we probably get settle how we think exactly this is going to roll out. I think it could take some more time for that. And then, with Sound and NxStage, I get your point.

Yes, you could argue that those are going to be a swap and we are delevered. But I would say it this way, we are looking to be and we are actually being more active in the acquisition arena, but it's small things, we're doing a lot of things in all of the regions, as you well know, we buy and sell stuff all the time and we're really looking at that.

I think we're always relaxed about what we can do with that money. We certainly know we can give more back to shareholders in a couple of different ways. But we think we know where we want to go and what we want to do. And if I told you any more than that, I'd probably have to hurt you, Tom, so I can't. But give us some time.

But I think, you'll find we're going to be judicious with what we do here..

Okay..

And I'll just a follow-on comment to Rice's comment with regard to capital deployment. Keep in mind, as we close these deals, in the short term, I would expect leverage to increase. We had indicated back in August that NxStage would bump up our leverage, if I remember correctly, 40 basis points to 60 basis points.

And when you think about NxStage, which is a public company, so you can look at their financials.

In the early period, as we get through the transaction costs, and we synergize to get to an earnings level that we anticipate mid-term the leverage, that will impact leverage, whereas Sound's, we've reported the earnings that we're releasing with that transaction.

So if you think about 2018, you'll see a higher level of leverage as we close out those two transactions, and over time, we should delever, as we normally do. So, relative to your question on tax reform, the €48 million is everything, Tom. So it's the ongoing cash effect, as well as any additional items associated with re-pricing of deferreds.

When you think about the first quarter, we did have some tax cost studies come in, work that was done in the quarter that allowed us to take the additional rate benefit associated with those positions, and there were also some corrections in the law associated with how you could treat depreciation in 2017.

So if you look at it that way, out of the €48 million, I'd say there is maybe a mid-teens effect related to the adjustment of deferred taxes, and the rest would be the ongoing cash tax benefit that we anticipate this year. That's all..

And seeing as you mentioned it, anything you could tell us on the NxStage and when you are with the FTC at the moment?.

Still talking. We are not disappointed on where we are, I mean, obviously, I'd like to be done, but we are still within the range of conversation and timing that we thought, Tom, but we are working and talking with these folks every week. But, we're just continuing to push through..

Perfect. We'll wait for you to say something more formal....

Yeah. And, Tom, one thing I would say, we have already filed the Hart-Scott for Sound. We had told you, I think, in our announcement that we thought we'd file that about five days post the announcement of the deal and we did actually get that done..

Perfect. Good. That's all very helpful. Thanks very much..

You bet, Tom..

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

Thanks very much. Yes, it's Ian Douglas-Pennant at UBS. So first, if you could just sense check something for me, from the numbers you just gave, I calculate something like an €82 million reduction in calcimimetic costs in Q1, which I guesstimate is about a 50% reduction in volume.

So first, is that correct? And then, could you also help me understand how Amgen's sales seem to be increasing for Sensipar? There's obviously something I'm missing here between both of those.

The second question is, are there any other drivers of the revenue guidance downgrade versus your previous expectations except Sensipar? And – because I'm not sure I fully understood all the adjustments and factors that you highlighted. But my summary is that margins are declining due to payer mix or reimbursement levels.

Just wanted to check whether that's fair or not..

Yeah. Let me take those. It's Mike. So on Sensipar, on calcimimetics, I think what we indicated in February was, we anticipated something on the order of $19 to $21 per treatment revenues associated with the drug. And I just indicated in Q1, we're about $11.

So I think rough math, it's about a 50% level, somewhere in that range, in terms of what we might have anticipated at the time. And that's reflecting itself in the change in the revenue guidance. We had indicated that the majority of the revenue guidance related to calcimimetics, there is volatility in that.

So, moving from an approximate 8% to a 7% to 9%, that range gives us a little bit – excuse me, 5% to 7%, that was 5% to 7%. That gives us a little bit more wiggle room there. Beyond that, I would say we're spending a lot of time on these two large deals from an acquisition point of view.

We typically do a number of small deals, as the year progresses and we guided to a little over a $1 billion in terms of our normal deal activity.

So, I just – it gave us a little bit of room with regard to the fact that we've got so many people focused on these large deals that some of those smaller deals will still come, but they might just come a little bit later..

And then the margins down on the commercial....

Yeah. And the margin, I mean, I went through all the margin puts and takes. I mean, if you want to say the margin is principally due, it's up to you.

I was pretty clear both in February and today that when you look at revenue per treatment and you look at the fact that we renegotiated all those contracts last year, we were starting out at a high in the first quarter of 2017 and that's why I guided so conservatively last year that revenue would be pretty much flat or maybe down slightly, and we came in spot on for the year.

And now as you're coming into Q1 of this year, you're going to see that seasonality effect flow through. So I don't think there's anything new to talk about here. I think it's just the annualization of the base period on commercial rates..

And Ian, it's Rice. And I understand your question on just in general how is Sensipar sales going up at Amgen, and what I would tell you is, and this is my opinion. But the side effect profile for Parsabiv is a little more worrisome than it is for Sensipar.

So I actually think what may be going on is, as people are moving from Part D to Part B, we're seeing people still dosing Sensipar versus moving to Parsabiv, because also in the administration of Parsabiv, that is to be done at the end of the treatment.

And physicians, nurses don't like that, because if they disconnected the bloodline and they're packed up, ready to go, you administer that drug and if people have a reaction, because the calcium tends to come up fairly significantly, they're kind of, what do we do now? Do we go, have to hang another bag of saline? Do we have to do something else? Sensipar is easier in that regard.

So I'm sure Amgen won't like anything that I'm saying to you, but I mean I'm just giving you some of what I know we've talked about with our physicians on that. So it just maybe that people aren't making the move to Parsabiv, but they obviously have made the move from Part D to Part B, but they can do that with Sensipar as well.

Hopefully, that helps..

Thank you..

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

Thank you, gentlemen, and thank you for taking my questions. I'll keep it two, please. My first one is on the North America same-store revenue growth. If I look at the business, so it's now – we're five quarters in of 2% growth, which I describe as a bit disappointing in the context of your historical track record here.

I know you called out some specific factors last year, but I'm just curious to know why we haven't seen an acceleration in same-store growth in North America? And what can you do or is there anything that you can do to see an improvement? And then, my second question is on the CVS announcement of entering the home market, just would love to hear your thoughts and reactions and what that means for your business down the line..

Hey, Veronica, it's Rice. So, when you look at same-store, yes, we've had a couple of quarters that I don't think we're pleased with at all. There are three components that we look at when we're looking at how we're growing.

It's the acute side of the business, which we were down about 5% or 6% this quarter, so that drives a pretty big – it's a pretty big drag generally on what we're going to see for same-store. We continue to see a good growth on the home side.

I would tell you – I can't say that I'm not happy about where we are, but understand, I think, people are working hard to try to see that improve.

I think we are a lot more disciplined, we better be about how we handle acute contracts, because this is a little bit of a black eye that we're working our way through that we took some business we shouldn't have. And I think we've got a smart group of folks that have figured that out.

So, it's going to take a little more time, and I know you'll ask me about it next quarter as well and I'm okay with that. But we just have to work our way through, it is probably the best I can say.

Also obviously, it has not been the easiest of times over last quarter, through the last two quarters of last year working our way through the hurricane situation and mistreatments there. We've had some issues over this winter as well, we had a pretty horrendous New England piece of bad news with four – these nor'easters up and down the East Coast.

That also has a hand in this. But let's stop making excuses and we're going to show you some improvement as we get into these outer quarters. Now with CVS, we're going to do what we do. I'm delighted that they think the market is robust enough that they want to jump in.

I did think it was interesting yesterday when they were talking about markets where there's 75% home penetration and 50%, they're right. That 75%, I think, is in Costa Rica. I think there's a 50% home penetration in El Salvador.

So there are pockets where there's not much else going on, but the vast majority, as we've always told you, particularly when we talked around the NxStage deal is that we see opportunities all over the place where they could be 20%, 25%. Australia is up around 27% or 28% now.

So all I'm saying is, I'm not sure I'm going to focus on Costa Rica so much or El Salvador. We're going to keep pushing into the markets where we're established, but they obviously think there's something good there. So we're happy to meet them in the marketplace and we'll compete and we'll see how that goes and we'll see what develops.

But I'm delighted that obviously, Baxter is bullish on the home market. We're bullish on the home market. PD is growing, NxStage has got a great product line. So I still think our timing was pretty darn good. And the fact they want to come in with us and compete, we'll welcome into the fold and we'll see where it goes..

Great. Can I just ask a quick follow-up on the home market and NxStage? I understand that the MAC regions are considering reducing the number of payments they make for home hemo from five to three. As far as I understand that would be quite a big negative for NxStage, since you are doing short cycle every day.

What's your thought on that and does that change at all the economics that you see in the business? And I'll leave it at that. Thank you..

Yeah. What I would say is, we have anticipated that that could be coming about. If you take the big book of business that we have, we've managed that at a three times basis. So we've never been really up on that curve of 5x if you will. You can't do four times treatments or four treatments in a week, you need medical justification for that.

And we do so if we need it, and there are some patients that do. But you can imagine that our modeling was based more off of the way we operate versus what NxStage may have been doing, which fits what they were doing at that particular point in time. But the fact that five going down to three has been talked about for a while.

We've sort of tried to gear ourselves toward that, and do our analysis based on that premise..

It's very clear. Thank you, both..

You bet..

Next question comes from the line of Michael Jüngling with Morgan Stanley. Please go ahead..

Yeah. Hi and good afternoon. I have two questions. So, firstly on EMEA, and you mentioned that the margins declined sort of 160 basis points, sort of primarily because of foreign exchange, but foreign exchange was only down, let's say, 0.5%, yet had a meaningful impact on the margins.

Can you explain how the maths and how the sort of science works behind such a large margin decrease on a very small change in FX? And that will help us, I guess, also modeling it forward.

And then on Sound Physicians, I'm still a little bit confused because of the disposal, because I remember when you first moved into Care Coordination, it was partly driven by diversifying away from reimbursement in the United States, which was challenging and also this business offers, as part of your CMD slide from last year, very nice growth prospects.

Your margins are just about turning and moving to profitability. Why not keep this business for its own prospects? Good growth, margins are inflecting and this diversification angle, I'm trying to understand what has changed, why it is not a good business in its own right..

Yeah. Hey, Michael, it's really Rice.

I'm going to – you're ready to go on his first question?.

Yeah, I am ready to go on his first question..

Yeah, go ahead..

I thought you were going to give me a second and I was going to say we were working on the first. Yeah, Michael, just – your reference point, I guess doesn't consider the weighting of the business. So the foreign exchange effect is transaction losses. That's typically what shows up in the margin versus translation.

And what's driving it is, we have a dollar-based business in a number of markets in the Middle East and we also have a good-sized business in Russia. So those were the two big drivers to the associated currency losses in the quarter, if that's helpful..

Yeah. And it's a fair question, Michael, on Sound. And I think it is a good business in its own right.

But when I think about where we're going to go in the future and I think about what we need to focus on from a diversification standpoint, what's different now than back in 2013, 2014 when we talked about this, when we started this conversation, we didn't know that the ESCOs are really going to happen.

We were kind of looking at equal opportunities not knowing what was going to come to fruition and the reality is the ESCOs now have come forward in a big way. We're up at 41,000 patients.

We feel very comfortable with those results and what was getting done at the time we got into this, we didn't know that the Cures Act was going to come and the exclusion on Medicare Advantage was going to get wiped away, if you will. So some things have changed that I think will give us some diversification.

We are looking at Care Coordination internationally. We've made a step. It's working. So I think it's a matter of comfort and where we diversify, and how we diversify.

But I also can tell you just from, what I would call the tension that we see in the organization meaning, when you're trying to do big deals like NxStage and this with Sound, you really have to get your people focused and you really got to give them clear direction and obviously, to make Sound work for the long-term, and for that to really be in its own right of business, it's that management team at Sound that's going to make that happen.

And the interface that we had from that, I think we got the value that we needed. And hey, timing is everything.

And so, it was a great offer, we think it's great for Sound, we think Summit will do great things with them, but we had to make a value judgment as to stay in or go, what do we do, and we just came down on the side that as I explained it to you, but I appreciate your perspective on that as well..

Great. Thanks, very helpful. And the final question is on EMEA again.

You announced a couple days ago there was some management changes, is the performance in Europe also related to perhaps the execution not being quite right and therefore, a change in leadership?.

No, I'd say, it's fair to make that alignment and ask the question. But what I will say is simply the incumbent Dominik Wehner, for very good personal, family, health issues, decided that he needed more time, and these jobs that we do kind of take all of our time. So it was really nothing performance related in that perspective.

This is the guy that's doing the right thing for his family. I'll leave it at that. And we're excited for Katarzyna to come in and we think she'll do great things. But I'd just leave it at that at this point out of respect for all the players involved..

Great. Thank you. Sorry for asking, I didn't realize..

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

Hi. Two questions for me. Firstly, given the movement out in California on the union ballot initiative, is it fair to assume that the industry is going to have to significantly outspend the $15 million that SEIU has earmarked for this initiative.

I'm modeling FMC on its own may spend €20 million this year, and then, of course, DaVita will have to spend probably 2X that, but it's not clear to me that this level of spending or higher if it needs to be is in your guidance yet. So if you could just address that, that would be very helpful.

And then second of all, Asia-Pacific margins, how much of the impact there comes from increasing your investments in China? Per your comments in Q4 that that market was opening up somewhat. I'm just trying to understand how that translates into incremental costs in the near-term, but potentially also incremental revenues in the mid-term..

Sure, Lisa. So I'm going to take the ballot initiative. Mike, I'll let you handle, China. So look, I can't speak for DaVita or anybody else as to what they're doing, but as we've said before, we didn't put spending to fight this ballot initiative in our guidance.

We've got money that we budgeted for and I think the way I'm going to say it is, as we are implementing our plan and we're doing it as we speak, we have a level of spending that we're going to undertake. If we find that it's got to be more than that or it's going to be a problem that we can't cover, we'll let you guys know that.

At this point, we feel okay about that. There is a big – a large degree of, what I would say, cooperation among the industry on this matter, because it touches us all in a very big way. We don't necessarily share what we're spending per se, we're using some of the same resources.

I don't want to get too much detailed into that, because no sense to me targeting or leading with my chin relative to what I say. The guys at SEIU, we are going to take it and deal with it. So we're going to be a little bit kind of quiet on that. But it's budgeted. It's not in the guidance.

If it comes to a point where it's going to affect us, we'll let you know. But we're working and we're going to fight this thing. I really don't want to go too much beyond that. A bit of good news is, I will tell you, it looks to appear that the ballot initiative that would have gone on in Arizona is not going to go. That won't happen.

At this point, it seems to be that that's not going to be pursued. But we still have Ohio we have to work with, there could be a few others out there. But, Lisa, we'll keep you apprised. But I'm not sure publicly, it makes a lot of sense for me to say much more than that..

Okay. And on your second question, Lisa. Yeah, I think we are investing as we've said in China. I think I've commented for a few quarters about a mix effect associated with the fact that we've done some acquisitions in that country in particular, which have very nice margins, but they're just a little bit lower than the overall margins for the reason.

So I think it's a positive step forward, as you say testing in the market. In addition, we're investing in production in China.

So if I were to think in terms of the mid-term for that, I mean, typically when you're building a brand new production facility, you're obviously not going to get the same kind of cost efficiency that you have in your legacy large facilities in other parts of the world. But we've done this before.

Back in the day, we did it in the United States, believe it or not. So from a mid-term view, we may see some bumps in terms of the cost to produce until we get the volumes commensurate with the plant size. But then over time, I think it will prove itself out to be a great investment in the country..

Yeah. And we're making that investment in PD products, Lisa, and Mike's right. I mean, Mike and I were the characters that went through this in the U.S. back when we were in the products business when we started going to single use.

It takes time and volume to get over that initial cost hurdle and – but I think it's money well spent and we're also trying to stay ahead of what ultimately could come back from the Chinese government that you need to have a certain amount of your production in country if you're going to sell medical devices.

And so, we want to be ahead of that game as well..

Your next question comes from the line of Ed Ridley-Day with Redburn. Please go ahead..

Hi. Thank you. First is just a follow-up, bigger picture on Care Coordination.

Given what you're saying and, Rice, I appreciate the additional color and your thinking on the strategy, but really with the way we are looking at the drivers of that business as it stands now, particularly, of course, the ESCO business and although you book the profits there, you ultimately do all the costs related to the ESCOs are in the dialysis business.

Are you thinking potentially of folding that back into dialysis services as you sort of think bigger picture about offering holistic services going forward? And wouldn't that frankly make more sense? That'll be my first question.

And secondly, if you could just give us your views as it stands now on where you think you stand with the Medicare Bundle update, of course, which you're going to get in a couple of months?.

Sure, Ed. Well, I got to tell you, for me to be talking about organizational moves with you, I'm going to have all kinds of people in the U.S. listening now. It's a great question. No, not at this point, not looking to do that.

I still think quite honestly and when I look at a calendarization in my head over the next couple of years, I think if we were going to have that discussion and we were going to think about that, I think we'd want to be in a place where we were in capitated arrangements.

We were kind of fully, fully, fully integrated and we've got a couple of different product lines there, Medicare Advantage, we've kind of really moved into the epitome or the ultimate of what we want, but we we're not contemplating that now. We obviously can do it.

I understand from your perspective the way it's set up today, you don't get necessarily great visibility of, are the clinics really benefiting and we'll think about how we try to do that. I can make that work. I really don't want to change an organization just because it makes the reporting better.

We should be clever enough to give you good enough reporting that we don't have to do that and I think we can. As far as the reimbursement, I was in D.C. last week, we're talking to people and just kind of checking in and seeing what they're thinking and obviously, they're not telling us.

But you're well right, you know the process, you've been with us a long time, so it'll be the last days of June, early days of July that we'll get a draft proposal. But we do check in periodically to see what people are thinking. We still know that MedPAC has been very clear. They think a net reimbursement increase of about 1.4%, 1.5% makes sense.

They started 2% gross and then they back out, some inflation adjuster, CPI adjuster. So we're still hoping that's going to be the case. But we're a little bit away from two months from really finding that out..

Fair enough. Thank you..

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

Gunnar Romer, Deutsche Bank. Just two questions left. Actually, one on Care Coordination. If you can provide us with the organic growth number, excluding the calcimimetics effect. I'm still not sure what that would look like. And so, any color around the underlying performance here in Care Coordination would be very helpful.

And then secondly, on the corporate cost, also technical question, I guess, it's quite a significant decline here in the first quarter. Can you explain what has driven that? And are you still sticking to your guidance on corporate cost for the year to be slightly up? Thanks..

Gunnar, it's Mike Brosnan. So, on Care Coordination relative to what we guided to for growth, we actually, as you recall, guided that revenues would be down globally 4% to 6%. So part of that was that Sensipar was being – prescriptions were being filled out of the pharmacy. Part of that was also Renagel. But we didn't split out all those pieces.

So I think the calcimimetic discussion is really about the core business, the dialysis service business, but overall for Care Coordination, because we sold Shiel, because we saw changes in the pharmacy, we have guided for revenues to be down 4% to 6% and we are holding that guidance. We still think that's the case for the year. No changes there.

Relative to the corporate costs, let's get a little bit more under our belts in terms of what the cost experience is going to be for fiscal 2018. I would probably leave my guidance where it is for now and then revisit it in the second quarter..

All right. And just a follow-up on the Care Coordination, the 4% to 6% down.

Can you just help us understand what the organic growth would be underlying, excluding the Shiel divestment, and maybe, yeah, the calcimimetics impact?.

Well, honestly, I don't think I'm prepared to do that on the call today. I mean, the calcimimetics impact would be organic..

Sure..

Shiel, granted Shiel, you could argue we could adjust, but I just don't think we're ready to do that parse through Care..

We'll take your – we'll keep your question live, let us think about it and figure out the right venue for that, but we don't want to start calculating and running numbers right at the moment, but we'll leave your question on the docket, and we'll come back to you, Gunnar..

All right, sure. Thank you..

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

Thank you very much for taking my questions. I have a couple, please.

So firstly on calcimimetics, what was the volume difference between those lost in the pharmacy business, and those gained in the clinic and how does this fair with your overall expectation, I guess, at the end of last year? Is the move from the pharmacy to service revenues overall revenue positive based on what happened in Q1 and just less than what was expected? And then also another one on calcimimetics, you mentioned the $11 revenue per treatment impact in Q1, did you say that the cost per treatment impact was also $11? I believe that you expected a dollar or two higher on the cost side, and it would just be very helpful to have your full year expectations for both revenue per treatment and cost per treatment both on an underlying basis, which I think you've mentioned, as well as inclusive of calcimimetics.

Thank you..

Hassan, it's Mike Brosnan. We're doing pretty good today. I just had one person I had to disappoint with regard to my answer. Unfortunately, on your first answer to parse through Sensipar in the pharmacy versus calcimimetics and services, we, deliberately, at the start of the year, guided separately for services and Care Coordination.

So, we're not planning on parsing through every quarter the trade-off between one drug in our pharmacy and the calcimimetics program and services. That's why we're giving the services guidance in terms of revenue per treatment, which we've been pretty clear on and we're giving the Care Coordination guidance for revenues overall.

So, I'd demure on getting into year-over-year revenues associated with the drugs. Keep in mind, in the pharmacy, we're also dealing with the IV Parsabiv. With regard to your $11 per treatment, you're correct. I had said earlier in the call that $11 revenue per treatment and I said it was kind of a breakeven for the first quarter.

We'll see how that progresses through the year, I'm not ready to say that we are not going to still have some friction, as the year progresses, it's just our first quarter, we're just right out of the gate..

Okay. Thank you very much..

You did. Yeah, Hassan, your question was a good one. What I would say and I think it was kind of intuitive to – in the overall global guidance I gave, with regard to revenues is, in February, I had guided on the provider side of the business globally, to a growth rate of about 9% to 11%. Rice mentioned earlier the products guidance at 6%, that stands.

We just talked again about the Care Coordination guidance 4% to 6% down, that stands, but the services guidance that we provided at 9% to 11%, as a consequence of the changes that we've talked about the calcimimetics and to a lesser extent, a little slower ramp on acquisitions, would affect the additional guidance that I gave on the provider business.

So I would say now rather than 9% to 11%, that's probably more in the range of 7% to 9%..

Okay..

Okay. So I think we have answered all questions. No further questions on the line. So, thank you very much. We extended the con call (01:13:32) but I think that was helpful for everyone. So thank you very much. See you next quarter..

We appreciate your interest. Thanks, folks. Thanks, ladies. Thanks, gentlemen..

Take care. Bye-bye..

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