Fresenius Medical Care AG (FME) Earnings Call Transcript & Summary

Great. Good afternoon, everybody. I'm David Adlington, head of the research group for the European medtech and services in London. It's my pleasure to introduce Rice Powell, CEO of Fresenius Medical Care. There is no breakout session afterwards. Thanks.

Thank you, David. Before I get into my prepared remarks, I'd like to introduce to you, she's down here in front, Helen Giza, our new CFO. She's been here 60 days, and she's still standing. That's a good thing. Helen, please. So you'll notice up on the top left, we're talking about 2018. I'm not living in a time warp, but 2018 is the last full year set of numbers we have at the moment. We haven't done Q4, so we're going to give you some view of '18 as a baseline, and then I'll go through the third quarter earnings and give you some detail there as well. But we are in the midst of actually doing our calculations and tolling up numbers for fourth quarter as we speak. So I thought it might be a little helpful just to give you a full year view. So looking at '18 and our growth story there. We report every quarter on the clinic growth in our network. You can see up 5% on clinics, you can see patient growth. We're at 333,000 patients at the end of '18. And you can see our treatment growth as well. Now when you look at EUR 16.5 billion revenue in 2018, the way this breaks down is roughly 70% of the revenue sits in the U.S. It is our largest business. It has always been our largest business, but my colleagues in China say they're going to give them a run for their money here as we go through time. Looking at EMEA, it's 16% of the total revenue. You see constant currency growth in the region, and EMEA is Europe, Middle East and Africa, at 4% constant currency growth. Asia Pacific is 10% of the revenue, growing very rapidly. I'll talk about growth in these regions in another slide or so. And then looking at Latin America at 4% of the total revenue. I would also remind you, when you break these figures down, let's remember that Care Coordination is a piece of our revenue as well, and I'll have a slide on that. I'll show here in a minute as to what Care Coordination contributes to the overall revenue. Now if you look at patient growth, we see out through 2025 a CAGR of about 6% growth. You can see Asia Pacific is leading the pack at 8%. If you were to back out Japan, which for years has grown somewhere around 1% to 1.2%, you back them out, and all of a sudden that growth in Asia Pacific on the strength of India and China gets into double digits, okay? Japan has a little bit of a dampening effect on that with their growth. North America at about 4%, Latin America, et cetera. I won't read those to you. What drives this patient growth? Age of the population across the world, lifestyle, higher life expectancy. And as countries evolve, and as emerging markets begin to develop and there's more money available, people realize that they need to give patients access to make these treatments. We would tell you today that we believe the growth would be much higher in certain emerging markets. And the issue is people die every day and don't know that they need dialysis. It's simply because there's not enough screening. There's not enough work that goes into the upfront screening of these patients to be able to know. When we went into Russia about 8 years ago and we built clinics, and we thought we were going to be capacity-accurate, we found out we were way under-capacity planned because we had no idea how many more patients there were because there were no screenings. So we learned the hard way that you really have to think about how you want to approach the market. So we've altered our process. So when we've gone into China, particularly in the interior of China, we haven't gone in and built freestanding clinics. We've gone in and bought hospitals in rural areas. And why do we do that, we're buying small, 30-, 40-bed hospitals? Because there's an infrastructure in that hospital where we can provide dialysis in the actual hospital itself. But we also have the ability to encourage people in the community to come in and let us do screenings on them so we can find out exactly what is the growth potential in a geographic region. And then as we get to the point that we are completely out of capacity in the hospital, we'll start to build freestanding dialysis centers. But it's something that we've learned over time in these emerging markets. You got to get these patients screened. You have to understand what that -- what I call tip of the iceberg underneath the surface of the water can be as you look at that growth. So by 2025, we're estimating almost 5 million people, okay, that will be dialysis patients by 2025. And unfortunately, the older I get, the quicker that date gets here, so we have to be prepared. Now looking at strategy. We think we have 4 very critical core competencies. The first one is product innovation. We are first and foremost a products company. It is the bedrock of our technology. It is the keystone of the foundation of the vertical integration that we have because it gives us the ability to interface with physicians, to interface with institutions and understand exactly what can clinical outcomes be based off the fact that we do know how to innovate, and we brought some of the best innovations in the dialysis industry to market over the 23 years that Fresenius Medical Care has been in existence. Standardizing medical procedures. Now many times, people ask me, "Rice, you've got 4,000 clinics around the world, okay? Is it like McDonald's?" And I cringe because it's not. Yes, we standardize, we try to wring every ounce of cost that we can get out of our clinics, but here's what separates Fresenius Medical Care from other providers. We can standardize, and yet we focus on those patients feeling like they are the only patient that we have. They have an individual experience. And then when we survey our patients, they say to us, "You make us feel special. I don't feel like I'm in a -- I'm a piece of meat being moved down the conveyor belt." And if any of you've ever been in a big hospital-teaching institution, I've been that piece of meat. I've been moved down that conveyor belt before, it doesn't necessarily feel so good. So it's important, and I think it's something that we spend a lot of time and effort and money on is how do we distinguish the provision of care that we give people around the world so that they don't feel like they're stuck in a franchise, if you will. Operating outpatient facilities. We believe it's a strength of ours. We have the ability to go out. We know what it takes to operate freestanding facilities. There is never -- today, I'll just give you an example of how it's gone. So we're on the third earthquake in Puerto Rico. We are the largest provider in Puerto Rico. We're in constant contact. We're calling D.C., "You cannot leave these people free floating as you did when they had the hurricane. We have to get back up and running." That's what we do. We're in the Philippines today looking at what happens if, in fact, this volcano erupts unless that's happened since I have last looked. We are constantly looking at what do we need to do to operate those facilities, to treat our patients and take care of our employees because you can't treat patients if you don't have employees. So people think that's trivial. We look and try to manage and stay in front of weather conditions and things like that. Because if we're not there, if the doors aren't open, people aren't getting treated. And then lastly, we think we've gotten very good at trying to coordinate patient's care and moving them through what can be a very fractionated system and not one that flows very well across the world. How you move patients through dialysis, how you take care of their comorbid conditions is radically different in the United States than it is in South Africa. But we try to take what we learn in the most sophisticated markets and push that down into the less sophisticated markets. So we're a step ahead of things as those markets evolve and develop over time. So if you look at how we view the world, I said products is the bedrock. Then we have our dialysis services, which is really the provision of care for our patients and our clinics. And then wrapped on that outer edge are all the other things we do to manage their comorbidities and to coordinate their care. Years ago, we realized dialysis patients, on average, have 9 or 10 key prescriptions that they need and they take. So we built our own pharmacy to be able to supply them if they need that. We give people access to cardiovascular procedures. A lot of our patients, a large percentage of them have pacemakers. They have defibrillators. They've got stents. They need work done on them, so we make sure they have access to get the vascular work done on their issues there. We've talked about outpatient facilities. Yes, we are a certified health plan in the United States. We're our own insurance company. We can insure. We only focus on dialysis patients. We're not looking to muscle out of their business. But we do think we know as much about dialysis as anyone. And we think having a health plan that helps patients move through their journey on dialysis makes sense in the United States. I think I'll [indiscernible] from there. So looking on our home strategy. If you look at the split of total treatments for 2019, our in-center treatments are about 88% of the treatments that we perform. It's growing about 4%. And you can see that home, home therapies at this particular point in time, was about 12% of the treatments that we performed. If you take home as itself and you break it down to the 2 therapies that exist, peritoneal dialysis therapy, which is where you use the lining of the stomach as the filter. It's the artificial kidney, if you will, the lining of your stomach is the most vascular part of your body. And so that's how we use that filter process through the chemicals that we put into the products that we pump into your belly. It dwells there, pulls the toxins out, goes away. That's about 78% of our home treatments. It grows about 8% a year. Hemodialysis at home, which is blood access, that's growing at about 40 -- 14%. It's 22% of the treatments. And we've had some of the highest growth we've ever experienced in this particular 2019 looking at the various quarters. And I'll show you a slide on that when I get to third quarter slides there. Now we talk a lot about beyond the initial $2 billion investment we made to acquire NxStage. Where else are we spending money? We are coordinating patient education. We're setting up home training clinics. Think about it this way. As you train patients that want to be at home and they're going to go home, you got to get products to them. You need trucks, you need drivers. There's a cascade effect here if you're going to see a shift to more patients being at home. And we have invested, and we'll continue to invest as necessary as that happens. Now giving you a sense, and we talked about China earlier, but just take a minute and think about, if you look at the health care expenditure as a percent of GDP at 6%, but then you look at the population of the diabetics in China today at 11%. So here's the way we look at this, as we see the percent of diabetics increase, you look at the slope of that curve, then the next thing you see, okay, diabetics, it grows, then obesity grows. And then the next thing you know, here comes dialysis down the curve. We believe there's going to be -- there's no doubt that China is going to be the largest market that we serve. It is today the largest market. There's a lot more growth that will go on there. But it is no question in my mind that it is what we transport from this country into other markets in terms of fast food, it's not doing anybody any favors. And it absolutely has a difference in what we see as the growth rates and the preponderance of dialysis in these developing markets when they adapt or they move more toward the diet that we have here in the U.S. And I can assure you, I'm not proud of that, but it is a fact that we -- we're well aware of. Now looking at the third quarter, specifically. It was a strong organic growth experience for us in the quarter. North America had very good growth in the dialysis business, the home growth was astronomical. I'll show you that. We actually had very good product growth, supported by the NxStage acquisition as well as the core dialysis products that we sell. And our Care Coordination had some negative effects from the ESCO program. I would say we have a very different opinion about what we're saving in value-based care than the U.S. government. The problem is they control the calculator, the pencil and the paper that the work's done on. But I'm still in D.C. arguing with them about how that's working, so don't count me out yet. We had a new machine that we launched in Asia, the 4008. The simple way to put this is, as we look at the Chinese market, it is very well developed in terms of premium products, value-based products. There's a real dichotomy there. We built this machine, developed it. We launched it because we know that what we sell in Europe as a standard machine, the 6008, is too expensive. It's not going to work in China. They don't need and they don't want as many bells and whistles. So we developed this machine to be able to deliver the same level of care but without necessarily all the analytics and the things that's in our highest machine. This machine starts in China. We think it has applicability in Latin America and other markets. But it's our first foray into differentiating the product line from premium to value-based, if you will. Now looking at third quarter, we were very pleased with 5.2% organic revenue growth, okay? We did see some tailwinds from the FX effects that helped us. And then if you look at the adjusted revenue, you can see constant currency growth at 5%. We had good growth of 8%. Looking down at the EBIT, we talked about this, we gave you guidance as to where we thought we would be on the earnings side of this. And actually, our net income adjusted was a little better than we had projected it would be in the third quarter. But all in all, we like the trends, and we like the underlying things that we saw in third quarter of this year. Now looking at this from a regional perspective. You can see that we had good constant currency growth and organic growth in North America. I hate it when people read slides to me, so I'm not going to go through each one of these. But you can see, probably I guess I'd say Asia Pacific was a star as well as EMEA on their constant currency revenue growth as well as organic growth. It was really a very, very good quarter for us. And we feel like the fundamentals have lined up, and we're progressing quite well. Now when you look at the services side of the business. Just to give you some orientation here, we look at health care services, and then we back out Care Coordination so you can get a sense of that. But if you look overall, 4% constant currency growth, organic growth of 4% and same market treatment growth of 4%. We historically have been same market treatment growth more in the 3% range, so we see that accelerating. And we like that. If you look at Care Coordination, obviously you're looking at constant currency growth, and you say, "Wow, negative 13%." Remember, we sold off the largest part of our Care Coordination portfolio, which was Sound Physicians, which was a hospitalist business, because we felt like we had learned what we needed to from how we wanted to take their aspect of looking at in-the-hospital systems and how we move dialysis patients through hospitals in the U.S. because all of our patients, on average, spend about 10 or 11 days in the hospital due to their comorbidities. And it was a black hole for us. We would lose patients in the hospital and didn't know when they were coming out. This was a chance for us to learn and understand. And it helps that when we decided to divest the business that we made a considerable profit on it, so that's always a nice touch as well. And then you can see the other place where we have Care Coordination is in Asia-Pacific, and you can see the growth there. It's different. It's not exactly the same kind of Care Coordination that we do in the U.S. This is really what they call day hospitals or out-hospital surgery centers where they do endoscopy, they do small microsurgery, they do eye surgery, things of that nature. But we like the idea that it's something that we know how to manage relative to a freestanding facility and running procedures through there. Now if you look at our products business. For the third quarter, we had very, very good growth there. Constant currency growth on the health care products side of 13%. Good organic growth at 10%. And then you can see how it played out over the regions. But I think it's worth noting that North America was at 24% constant currency. Again, a big piece of that is NxStage, but the underlying product business for dialyzers, hemo equipment and things of that nature was running quite well in all the regions. This is one of the better product quarters we've had in quite a while, but it's also an acceleration of where we were in Q2. So we very much like what we're seeing there. Our largest product business, sometimes people just assume that is the U.S. because it's such a large market. It really isn't our largest product business. It's in EMEA. You can see it's 37% of the book, and then North America comes in at 30%. It's the second. So our outlook has not changed. We gave you targets for 2019. Revenue growth, 3% to 7% and minus 2% to 2%. We termed 2019 an investment year. And we are -- we have invested. We are doing that. We talked about $100 million cost optimization plan to kind of rebase our clinic network in the U.S. to look at our office space because office space mimics where your clinics are. You've got overhead people sitting there to help administer what goes on in the region. We'll talk about this in about a month when we give you the fourth quarter earnings, and you'll see that we've done exactly what we said we were going to do. And then we also had laid out our targets for 2020, mid- to high single-digit growth rates. If I had a dime for everybody today that came into the 1-on-1s and say, "Well, can you give me a new guidance, I would retire, okay?" But not going to do that. You'll have to wait a month, and we'll see where we are, okay? But the good news is the guidance is out there. And I think at this point, I'm going to save you 5 minutes in your day. I know I'm probably holding some of you up from your next meeting or cocktail hour. So I'll conclude my remarks at this point. And we're not doing any Q&A at this point, right, David? Okay. Thank you very much for your interest.