Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) Q1 2024 Earnings Call Transcript

Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) Q1 2024 Earnings Call Transcript May 7, 2024

Fresenius Medical Care AG & Co. KGaA beats earnings expectations. Reported EPS is $0.36, expectations were $0.26. Fresenius Medical Care AG & Co. KGaA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Dominik Heger: Thank you, Alice. Good afternoon or good morning, depending on where you are. I would like to welcome you to our Earnings Call for the First Quarter of this year. We appreciate you joining us today. 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. As we have only 60 minutes for the call, we have prepared a short presentation to leave time for questions. As always, we would like to limit the number of questions to two in order to give everyone the chance to ask.

Should there be further questions and time left, we are more than happy to do a second round. With us today is Helen Giza, our CEO and Chair of the Management Board; and Martin Fischer, our CFO. Helen will start with an update on the major developments and Martin will provide a review of the financial performance in the first quarter. Then we are happy to take your questions. With that, Helen, the floor is yours.

Helen Giza: Thank you, Dominik. Welcome everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care. I will begin my prepared remarks on Slide 4. I’m pleased to report that we continue to make tangible progress on both our transformation and our turnaround efforts. We are meaningfully advancing toward our 2025 group margin target band. The progress is visible in both of our operating segments. Care Delivery, the first quarter was marked by important leadership changes and organizational improvements. As you know, Craig Cordola, our new Head of Care Delivery, officially started on the 1st of January. A key priority for his first 100 days was to implement a new organizational structure and leadership team for his business and focus on holistic end-to-end process improvements.

With the streamlined Care Delivery organizational changes now in place since the 1st of April, I’m very encouraged by the focus, professionalism, and speed of implementation that Craig and his new leadership team are bringing to the business and their priorities centered around driving patient growth are very clear. In the U.S., a major focus for the Care Delivery team is on improving clinic utilization, optimizing processes, as well as unconstraining clinics, and optimizing the clinic footprint, especially in growth markets. We were able to decrease the number of constrained clinics by about one-third by the end of the first quarter. We have very good visibility on the capacity constrained markets and specific clinics, and the challenges are not uniform.

For example, in several constrained markets, staffing shortages remain a factor. Therefore, hiring and reducing turnover remains a priority. By the end of the first quarter, our open positions for nurses and technicians across the U.S. were reduced by around 500 to approximately 3,500, which is now very close to a normalized level of 2,000 to 3,000 open positions. This will position us better to take on more patients in the coming quarters. In other markets, for example, we are seeing strong demand and do not have sufficient capacity to capture all the patients. For growth markets, it is not just about more hires, but we also need to consider how to make more dialysis chairs available if the expansion drives profitable growth. Expanding our strategic growth areas within Care Delivery remains a priority.

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Q&A Session

The main driver of the mentioned favorable phasing in the first quarter comes from our value-based care business. We had a strong first quarter with patient lives increasing to 125,000 lives and positive revenue and earnings contributions. We know that value-based care revenues and returns can be lumpy and therefore, focus more on annual performance. We have planned for our medical costs under management to grow to $8 billion for the full year. We expect our value-based care business to be a positive contributor for full year 2024, and the positive EBIT contribution in the first quarter puts us in a good position to achieve that. As you have seen, we continue to move at speed in our portfolio optimization plan with several additional market exits announced and others closed since our last earnings call.

I will review those in more detail later on. Turning to Care Enablement. I’m very excited about our progress with further proof points demonstrated the continued momentum of our FME25 transformation efforts. This resulted in an inflection point in our Care Enablement margin expansion from 1.3% in the fourth quarter of 2023 to 6% in the first quarter of 2024. Driving this positive margin development is a further improvement in pricing as we both renegotiate and sign new contracts on more favorable terms. With an eye toward cost reduction and margin improvements, several initiatives are underway to optimize our manufacturing footprint and supply chain, which will further benefit the margin development in 2025 and beyond. For example, we are in the process of moving production from our plant in Concord, California to Mexico with production set to wind down in California later this year.

We continue to optimize the production of a lower-cost fluid line in Knoxville, along with additional cost reductions across initiatives across the manufacturing network. In January, we launched further supply chain initiatives in North America to improve operational effectiveness of our distribution network. Pricing as well as margin expansion continue to be a key focus of the CE commercial and operation teams globally. At the same time in Care Enablement, we are preparing for the rollout of high-volume hemodiafiltration in the U.S. and the opportunity to bring much needed innovation and set a new standard of care for patients and at the same time, maximize the benefits of our vertically integrated strategy. While all of these developments in Care Delivery and Care Enablement are essential for the future success of our business, it is terrific to see our turnaround and transformation efforts, driving improved financial performance already, and we are on track to achieve our 2025 margin targets.

Moving to Slide 5. For the group, the first quarter result was relatively weaker compared with the full year, which usually ends with a strong quarter. Please keep this in mind when we guide you through our first quarter developments although we have benefited this quarter from a favorable phasing effects, which I’ll come back to later. In the first quarter, we delivered solid revenue growth of 4% with positive contributions from both Care Delivery and Care Enablement. For Care Delivery U.S., we knew that the first quarter was not going to be easy from a volume perspective and it broadly developed in line with our expectations for a broadly flat quarter. Adjusted exit from less profitable acute care contracts, U.S. same-market treatment growth came in at minus 0.3%.

This reflected some more significant weather events within our clinic footprint and an increased impact from the flu season this year. Both led to a higher level of missed treatments, and while improving at the end of the quarter, we continue to have some capacity-constrained clinics, but at the same time, we are encouraged by the increase in referrals sequentially. Therefore, in line with our planning, we expect to see growth of 0.5% to 2% over the course of the year, and the changes and focus of the new Care Delivery leadership are ensuring that we are well-positioned to better capture the growth. In the first quarter from an earnings perspective, both segments realized an improved operating income margin on a year-over-year basis. In particular, strong momentum in Care Enablement led to an accelerated margin improvement on a sequential basis and solid development against the strong first quarter of 2023.

This was supported by strong execution of our FME25 transformation program. As planned, FME25 contributed €52 million in additional savings and we are well on track to achieve the targeted €100 million to €150 million in additional savings by year-end. As already mentioned, we continue to move at speed on our portfolio optimization plan. While we were executing against our turnaround and transformation plans, it is paramount that we do not lose focus on our patients. In the first quarter, we remained on a high level of clinical quality, which is not only the core of all we do, but integral to our sustainability agenda. To this extent, we will host a Sustainability Expert Call on the 13th of June to highlight our initiatives and achievements in this area.

Information on the call is available on our Investor Relations website. Turning to Slide 6. As I just referenced, we are moving at pace to exit noncore and dilutive assets. In the first quarter, we announced that we will divest our clinic networks in Brazil, Colombia, Chile and Ecuador. And after further signing the divestments of our clinic networks in Guatemala, Peru, and Curacao, we have now signed or closed the exit from all of our clinic operations in Latin America. Additionally, in April, we closed the previously announced divestments of the Care Delivery businesses in Turkey and the Cura Day Hospital Group in Australia during April. These collective transactions that I just described are expected to generate cash proceeds of around €650 million upon closing, which we will use to continue to delever.

And all transactions that are currently signed as part of our portfolio optimization plan are estimated to have a negative impact of around €250 million in the full year 2024, mainly from goodwill write-off and book value adjustments, which will be treated as special items in operating income. With that, I’ll hand over to Martin to walk you through the first quarter financial performance.

Martin Fischer: Thank you, Helen and welcome to everyone on the call. I will recap our first quarter performance beginning on Slide 8. In the first quarter, we delivered strong revenue growth of 4% on an outlook basis. Organic growth of 5% was mainly driven by our growing value-based care business and the favorable rate and mix development in Care Delivery. In Care Enablement, growth was supported by positive pricing development. During the first quarter, operating income on an outlook basis improved by 23%, supported by higher prices, higher value-based care contribution and strong but expected FME25 savings resulting in a meaningful margin improvement of 130 basis points. As Helen mentioned, our value-based care business not only improved year-over-year, but was a positive earnings contributor in the quarter.

This led to an earnings development that was somewhat better than expected from a phasing perspective. The €157 million in special items that you see on the chart comprise €143 million in portfolio optimization costs. This is primarily related to the impairment of tangible and intangible assets resulting from the classification as assets held for sale. It also includes FME25 costs of €28 million as well as €1 million in costs associated with the legal form conversion. Additionally, Humacyte remeasurement contributed positively to special items with €15 million. Turning to Slide 9. This slide provides an overview of the 130 basis points improvement for our operating income margin compared to the first quarter of 2023 on an outlook base.

Starting from the left, as a reminder, the special items in 2023, mainly were related to our portfolio optimization efforts in Care Enablement. This brings us to the starting point of our outlook base and then the quarterly margin contribution by segment. The positive margin contributions from both Care Delivery and Care Enablement are important proof points that we are successfully executing against our turnaround and our transformation plans. While there is more work ahead of us, the step up from 7.3% to a 8.6% group margin in the normally weaker first quarter is visible progress towards our 2025 group margin target. Next, on Slide 10. Care Delivery revenue increased by 5% on an outlook base, supported by 6% organic growth. In the U.S., growth of 6% was driven by a growing value-based care business, assumed moderate reimbursement rate increases, and a favorable payer mix development as we continue to see incremental increases in our Medicare Advantage population.

As expected, our U.S. volume development was down by 0.3% when adjusted for the impact of acute contract exits. This is broadly in line with our expectation for the first quarter, and we expected this to improve over the course of the year. Revenue in the internal markets increased by 2%, driven by organic growth and the benefit of increased dialysis days year-over-year. In the first quarter, we observed operating income growth of 25% year-over-year. Positive business growth was driven by improved pricing, payer mix effects, and higher contributions from value-based care. Additionally, FME25 savings also contributed to improved earnings. This was partially offset by higher labor and inflation costs, largely related to the annualization of merit increases in the prior year and fully in line with our assumptions for the current year.

Turning to Page 11. In the first quarter, Care Enablement revenue increased by 2% on an outlook basis supported by 2% in organic growth. This growth largely reflects our continued pricing momentum. We need to compare this to a very strong first quarter in 2023 that benefited from higher sales in critical care products in China as part of a corporate-related onetime government initiative. On an outlook basis, operating income for Care Enablement grew by 23%. Business growth remained stable with continued improved pricing being offset by the negative volume base effect from the mentioned prior year China critical care sales as well as unfavorable foreign exchange transaction effects. The positive development was driven by strong FME25 savings, but partially offset by inflationary cost increases.

This is well in line with our outlook assumptions for the year. Despite the absence of the China Critical Care sales, our first quarter development not only increased, but also better reflects more sustainable improvements in performance. This is, in particular, visible when compared sequentially to the fourth quarter of 2023 with 1.3%. We see a clear inflection point in margin improvement. Also the extent of development might vary quarter-by-quarter. We also expect for the full year, a very visible step-up of the Care Enablement margin compares to 2023 with clear progress towards our 2025 target margin day. Continuing on Page 12. Our operating cash flow development was negatively impacted by €58 million, resulting from a cyber incident on February — in February at Change Healthcare, who is a U.S. clearinghouse provider.

This more than offset the otherwise positive operating cash flow development. As a consequence of the cyber incident, we had a ramp-up of open claims during the quarter. which were moderated at the end of the quarter to €273 million. At the end of quarter one, €311 million of the short-term financing instruments in the U.S. have been utilized. On the back of strong crisis management and quick implementation of countermeasures, plus advanced payments received from different payers, which totaled €250 million. The impact was mitigated and our gross debt for the group was flat compared to year-end last year. Cash collection has continued to pick up in April and with claim management normalizing, debt levels have also reduced to a normal level in the U.S. We continue to enforce our strict financial policy that includes a disciplined approach to capital expenditures.

As a result, we realized free cash flow conversion consistent with prior year level. Our net leverage ratio of 3.2% was stable sequentially. Remaining at the lower end of our self-imposed target corridor of 3 to 3.5 times net EBITDA — net debt to EBITDA. In line with our 2025 strategic ambitions and current capital allocation priorities, deleveraging remains a top priority. We continue to execute against our portfolio optimization plan and proceeds will be used to further reduce debt. I will now hand over to Helen to finish with our outlook.

Helen Giza: Thank you, Martin. I will finish the presentation with our outlook on Slide 14. While phasing for first quarter earnings were somewhat better than expected, driven by our value-based care business, overall, our performance and outlook assumptions developed broadly in line with our expectations. Therefore, we are confirming our 2024 outlook of low to mid-single-digit revenue growth and mid to high teens operating income growth for the full year. This quarter once again demonstrated that we are not only focused on executing against our transformation and turnaround initiatives but also serves as another proof point that we can deliver. I’m very encouraged by the progress we are making at a group level as we take the necessary steps to strengthen and transform our business and lay the foundation to capture profitable growth.

We started 2024 up strong with continued momentum with our FME25 savings and portfolio optimization plan as well as an inflection point in our Care Enablement margin. There is clearly more work to be done, and of course, but we do remain confident in our path to achieve a group operating income margin of 10% to 14% in 2025. That concludes my prepared remarks. And with that, I’ll hand back to Dominik to start the Q&A.

Dominik Heger: Thank you, Helen and Martin for your presentation. Before I hand over for the Q&A, I would like to remind everyone to limit your questions to two. If we have remaining time, we can go another round. And with that, I hand it over to Alice to open the Q&A, please.

Operator: We will now begin the question-and-answer session. [Operator Instructions]

Dominik Heger: Thank you. The first question comes from Richard from Goldman Sachs. Richard?

Richard Felton: Thank you very much. So, two questions from me, please. The first one on Care Enablement margins. So, obviously, strong sequential improvement. But my question is how sustainable do you think that improvement is now? So, obviously, last year, you had a strong start in Q1 and then margins faded slightly through the year. Is there anything that you can call out in terms of sort of phasing for CE margins this year? Or can we expect further improvements from the solid base in Q1.That’s the first question. Then my second one is on the Q1 number for U.S. treatment volumes. Obviously, it were relatively subdued start to the year. Are you able to share any additional color or quantifications on the drivers of that between excess mortality, missed treatments and new starts? Thank you.

Helen Giza: Hi Richard, this is Helen. I’ll take those two. So, on Care Enablement margins, as you can probably tell from my tone here, we’re really excited to see the inflection point. We had said that we expected the Care Enablement margin to at least double from last year. And of course, what you see here is quite a decent step-up. We do expect there will be a little bit of phasing as we go through the quarters. And as we know, value — sorry, VBP, value-based pricing in procurement, excuse me, in China will come in at the back half of the year. But at the same time, we also expect to have further FME25 contributions and the impact from price. So, I think overall, that 6% might be an aggressive proxy for the year, but definitely trending toward that direction, but with some fluctuations probably through the quarters.

On your second question, yes, look, we all know. We are watching. I think the world is watching the U.S. treatment volume growth. And obviously, while Q1 came in line with our expectations, it is obviously still hovering around that flat piece. We did have a flu season that was a little bit stronger than we had thought. That did result in higher mortality and missed treatments in January. I think also for us, with our regional footprint, bad weather in the first six weeks of the year also impacted those missed treatments. The positive sign that we’re signaling here is referral trends are better Q4 to Q1. And then I think outside the external factors, if you will, about kind of the flu season and weather obviously, the operational double down here and pulling apart our end-to-end processes to improve our operational capabilities is well underway.

Of course, we know these things take some time, but confident in the overall plan here that we’ll get this within the range that we have obviously guided to.

Richard Felton: Great. Thank you, Helen.

Dominik Heger: So, the next question comes from Victoria from Berenberg. Victoria?

Victoria Lambert: Thanks for taking my question. Just the first one for me is, where was clinic utilization tracking in Q1. DaVita commented that they were tracking, I think it was 67% during the quarter. So it would just be good to see the comparison is between both of you. And then I saw that there was a divestiture from your Turkish clinics business. Could you give some color how big that divestment is and what other geographies you may be looking to exit this year? thank you.

Helen Giza: Hi Victoria. I’ll take the first question and maybe Martin and I, we will tag-team the second question. In terms of our utilization, I think we are seeing it very similar to DaVita. I think DaVita said 58% on their call. We are seeing it very similar in that high 50s, obviously not where we — where any of us wanted to be, but it is kind of a key focus area for us. And I think the work that we’re doing kind of on the operational turnaround, we’ll certainly help that as well. Obviously, that constrained clinic coming down by a third from quarter end last year is significant for us as well. Martin, do you want to take the numbers on the Turkey divestiture and I can speak to the overall Turkey — sorry, the rest of the divestiture few?

Martin Fischer: Yes. So, we have divested Turkey just only recently. I think there is — it’s a smaller sized business, and we think in April, exactly. And it is — sorry, yes. We closed it in April. It’s a smaller-sized business. I think it’s more in the low double-digit volume range that is relevant for us. And we are in the process or we just closed and have — in Q2, we expect the divestiture effects to materialize. And with that, I think — we also divested the remainder or signed that I meant the remainder of Latin America in April and in the first quarter as well. But for the first quarter, there is almost no effect that we have from divestitures. It will be shown in the quarter two.

Helen Giza: Sorry, on your broader question about what else is in scope, as you can see, we have — we’ve moved quite some pace from — Argentina and NCP quite the loans we list in Q1 with many of those also going into Q2 announcements and closing. We have signed roughly around $1 billion of revenues for those divestments. I think you can expect that the majority of what we had in scope is now out there. There’s a handful of things that we are still working through some other country footprint, but obviously, we can’t speak to that until it’s public and kind of maybe some other smaller assets in scope. I think we’ve been very consistent with our portfolio optimization plan here. And as you saw in our press release, we expect to get around €650 million of proceeds from what we had signed in 2024, which adds to roughly the €135 million that we got last year. I think all on track, proceeding well, a lot of activity these last few months.

Victoria Lambert: Thank you.

Dominik Heger: The next call comes from James from Jefferies. James, the line is yours.

James Vane-Tempest: Hi, thanks for taking my questions and two, if I can, please. If I can just come back to the same-store you mentioned, I think it was minus 0.7% or minus 0.3% adjusting to the acute clinics. There seems to be a different trajectory to DaVita, who I imagine also had to deal with weather and fluent things. So, I guess what are the key differences between them in your business? And did I hear correctly, you’re also reiterating the 0.5 to 2% volume rate target for 2024 if I didn’t see that in the slides. And then my second question is just on the intersegment business. I mean the margins were positive here. So, I was just kind of curious this contribute to the Care Enablement margins? And should we expect a positive margin for the eliminations in full year 2024? Thank you.

Helen Giza: Hi James, I’ll take that first question. Yes, look, there’s — clinic footprint does vary. I think there is definitely a distinction between our competitors’ performance on same-market treatment growth in ours. But the footprint does vary. We were hit pretty hard on East Coast. So, flu season should be roughly the same weather can vary. And clearly, we’ve got some operational work to do and that is well underway here, particularly on some of our processes as well as unconstraining clinics and still some labor challenging markets for us. So, we do reconfirm our growth wasn’t on the slide, I think I spoke to Ed, of 0.5% to 2%. But obviously, we know that, that is expected to step up over the course of the year. And I think what we’re looking at in terms of the patient funnel and referral trends, admissions, new patient starts, obviously, they’re all important metrics for the incoming funnel.

And then for us, operationally, we need to kind of make sure that we can get them into our clinics and service them, and that’s kind of the ongoing process work that we’re doing. In terms of the intersegment business, nothing has changed there in terms of the intercompany pricing or anything like that. So, I want to be very clear that, that’s not transfer pricing or intercompany games. This is really — the progress in Care Enablement is really underlying the operational FME25 transformation programs. But I’ve been telling you all it’s coming. We just — they take longer. We just got to be patient and now we’re starting to see that inflection, particularly on the manufacturing side, and that was evident in the first quarter as well as the continued pricing.

Martin Fischer: Also perhaps to add on the intersegment, it does not roll up into Care Enablement. It rolls up together on the corporate piece. So what you see in the Care Enablement numbers is a true Care Enablement operational performance improvement.

James Vane-Tempest: That’s very clear. Thanks very much.

Dominik Heger: Thank you, James. The next question comes from Veronika from Citi. Veronika, the line is yours.

Veronika Dubajova: Hello everyone and good afternoon and thank you for taking my questions. I will also stick to two — on two very predictable topics, I apologize. The first one is just circle back to the same market treatment growth and Helen, I don’t know if you can maybe articulate a little bit better your expectation of the cadence of growth as we move through Q2, Q3, and Q4. I guess would you already expect to be in the 0.5% to 2% range in the second quarter? Or do we need to wait for that until 3Q or Q4? And then apologies for being picky, but any impact from day number of days in Q1? And if you can just remind us if that’s included or excluded in the minus 0.7, apologies. I should have asked that of Dominik first thing this morning, but I forgot.

My second question is just a bigger question on your revenue per treatment expectations. I know you don’t comment on this, but obviously backing out the same market and it does look like revenue per treatment in Q1 was very healthy. Anything unusual here? And if you can give us an update on Medicare Advantage and how that’s trending and if that was a meaningful driver? Thank you guys.

Helen Giza: Hey Veronika, thank you. Same market treatment growth, not a surprise. Look, I think the cadence of growth, our expectation is that this is going to ramp up over the quarters, and we’re expecting it to be stronger in half two. I think the — obviously, I have a range out there and kind of — we’re obviously managing the guidance within that range. The work that we’re doing, some of that’s taking kind of week or months to take hold. So, I think that’s also why we’re kind of saying it will ramp up. I don’t think it will be the significant step-up like the numbers you threw out there, Veronika for Q2. But ramping up over the course of the year. The impact of dialysis days, there is actually one more day in the quarter, but we actually adjust for that in our same-market treatment growth calculation, our company anyway.

So, that has been adjusted out already. So, obviously, that kind of — it’s a negative adjustment. Moving to your RPT question. Look, this is something we — you see the revenue growth. And obviously, as you say, you back out the volume really, really pleased with the progress that we’re seeing on that line from reimbursement, from pricing and for mix. MA mix continues to grow. There was a time when I said, my gosh, if we can get this to 35%, that would be great. And now we’re north of 40% and kind of going towards that mid-40% number. So, I think the mix — commercial mix is strong, slight improvement there and then kind of obviously the contracting that comes with it. So, really pleased with the progression on the RPT.

Veronika Dubajova: Excellent. Thanks so much.

Dominik Heger: Thank you, Veronika. Next question comes from Graham from UBS. Graham, line is yours.

Graham Doyle: Hi guys. Thanks for taking my questions. Just first one on GLP-1, which hasn’t been asked it’s been a while, but we’re obviously still waiting to get more information from the flow data. But I was wondering in terms of what you have internally, do you have any data that indicates where you’re treating a patient who’s currently taking GLP-1 that it actually does translate into longer times on dialysis, i.e., lower mortality overall, therefore, benefit to you guys? So that would be question number one. And question two is, as you continue this great delivery and you’re seeing the balance sheet deleverage. What are your thoughts in terms of what you might do with that extra balance sheet room, maybe not the next sort of six to 12 months, but beyond that, particularly as you’ve obviously retrenched from some international markets that lease flex for things like, say, by one of your peers clearly does? Thank you very much.

Dominik Heger: Thank you.

Helen Giza: If I can over the mute button. Sorry, about that. hi Graham. Yes. GLP-1s, we do have good data on the patients — our patient population that is taking GLP-1s. Two things I would say. For those that are on it, they’re not on it long enough yet for us to have any experience to kind of see what that translates into in terms of extended time on dialysis. I think maybe we have about a year’s worth of experience there. I think the other comment I would add on GLPs in outpatient population is that we have a very, very high dropout thus far of those patients that are on a GLP-1 and then kind of dropping off it pretty quickly. So, I think that the — there is a study that will read out on GLP-1 drug on dialysis. And I think that’s not expected to read out until 2027.

So, we — obviously, we’re later this month, we will have the expected readout of the double-click, if you will, of the data from flow, but everything that we’re seeing so far continues to confirm our expectations. Let me have Martin speak to the current capital allocation and delever plan, and then I’ll speak to maybe how I’m thinking about the strategy for the broader capital allocation plan.

Martin Fischer: Yes. So, Graham, we have well-articulated 2025 plan. So, until then, it is all about execution. It is about making sure that we continue to execute on our divestment plans. And we will continue to deploy capital to deleverage also kind of to make sure that we do what we can do from our side to keep the investment. There is a 3.5% own implied on applied range that we have. And I think with the 3.2%, we are well-positioned there in and there’s still some room for us to optimize. Having said that, capital allocation follows strategy and with that, I think I hand the strategy part of the question to Helen.

Helen Giza: Yes. Thank you. Graham, I think we feel really good about the capital allocation plans we have in place. And obviously, the combination of the divestments, the improving cash flow, improved operating performance is getting us to a natural delever. We’ve been asked the question a lot, it’s 3 to 3.5 times where you’re going to stick or are you going to change it? I think that answer depends on kind of our outlook. Obviously, I’m working with the leadership team pretty hard now on the strategy beyond 2025 and what those capital needs are. Obviously, we have HDF launch, clearly, sitting in our strategy wheelhouse as well as continued home and value-based care. I think we’ll be continuing to work that internally. And when we can deliver the strategy, we’ll also deliver the capital allocation plan with that.

So, we’re probably thinking next year for a Capital Markets Day on most of this. But now the focus is on strong cash flow generation, improving the profitability, delevering with the cash that we have and building headroom, particularly in this kind of volatile financial market that we’re in. I think we all feel good about the current plan.

Graham Doyle: Awesome. That’s great. Thank you very much guys.

Helen Giza: You bet.

Dominik Heger: Thank you, Graham. The next question comes from Lisa from Bernstein.

Lisa Clive: Hi there. Can you just comment on the VBP in dialysis products in China? Is that going to be consumables and machines? And also, if you could just give us rough estimate of what your Care Enablement sales in China are and assuming that, that gets cut in half, perhaps what the profit impact would be as well? Thank you.

Helen Giza: Hi Lisa. Yes, the — it’s — for that business in China, it’s consumables. I don’t think we’ve disclosed our separate revenue on the China business per se. We have built in an expected impact for VBP into our guidance outlook and kind of with what we’re seeing on tenders and so on. Expect that to be a back half impact, which also, obviously, with the Care Enablement — with the Care Enablement margin in Q1, obviously, we have — that’s why I’m saying that might be a little phasing through the quarters. So, I think what we’ve seen and what we’ve been successful on in the work there on VBP in China seems to be holding its own. And yes, we’re on good track there, I feel.

Lisa Clive: And just a follow-up question. Could you give us a rough idea of what your market share is in China consumables? I mean I think globally, you’re like in the 40%, 50% range in most markets, if I’m correct on that. Just wondering if China is different?

Helen Giza: Lisa, I don’t have that market share number to hand. Why don’t I have Dominik follow back up with you there. I mean you’re right in terms of being the clear leader in the HD product, but let me see if we can snag that market share and get back to you.

Lisa Clive: Okay, perfect. Thanks.

Helen Giza: Thanks.

Dominik Heger: thank you, Lisa. Next question comes from Robert from Morgan Stanley.

Robert Davies: Morning guys. Thanks for taking my questions. I had a few. One was just — could you give us an update because I might have missed it earlier, just in terms of where you’re seeing sort of labor inflation trends so far this year? Are those still coming down in the way you’d originally expected coming into 2024? The second one was on just sort of outlook. I know you said a medium-term margin target. Just in terms of where you’re at normalized growth rates given the sort of trend of excess mortality and I guess, kind of exiting COVID comps, there’s a lot of moving parts. So, just be curious for a little bit more color on what your expectations of what the kind of midterm growth potential for this business is likely to be. And then the final one, perhaps you could just give us an update on how things are trending around home dialysis where that is a percentage of overall kind of activity at the moment? Thank you.

Helen Giza: Martin, do you want to take the one and I’ll take the next two?

Martin Fischer: Yes. As it comes to labor inflation, we are — Robert, we are well on track. So, we have certain assumptions built into our guidance. We assumed a 5% kind of inflation being offset by efficiencies and coming down to a net 3%. We do see that confirmed in our first quarter, so it is developing in line as expectations as we also outlined in the expected headwinds. So, we are confident that we see further easing as we assumed also throughout 2024.

Helen Giza: Robert, on your question on the outlook for growth, I think we’ve been pretty consistent that we feel that the underlying fundamentals in this business are on track. The growing population, the aging population, the increasing incidence of the disease states still no substitution dialysis and small numbers of transplantation. And I think with our neutral view on GLPs, we’re still, I think, feeling confident that the return to market growth of 2% to 3% back to a pre-COVID level by the end of 2025 is on track. So, we are still confirming that. Home — your question on home, I think we’ve all been a little frustrated with the kind of the stagnation in home, and we all know why — whether it kind of the training ability of kind of training capacity of our staff.

What I would say is we have a little bit of an increase. It was still in that low 16%. But I think the trends that we’re seeing there now is a little bit of an inflection point in the number of patients being trained. So, more patients coming in for training. And the expectation and hope is that, that will translate into net patient gains, which is the important number there so we’re making progress. I think we all wish it would be faster. We know we have an aspirational goal out there, but I think this is going in tandem with the kind of the operational turnaround kind of in the clinic efficiencies as well.

Robert Davies: Okay, great. Thank you.

Dominik Heger: Thank you. The next question comes from Hugo from BNPP. Your line yours Hugo.

Hugo Solvet: Thanks Dominik. Hi guys. Thanks for taking my questions. I have two. Maybe, Helen, first, you mentioned the strong trends in terms of referral strong, just curious what’s the lag here takes to same treatment market growth? And I didn’t catch your earlier answer on the answer of the Veronika’s question. Would you expect as soon as Q2 to be at or above 0.5% for same market treatment growth? Second, a follow-up on hemodialysis. Curious to get your thoughts and views on the improving access to on dialysis act, maybe the likelihood to go through and the feedback that you’re getting from your teams in Washington? Thank you.

Dominik Heger: Thank you. Hugo, we couldn’t probably hear your first question. I think you asked how long referrals take to reflect in same market treatment growth. Is that correct?

Hugo Solvet: That’s correct. Yes, thank you.

Helen Giza: Okay. Maybe — hi Hugo, maybe I’ll take these in reverse order as we pull some numbers here. On the last one about the Dialysis Act, I don’t think — obviously, that we’re supportive of what’s going on there. We’re not expecting that, though, to have any more of an impact to us than what we’ve already got in here. If I recall correctly, it was budget neutral from CMS. So that likely will kind of maybe reduce the likelihood of getting it — getting it through. But I don’t think that changes our plans or anything on home. In terms of the same market treatment growth, I mean, I’m not going to guess what the number is for Q2. I mean I know the work that’s underway. I can see the patient funnel. Obviously, we’re expecting it to increase, but I’m not going to guess at that number right now.

We’ll give you the update in Q2. And then in terms of your — the first question on how long it takes to get referrals. I mean that referral becomes a patient in a chair. And obviously, the more treatments we have, it plays into the treatment number — pretty quickly, but obviously, on new patient and one treatment adds so a lower number to the numerator, if you will. I think, obviously, we want to make sure that, that referral gets scheduled, get into our clinic that they’re not missing their treatment and overall, that’s adding to the growth. But obviously, that does take time to show up in because of the number of patients, the number of treatments in the base takes one additional patient. It takes a while to show up in the number and we need a lot of patients to get that back.

But we’re optimistic. I feel really confident with the work the team is doing. I think we’re addressing it the right way. We’re pulling apart processes and improving them end-to-end. So I’m optimistic that it’s going to translate into real growth.

Hugo Solvet: Thank you very much.

Dominik Heger: Thank you, Hugo. The next question comes from [indiscernible] from JPMorgan.

Unidentified Analyst: Hi, good afternoon. Thanks for taking my call. My call is on behalf of David Adlington. I had two, please. Firstly, can you please quantify how much of a benefit the BBC was in Q1? And how should we be thinking about that for the rest of the year? And then second one is just a follow-up on the labor inflation. Could you comment on how much your agency costs have reduced year-on-year? And can you take these agency costs down further?

Helen Giza: Thanks [Indiscernible]. I think I’ll take both of those. The BBC business, as you know, obviously fluctuates up and down depending on the kind of the — kind of the claims and experience there. I think probably the number that’s meaningful for Q1 is that we saw a low double-digit positive amount in the quarter. So, that kind of gives you a sense of when we talk about the phasing of the earnings contribution in Q1 was low double-digits. And that’s in euros. The kind of — how that plays out through the rest of the year will depend on that — the kind of the contract and the way the revenue flows. In terms of your labor question, as quickly as that temporary labor market rose and what I referred to as the hot mess of the summer of 2022, and those weights increased that all dissipated as well.

So, our use of contract labor is down significantly year-over-year and quarter-over-quarter. We’re using it selectively. I would say, though, where we know that it makes sense to use it. There’s really tight controls over using it in certain metro areas, hotspots or clear constrained clinics where we need to get temporary labor in, but definitely down in usage and significantly down in rates.

Unidentified Analyst: Perfect. That’s very helpful. Thanks Helen.

Dominik Heger: thank you. The next question comes from Oliver from ODDO BHF.

Oliver Metzger: Yes, good afternoon. Thanks for taking my questions. So, the first one is also on labor. So, recent data suggest a stronger-than-expected economy of U.S., also some more positive labor data. So can you elaborate about the current labor shortage situations? And also in this context, maybe after a bad experience you made two years ago, if the situation deteriorates quickly, have you learned something from two years ago where you can adapt that the consequences might not be as severe, just talking in an extreme case scenario? Second question is a summer is not far away. So, some indication about the next years, the bundled rate increase should come — so I assume you have a lot of interactions with CMS and also government.

So, is there already any tenancy? How do you think the next year’s bundle rate might look like? Also in this context, how is your experience about the weak bundled price increase this year to spread into the commercial plans? How is the mechanism also time-wise? Do you see there an immediate impact from PMS price than a few months later, you see also commercial prices to that also a slower increase. So, that would be very helpful. Thank you.

Helen Giza: Thanks Oliver to both those questions. Yes, look, I think the — the labor trends, I think we’re balancing, as Martin said, balancing the merit increases and being selective about where we’re paying for that labor, but offset by labor efficiencies, that’s key. I think also I’m really encouraged by another reduction of 500 open positions in Q1. And when I look at now this open position number, 3,000, 3,500. It’s still actually at the same kind of split between nurses and PCTs. Our overall turnover is also improving. So that — and I think also about one-third of those hires that we now are getting in are what we call boomerangs, returning employees. So, the benefit of that is we’re making inroads into the open positions.

We’re hiring back experienced tenured employees that require less training and our overall turnover is improving as well. I think we’ve also — we have learned a lot from the summer of 2022. I think in terms of being able with our metrics to see those signals earlier in a clinic and also this kind of very dedicated use of temporary labor. I think the market doesn’t feel like it was, but obviously, in some areas, we’re still watching it quite closely. I love the crystal ball of what the PPS rate is going to look like. And I just about the cost. But I think what we know is MedPAC has put out a suggested 1.8%, I hope that after the spikes of cost inflation and things being a little out of control over the last few years, as things settle down, the reimbursement rate and the mechanisms that we have relied on for years come back into play.

And I don’t know, common sense on the normality play now. Saying that, we haven’t built our guidance on egregious increases. So I think as you’ve — as we’ve said, been quite consistent, we have assumed moderate overall rate increases and if they’re higher grade. So I think we’re being cautiously conservative there and appropriately so until we know anything else.

Oliver Metzger: Okay. Thank you. And regarding the spillover from the bundled rate into the commercial contracts, what’s your–

Helen Giza: Yes. Sorry, I missed that. I missed that second part of that question, my apologies. Look, the commercial rate for both MA and commercial are obviously contracted separately. We obviously take into account what — when we’re entering into any negotiation, it’s kind of kind of taking the impact of the PPS rate as a baseline into those negotiations and always kind of a healthy trade-off between volume and price, network adequacy and coverage. So I think our overall guidance is moderate overall rate increases. So, I think the what we — we have a new head of contracting strategy who is really, really terrific. And I think overall, helping us with our future contracting strategy here. They’re not all automatically linked to the PPS weight.

I think you know that some have escalators in them, CPI. So they’re all quite different. But overall, as I said, we’re assuming a moderate increase of the 1% to 2% rate. So, yes, I think everything looks good and on track there.

Oliver Metzger: Okay, great. Thank you very much.

Dominik Heger: So, we have time for one last caller. Falko from Deutsche Bank.

Falko Friedrichs: Thank you very much. Helen, I have two clarification questions on guidance, please. Firstly, on the same-store treatment growth guidance and specifically the upper end, the 2%. Can we still consider that as a realistic average growth rate for this year? Or should we rather view this as a potential exit rate? And then look at the lower end of 0.5% to 1% as a realistic average growth for this year? And then secondly, I was a little surprised that you confirmed your 2025 EBIT margin target again today. Is there actually still a realistic scenario in which you can get to a 14% margin next year? And if that’s not the case, I’m just a little surprised that sort of you keep this type of aggressive hurdle here.

Helen Giza: Yes, I think it’s a fair question, and it’s obviously one that we are working through in real-time on the back of flat same market treatment growth in Q1. Obviously, we’ve got a guidance range out there. I think it’s fair to assume that, that 2% is more of an exit rate than an average rate at this point. And I think, obviously, as we get another quarter under our belt, we will refine or adjust or update accordingly. On your second question, I don’t feel it’s aggressive. We clearly have a range out there for our EBIT margin. I think I’ve been pretty consistent in my commitment to try and give an update on that band itself by half one. I think that is still my plan — you know me by now. I’m trying to take it a quarter at a time.

I’m really pleased with the progress. It’s on track and the financials and bottom line performance are clearly speaking for themselves. I know there’s a question out there of what’s it going to take to get to the top end of those EBIT margins. But I think the progress that we’re making will continue to inform that and for now, I’m not going to change it today. But clearly, it’s top of mind for me knowing that the time I get to half one, the end of 2025 is only 18 months away. So we’ll continue to provide the appropriate color and kind of how we’re seeing those guidance ranges as the year goes on.

Falko Friedrichs: Okay, thank you Helen.

Helen Giza: You bet Falco.

Dominik Heger: So, we have run out of time. Thank you, everyone, for this contribution. This is great for I know what you all have a busy day. Thank you very much. We’ll appreciate that. And we’ll meet you on the road and our latest next quarter. Thank you.

Helen Giza: Thanks everyone. Thanks for your continuing support. Take care.

Martin Fischer: Take care.