Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) Q4 2023 Earnings Call Transcript

Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) Q4 2023 Earnings Call Transcript February 20, 2024

Fresenius Medical Care AG & Co. KGaA beats earnings expectations. Reported EPS is $0.44, expectations were $0.36. 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).

Operator: Ladies and gentlemen, welcome to the report on the Fourth Quarter 2023 Conference call. I’m Andrea, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Dominik Heger, Head of Investor Relations. Please go ahead, sir.

Dominik Heger: Thank you, Andrea. Good afternoon or good morning, depending on where you are. I would also like to welcome you to our earnings call for the fourth quarter 2023 for the first time at 2 p.m. As always, I need to start out the call by mentioning our caution 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 and to our SEC filings. With the Q4 results, we traditionally share an update on our strategic plan. Therefore, we have more to cover than in the other quarters. Given that we only have the 60 minutes, we need to limit the number of questions again to two in order to give everyone the chance to ask questions.

It would be great if we could make this work again. With us today is Helen Giza, our CEO and Chair of Management Board, and Martin Fischer, our CFO. Helen will start with an update on our execution against our strategic plan. Martin will provide a review of the fourth quarter, and Helen will finish the prepared remarks with our outlook. Then, we are happy to take your questions. With that, Helen, the floor is yours.

Helen Giza: Thank you, Dominik, and welcome 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 4. A year ago, we laid out our strategic plan to turnaround and transform Fresenius Medical Care. This plan included ambitious structural, operational and cultural changes. Thanks to the hard work and dedication of our teams around the world, we have successfully executed on our commitment of fundamental transformation, making progress against all facets of our plan. We have done what we said we would do. A lot of the change we have undertaken would not have been possible without the implementation of our new operating model at the start of 2023.

With our two distinct global segments, Care Delivery and Care Enablement, we are now operating with an end-to-end level of transparency and accountability that has not been in place previously. The new operating model enabled us to introduce new financial reporting with enhanced transparency. And throughout 2023, our commitment to our operational turnaround initiatives helped drive organic growth in both segments and improving operational performance. Our FME25 transformation program delivered savings ahead of schedule while ensuring our company becomes stronger and more resilient in the future. We have also undertaken a cultural transformation with greater emphasis on accountability. To this extent, we made two important leadership changes on our management board with Martin Fischer joining as CFO in October and Craig Cordola, our new Head of Care Delivery, joining in January of this year.

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Q&A Session

I’m very excited about the new perspectives that they bring to our company and the impact that they are already having. In the fourth quarter, we finalized our change in legal form and are now operating in a simplified governance structure with strengthened rights of our free float shareholders. We continued to execute against our portfolio optimization plan with several key assets divested by the end of the year and more underway and proceeds applied to deleveraging. And finally, our relentless focus on improving operating performance allowed us to upgrade our outlook for the first time in the company’s history. And I’m very proud to say that we even exceeded our upgraded outlook, and we did a little bit more than we said we would do. Turning to Slide 5, beyond our achievements on the strategic front, I’d like to quickly recap our operational performance in 2023.

We achieved revenue growth at the top end of our outlook range and organic growth in the year was mainly driven by favorable business developments. As we still experience the annualization impacts of excess mortality from the COVID pandemic, volume development in the US is an important KPI that we have been watching closely, and I know the market is as well. 2023 we assumed a minus 1% to plus 1% growth in same market treatments in the US, and when adjusted for the exit of less profitable acute care contracts, we finished the year right at the center of that assumed range. This makes us optimistic for a positive growth development for 2024, which we have included with a careful assumption as the basis for our outlook for this year. As I mentioned, our earnings exceeded the top end of our upgraded outlook, thanks to business growth, realized FME25 savings ahead of plan, and the Tricare settlement.

Contributing to the earnings growth were faster-than-expected labor productivity improvements in Care Delivery as well as positive impacts from our pricing initiatives in Care Enablement. Regarding the portfolio optimization, the divestments closed in 2023 accounted for €214 million of revenue and €20 million of operating income. The strict commitment to our stringent financial policy resulted in significantly improved cash flow and an important decrease in our net leverage ratio. And we continue to make progress on our broader sustainability goals. Earlier this year, we submitted our commitment letter to the Science-Based Targets initiative underlining our goal to achieve climate neutrality in our operations by 2040, in line with the Paris Agreement.

Moving to Slide 6. Although we are going through a significant transformation, first and foremost, we remain a purpose-driven company focused on patient-centric care of the highest quality. Patients’ overall satisfaction with our services measured by the net promoter score of 72 was at an even higher level than in previous years. Our global quality index is another important KPI in this regard. Throughout 2023, we saw sequential stability in our clinical performance at a high level. Next on Slide 7. In 2023, we delivered 5% revenue growth at constant currency and 4% organic growth. Organic growth in Care Delivery was driven by the expansion of our value-based care book of business in the United States and higher reimbursements. Organic revenue growth and Care Enablement was driven by both higher volumes and prices.

As a reminder, organic growth does not include the Tricare settlement or the divestment proceeds. Along with the solid top-line growth, the successful execution of our turnaround initiatives translated into improved earnings. Our operating income increased 15% in constant currency, and our group margin expanded 100 basis points to 8.9%. We are making important progress towards our 2025 group margin target, which is supported by our FME25 program, where we realized €346 million in savings through the end of 2023, well ahead of our plan. The €181 million Tricare settlement proceeds was another positive earnings driver, for which we increased our outlook the second time in 2023. And we realized meaningful labor productivity improvements in Care Delivery that we originally only expected to realize in 2024.

It is terrific to have achieved so much already in 2023, and as such, we would expect a lower incremental degree of improvement in 2024. In Care Enablement, our successful pricing initiatives and earnings improvement were diluted by continued inflationary pressures and foreign currency transaction losses. Turning to Slide 8. As you can imagine, I like this slide a lot, as it confirms that we delivered against what we said we would, and more. In 2023, we guided for low- to mid-single digit revenue growth, and we finished the year at the top of our outlook range with 5% revenue growth. While we started the year with an expected up to 9% earnings decline, we were able to upgrade our earnings outlook twice in 2023 and ultimately delivered operating income growth of 15%, exceeding our double-upgraded range of 12% to 14%.

This approach of a realistic outlook, combined with successful execution, is something I intend to continue. Next on Slide 9. Excuse me. To turnaround our business performance, we need to reduce distraction and focus on our core and higher-margin businesses. Since we laid out our portfolio optimization plan at our Capital Markets Day last April, we have been moving at speed. We have announced and closed divestments of our clinic network and production sites in Argentina, our clinic network in Hungary, and NCP, our cardiovascular clinic network in the United States. We have announced additional divestments that are subject to regulatory approval and are in the process of closing. These include our clinic network in Sub-Saharan Africa, Cura Day Hospital Group in Australia, and our clinic network in Turkey.

We continue to work on a number of other divestments, and of course, we’ll keep you updated. Turning to Slide 10. We strictly adhered to our disciplined financial policy in 2023. We improved our cash flow, and we limited our capital expenditures. With our top priority to deleverage, we applied proceeds from divestments and the Tricare settlement to reduce our debt. We reduced our leverage ratio from 3.4 times to 3.2 times. And in light of fully being on track for our deleveraging and as prescribed by our dividend policy, for 2023, the Supervisory Board and Management Board proposed a dividend of €1.19 per share. The 6% increase is in line with year-over-year adjusted net income growth. Martin will walk through our improved cash flow and strengthen financial position in more detail later in the presentation.

Next on Slide 11, we believe that value-based care is an important element in the future of healthcare. While value-based care is not entirely new, it is still in its early development stages as a business or risk model. It needs to continuously evolve from a technology and scale perspective. Also, revenue and profit recognition is often more retrospective than in our core business, which creates some volatility, in particular, during a financial year. We continue to lead the industry with our capabilities for both CKD and ESRD patients. We focus on clinical excellence, which also includes reducing hospitalizations, being a key indicator here. And of course, as a dialysis company, we also have a clear focus on increasing optimal new starts for the dialysis treatment when patients progress to ESRD.

For 2024, we expect that medical costs under management will grow by 20% and patient lives covered by around 10%. From a revenue contribution, we assume around US$2 billion with a positive operating income contribution. Home is an important treatment modality, as it offers qualifying patients the opportunity for more flexibility in treatments and an improved quality of life. This is also visible in lower hospitalization days, which is supportive in particular to costs in value-based care arrangements. Growth in home treatment is also an important opportunity for our business as it is asset light and requires significantly less labor hours. Although our home growth has recently slowed at around 16% penetration in the US, we remain optimistic in the opportunity for future growth given the wide benefit it offers.

With our new Care Delivery leadership, we will take a fresh look at the most optimal way to increase home treatments to get us closer to our aspirational goal of 25% by 2027. Turning to Slide 12, we spent a lot of time talking about our strategic plan towards our 2025 targets. However, our thinking and planning does not stop there. As you will have seen from our press release earlier this month, we are on the verge of introducing a key innovation development in the United States with the potential to set a new standard of care for the industry. High-volume hemodiafiltration, or high-volume HDF for short, is a technology that is already transforming how dialysis is done in many of our international markets, and would present an important opportunity for our patients and our business in the US, following the CONVINCE study publication last year.

Unlike conventional high-flux hemodialysis, which primarily employs diffusion to remove small molecules and fluid from the blood, high-volume hemodiafiltration incorporates both diffusion and convection techniques to eliminate larger molecules and effectively manage fluid replacement through convection. The CONVINCE study was a multinational research study that compared these two types of dialysis techniques. It was a three-year trial performed at 61 dialysis centers in eight European countries and included 1,360 patients. The results showed a 23% reduction in all-cause mortality in patients treated with high-volume HDF versus those treated with high-flux dialysis. In our own EMEA dialysis patient population, over half the treatments are already high-volume HDF, and we have been using this technique for a decade.

Our 5008X haemodialysis machine received FDA clearance this month. It is the first machine capable of high-volume HDF to be approved in the United States. Along with our CorAL dialyzer, which is already registered in the US, the 5008X combines the latest device engineering and cutting-edge membrane technologies required to make high-volume HDF possible. This is a very exciting opportunity for the upcoming years as we plan a broad commercial launch in 2025. In the US, there is currently an estimated install base of around 160,000 in-center haemodialysis machines across all service providers that could be replaced to adopt this new standard of care. I’ll now hand over to Martin to provide an update on the fourth quarter.

Martin Fischer: Thank you, Helen. And welcome to everyone on the call. I will recap our fourth quarter performance beginning on Slide 14. The fourth quarter developed in line with our expectations. We continued to deliver solid organic growth, revenue growth and contributions from both operating segments. USA market treatment growth was broadly stable and in line with our assumptions for the year when adjusted for the exit of less profitable acute contracts. These acute contracts exit demonstrate our continued focus on driving profitable growth. Earnings in the fourth quarter were supported by strong FME25 savings, as well as proceeds from the Tricare settlement in the US and improved pricing and Care Enablement. In Care Delivery US, our value-based care business continued to expand.

While this development was revenue supportive, we experienced a negative earnings contribution in the fourth quarter driven by CKCC retrospective trend adjustments. As Helen described earlier, we continued to make important progress on our portfolio optimization plan, with the divestment of NCP and Argentina closing in the quarter. Turning to Slide 15. In the fourth quarter, we delivered revenue growth of 7% at constant currency. Organic growth of 3% was mainly driven by price in Care Delivery and both volume and price in Care Enablement. The Tricare settlement and the closed portfolio optimization activities are not included in organic growth. During the fourth quarter, operating income, on a guided basis, improved by 18%, and our group margin improved to 11%.