Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Ladies and gentlemen, thank you for standing by. I’m Timo your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care Report on the First Quarter 2023 Earnings Results. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead sir.

Dominik Heger: Thank you, Timo. As mentioned by Tim, we would like to welcome you to our earnings call for the first quarter in 2023. We appreciate you joining today to discuss the performance for the first quarter. I will as always 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. We will try to keep the presentation short and leave time for questions that might be new to all of us in the new reporting structure. As always, we would like to limit the number of questions again to two without sub questions in order to give everyone the chance to ask questions.

Should there be further questions and time left we can go a second round. It would be great if we could make this work again please. With us today is Helen Giza, our CEO and Chair of the Management Board; and still also our Acting CFO. Before I hand over to Helen, I want to remind everyone that we hosted a virtual Capital Markets Day on April 19th. If you were not able to join the slides and replay from the CMD are both available on our website for watching. With that Helen, the floor is yours.

Helen Giza: Thank you, Dominik, and hi everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care. I’ll begin my prepared remarks on slide 5 today. A few weeks ago at our Capital Markets Day, we spoke at length about our operational turnaround to improve profitability. We have a clear aspiration to unlock value as the leading kidney care company and a clear path to achieve that. What I hope came across at the CMD is that we not only have a detailed plan, but we are already executing against these important initiatives. And I would like to highlight some first quarter accomplishments and area of focus before I turn to the quarter’s financial performance. Starting with structure, the conversion of the legal form including the preparation of the carve-out and all the administrative filing requirements are progressing as planned.

A physical EGM is expected to take place on July 14th and this is an important step towards simplifying and improving our governance structure and strengthening the rights of our free-float shareholders. Our new global operating model with two distinct global segments has been fully in place since January 1st of this year. And in April along with our CMD, we published the historical financials for the financial year 2022, reflecting the new financial reporting format. As acting CFO, I have to say this was a Herculean effort to reorient our entire reporting. And I know that we still owe you the quarterly numbers for 2022 and we’ll be providing those soon. Today as promised we are able to present our first quarter results in this simplified reporting format around our two global segments; Care Delivery and Care Enablement.

We continue to make progress on our FME25 transformation program. And in the first quarter we achieved sustainable savings of €60 million, which keeps us on track to achieve €250 million to €300 million in savings by the end of this year. In terms of other strategic drivers, we are seeing a necessary and overdue increase in home trainings in the US by 14% and we have expanded our value-based care population in the first quarter by 5% to around 95,000 lives. We also realized the first tangible results of our portfolio optimization efforts with a discontinuation of a development program for PD Cycler, and we are continuously working on developing a winning culture focused on accountability and underpinned by our efforts around sustainability, diversity, equity and inclusion.

And as a sign of our commitment to gender equity in the workplace, we signed the United Nations Women’s Empowerment Principles last month. Turning to Slide 6. Our patients are core and center to everything we do. Through the global medical office, we are continuously monitoring our clinical performance to enhance care, and we take a consistent global approach to pursue equity and high standards of care across diverse patient populations. An important KPI in this regard is, our quality index, a global indicator for patient well-being and treatment success. The quality index considers dialysis effectiveness, vascular access and anemia management and we are tracking this on a quarterly basis and saw sequential stability at a high level. Next on Slide 7.

While we continue to face macro pressures and the annualization effect of COVID-19-related excess mortality, I’m encouraged by the improving trends and execution on our turnaround plan. During the first quarter, both Care Delivery and Care Enablement segments, contribute to organic growth. This was driven by improving sequential volume development in Care Delivery, and strong performance within our Critical Care business and Care Enablement. Our expected strong year-over-year decline in operating income was moderated by several factors, and improved business performance like the phasing of Critical Care product sales in China, which were especially strong in the first quarter and the turnaround measures starting to materialize. As I just referenced, and we’ll speak more about in a moment, we executed the first steps of our legacy portfolio optimization.

Turning to Slide 8. In the first quarter, we delivered revenue growth of 2% at constant currency and we continue to deliver organic growth, with positive contributions from both Care Delivery and Care Enablement, in line with our expectations. During the first quarter, operating income on a guided basis, which is in constant currency and excludes special items and US provider relief funding, declined by 13% resulting in a margin of 7.5%. As expected, our business development continued to be impacted by macroeconomic inflationary pressures. While we are seeing signs of stabilization, the increased costs especially relating to raw materials, continued to put pressure on Care Enablement. At the same time, the turnaround drivers are leading to improved business performance, which was also supported by the phasing of strong product sales in China.

A significant contributor to the year over decline in the margin, relates to the absence of positive prior year effect in the base in Care Delivery. Moving to Slide 9. This slide shows our operating income development compared to the first quarter of 2022. Starting from the left, you can see how we get to the starting point on our guidance basis, which excludes special items and the US provider relief funds, applied in 2022. It is a milestone for us to share for the first time, the earnings development of our two operating segments and I will go into specific detail on the margin drivers, for the segments later. With intersegment eliminations, operating income for products, transferred between Care Enablement and Care Delivery remained stable year-on-year.

In the new reporting format, we have significantly reduced the corporate bucket and development of the corporate line was stable year-over-year. By far, the biggest special item in the quarter related to our legacy portfolio optimization especially in our Care Enablement business. I will speak more to that when I get to the segment. Other special items relate to FME25 costs the Humacyte investment remeasurements, and costs associated with the conversion of legal form. We are still assuming cost of €50 million to €100 million for the conversion of legal form for the year, and most of these costs in this respect, will be incurred after the shareholders have approved the change of the legal form later this year. Turning to Slide 10. In Care Delivery, we continue to execute on our turnaround plan to drive operational efficiencies and we are seeing green shoots of recovery, particularly around labor trends and volume.

We are seeing stabilization in the US labor market. Our open position for direct patient care staff, have decreased since year-end by around 10% to 4,000. As a reminder, historically, we would have had around 2,500 to 3,000 open positions, at any point in time. The improved staffing situation enables us to increase our home dialysis trainings and also increases our ability to take on new patients. And while the annualization effect of COVID-19-related excess mortality continues to weigh on growth, we see sequential improvement. In the first quarter, our same market treatment growth in the US was slightly negative at minus 0.3% compared to minus 1.9% in the fourth quarter of last year. And as a reminder, for full year 2023 we expected the US dialysis treatment growth between minus 1% and plus 1% compared to last year.

For Care Delivery International, same-market treatment growth was positive at 0.5%. This improved trend in volumes is supportive of both revenue growth as well as improving operational efficiencies and clinic utilization. The optimization of clinical infrastructure is underway. More than 50 US clinics have been closed during Q4 2022 and Q1 of 2023. And overall, our FME25 transformation initiatives are moving forward and we continue to deliver on clinical operational efficiencies. Next on slide 11. Here, we look at how these trends translated into financial performance for Care Delivery. Revenue increased by 3% on a reported basis and 1% at constant currency. Care Delivery US revenue grew at 2% reported mainly driven by positive exchange rate effects.

It declined by 2% on a constant currency basis due to a negative organic development and the absence of positive prior year effects. Care Delivery International saw strong revenue growth of 5% reported and 12% on a constant currency basis. At constant currency, this was mainly driven by strong organic growth which was mostly due to the effect of hyperinflation in various markets and due to contribution from acquisitions. Operating income from Care Delivery decreased by EUR eight million resulting in a margin of 8% on our guided basis. The negative business growth development largely relates to the absence of positive prior year effects; which include the partial reversal of an accrual related to a revenue recognition adjustment for accounts receivable and legal disputes the reconciliation of revenues for the final performance year of the ESCO program and last the suspension of sequestration in the US.

Besides these base effects we have seen a promising development in price and volume impacted by timing of claims and InterWell Health. While we still assume a labor headwind for the full year on a comparative basis we saw slightly better labor and inflationary impact compared to the first quarter of 2022, when the entire industry was facing significant staffing challenges due to Omicron. The easing of the US labor market since then has meant moderating wage increases and significantly reduced usage of and rates paid for temporary labor. And finally, Care Delivery had a strong contribution from FME25 savings mainly due to clinical operational efficiencies. Turning to slide 12. Even though we have seen some stabilization in the macro environment Care Enablement continues to face significant inflationary pressures and delivering on our turnaround plans are more important than ever.

Although, much of our business is locked into longer-term contracts pricing and contract excellence are among the most important initiatives which we did launch at the end of last year. As mentioned at the CMD, we are already executing on our legacy portfolio optimization measures, which are treated as a special item. In the first quarter, we terminated the development of VersiPD a US specific PD cycler. This decision was as a result of strategically aligning on a global PD cycler portfolio. Improved business performance in Care Enablement was driven by higher sales of critical care products in China as the government there made a big push to ensure all hospitals were well equipped for future pandemic situations. Therefore, we do not expect this level of critical care sales to continue in the remainder of the year as a significant portion of the expected demand for the year has been covered in the first quarter.

Care Enablement performance was additionally supported by higher sales of home hemodialysis machines. In addition, our FME25 transformation program is on track and delivering savings for the business and savings in the first quarter largely related to productivity efficiencies. The strong inflationary pressures and high material prices are expected to continue to weigh on our cost development in Care Enablement for the remainder of the year. Next on slide 13. Here we look at how these trends have translated into financial performance. Care Enablement revenue increased by 3% on a reported and constant currency basis. As I just highlighted, growth was driven by higher sales of critical care products in China and home hemodialysis products. Operating income for Care Enablement decreased by €27 million resulting in a margin of 5.2% on our guided basis.

Inflation continues to be the biggest headwind for this business. It was partially offset by FME25 savings and positive business growth. Excluded from the shown operating income on guidance base is the largest special item in the quarter the €83 million write-off associated with the previously mentioned discontinuation of the PD cycler program. Turning to slide 14. The slightly lower operating cash flow in the quarter was mainly due to the decrease in net income. Free cash flow conversion remained at a stable level. While toward the upper end of our self-imposed range our leverage ratio of 3.4 times remained in our target corridor of 3 times to 3.5 times. And as I’ve emphasized previously, deleveraging remains our top capital allocation priority, especially, given the high interest rate environment.

I’ll conclude with our outlook on slide 16. We reiterate our guidance for 2023. We have described 2023 as a year of level setting. And while we continue to face certain headwinds, I am encouraged that we are already seeing green shoots of recovery and traction on our turnaround plans. Thus, we remain confident in our path to unlock value as the leading kidney care company and to achieve the improved operating profit margin of 10% to 14% in 2025. That concludes my prepared remarks. I’ll now turn it back to Dominik.

Dominik Heger: Thank you, Helen for the very first presentation in the new structure. I’m sure there are many questions and I’ll turn it over to Q&A. Timo, could you please open the line?

Q&A Session

Operator: Thank you. [Operator Instructions] First question is from the line of Victoria Lambert.

Operator: Sure. The next question is from the line of Hassan Al-Wakeel with Barclays.

Operator: The next question is from the line of Veronika Dubajova with Citi. Your question, please.

Operator: The next question is from the line of Oliver Metzger with ODDO.

Operator: The next question is from the line of Robert Davies with Morgan Stanley. Your question please.

Operator: The next question is from the line of David Adlington with JPMorgan.

Operator: The next question is from the line of James Vane-Tempest with Jefferies. Your question please.

Operator: The next question is from the line of Lisa Clive with AB Bernstein. Your question please.

Operator: The next question is from the line of Christoph Gretler with CS. Your question, please.

Operator: The next question is from the line of Sezgi Ozener with HSBC.

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

Dominik Heger: So no questions. Thank you very much for the participation the lively discussion. And with that, we would close the call now and we look forward to seeing you over the next couple of weeks on the road or virtually. So thank you for participating.

Helen Giza: Thank you all. Thank you for your continued support. Take care.

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