Fresenius SE & Co. KGaA (FRE) Earnings Call Transcript & Summary

Good morning, everybody. I'm David Adlington. I head up the European Medtech and Services Research Group in London. It's my pleasure to introduce Stephan Sturm, CEO of Fresenius SE. The breakout room afterwards is at Yorkshire Room, just down the corridor that way. Stephan, thank you.

David, thank you. Good morning, everybody. Thank you for your interest in Fresenius. Much appreciated as always. Also, as always, no slides to distract you, you will have to focus to my -- on my speech. Thank you. We have concluded our investment year 2019. And it's a bit too early to tell you something definitive as to the outcome. But I would work on the assumption that when we publish our results on February 20, it is very unlikely that we're going to create a major surprise. To remind you all, the guidance that we had given to the capital markets did foresee very healthy top line growth at 4% to 7% at constant currency. On the occasion of our Q3 results, we were indicating that we would likely end the year rather in the upper half of this corridor, 4% to 7%. And we also indicated, as part of this investment year, that our earnings growth would not be existent in 2019 and that we would be targeting earnings growth of around 0%, again currency adjusted. Without the currency effect, we would be looking at a small single-digit earnings growth. Investment year. I want to give you a few headlights of what we -- highlights of what we actually have gone through and what that means. Investments that ended up on our balance sheet, but to a very large degree, also were taken through our P&L. When I look at Fresenius Medical Care, and I will be fairly brief with comments on FMC because they're here separately, and I would encourage you to see and ask questions to Rice Powell, the CEO, later today. But the highlight there has been the conclusion of the acquisition of NxStage, a much stronger focus on home dialysis, home hemodialysis, in particular, but also the further rollout of home infrastructure in Asia and China. In particular, when I'm talking about home in China, I mean both hemodialysis and peritoneal dialysis. We've made further progress with our more integrated, more comprehensive payer systems, but that has also been an initial investment for us. At Fresenius Kabi, we have continued our investment in our biosimilar portfolio. But we have also gone through a variety of major plant expansion, upgrading automation projects, in particular, but not only in the U.S. We are looking at a mid-triple-digit million dollar amount of investment to expand our large -- already large U.S. manufacturing facilities, but we are also expanding our manufacturing footprint for clinical nutrition in China and for the European markets with a new plant in the Netherlands. As far as Helios is concerned, investment meant that we had to prepare ourselves for the regulatory changes that were already coming about last year but will kick in with more force in this year, in 2020. So what that meant was that we had to prepare ourselves for a further increase of minimum case numbers per indication, which structurally is a very good phenomenon for us. We had to invest into more doctors, filling doctor vacancies, and we had done a very major investment in substantially increasing our nursing staff. So all in all, I would say 2019 has come about as we expected, even though we found the situation at Fresenius Kabi in North America, a bit more challenging than expected at the outset of the year. Whereas when we were talking about earnings decrease at Helios in Germany that, by and large, has come about somewhat better than originally expected, and therefore in particular, over the course of the second half of 2019, I detected quite some alleviation of original investor concerns, and Helios Germany didn't seem to play that much overall anymore. But all in all, expect us to have delivered 2019 in style, in line with expectations. On to some highlights of the operating business in 2019. As far as Fresenius Medical Care is concerned, and again more details available at their dedicated session, I want to point out the ESCO payer structure that we have gone into and where on numerous investor calls, we have made it clear that we feel unfairly treated, that we have delivered very solid savings which, however, were not recognized by the government. We have made it very clear that we would only be open to participate in any further voluntary and more comprehensive payer models if this situation was brought to a mutually acceptable standstill. I believe, in our conversations, we have made a bit further progress. But still, overall, we very much welcome the idea that we would be working, going forward, off a fixed baseline and would be eligible to receive savings relative to that fixed line rather than have to argue what the baseline actually is, which is at the core of the issue. At the same time, when it comes to NxStage, that acquisition was wrapped up and closed at the end of February in 2019. The integration has gone very smoothly. Volume growth here is absolutely in line with our expectations. All in all, the acquisition is tracking very much in line with our expectations. I believe FMC deserves a bit of credit, having identified the theme of home dialysis so early, much before the president came about with the executive order. And now home dialysis is really the name of the game in the area of dialysis. The other topic that was widely disputed in 2018 also to -- in early 2019, is the commercial mix. There, I believe, we have seen a good stabilization, good growth in terms of the number of treatments. All in all, also for Fresenius Medical Care, an investment year, which however we managed to execute in line with expectations. As far as our Kabi business is concerned, a tale of 2 regions. When -- we had a massive outperformance in '17 and '18 in North America driven by drug shortage effects generated by some of our competitors. Those shortage effects were normalizing over the course of 2019. And given the high base that we had created for ourselves that led to growth rates that I feel are somewhat below what the structural norm. That was widely anticipated. What we called wrong was the fairly major contraction of the liquid opioid market. And there, in combination with our major competitor returning to the market, that has been a pretty substantial weight on our top line and earnings growth. I can say that we have delivered on our guidance, of around 15 new product launches over the course of 2019. In North America, the actual number has been 16. But although -- also there, we had a bit of a disappointment inasmuch, by and large, these new product launches came a bit later than originally expected, which means that not only did we have a smaller contribution to 2019 revenue and earnings, also, more importantly, the overall size of the opportunity, given that we were somewhat late to the game in many of these situations is smaller than originally anticipated. In particular, as far as this point is concerned, I'll come back to 2020 in a minute, I would say, you're going to see a positive contribution from these new product launches, just because we have a full year effect of these. But also, when I look back about a year, the contribution that I expect from these 2019 launches is going to be a bit smaller just because we were a bit late when it comes to launching. For 2020, I do expect a somewhat similar performance as far as the number is concerned. Of new launches, I would hope that we can do a better job when it comes to the timing of these. Overall, we see a fairly stable competitive environment. A few additional competitors here and there creating price challenges that we need to respond to. Therefore, it is not that much a revenue and market share loss that we're looking at. It is much rather a bit more of a price erosion than we have witnessed over the last decade. Nothing completely out of the ordinary. I would say the historical price erosion bracket has been from the very low to the mid-single digits, and that is also what we're currently looking at, but rather towards the mid-single digits than at the very low. That is also what I do expect to continue for 2020. The highlight for the rest of the business has been our emerging markets business. When I talk about Kabi in the emerging markets, this is first and foremost, our clinical nutrition business in Asia, more specifically in China. And there, we have continued to see volume growth well in the double digits compared with very benign price pressure. And that has driven our revenue growth in that region above 10%. I have been asked on numerous occasions over the course of last year, whether I felt that, that was a sustainable pace. And I have kept on saying whenever we get into the double digits, I start to feel a bit uncomfortable as to how sustainable that pace actually is. I continue to believe that a growth rate in the high to very high single digits is something that we should be able to deliver on also going forward, hence also our planned expansion project. Takes me to biosimilars, another highlight of this past year. We were able to launch our first biosimilar brand name, Idacio. It's a biosimilar of adalimumab, of HUMIRA, in Europe. As expected, there was an initial small to very small revenue contribution. In this past year, this was meant to be a learning exercise and to gear up our overall infrastructure. So when we're talking about a single-digit million euro amount in 2019, we very obviously expect a multiple of that. This year, there is a number of tenders that we already have participated and awaiting the result or will participate, and that is going to be a more visible contributor to at least top line growth for the time being, and we continue to track in line with our original expectations. Takes me to Helios. And also here we have a tale of 2 different countries. We were under pressure in this past year in our core German business, in particular, because we took it a bit too far when it comes to preparing ourselves for ever-rising minimum case numbers, from which on you would only be eligible for reimbursement. So we were anticipating already the next step or the step thereafter. And that create a bit of frustration inside our own organization, and that led to some more vacancies than what we're used to. And therefore, some revenue shortfalls, which in a fixed cost business has a pretty dramatic effect on EBIT. So negative EBIT growth in this last year, I said it in my intro. As part of our investment, we were able to fill that vacancy -- those vacancies. And the doctors that we rehired are now in the process of to recapture the patient potential that was lost. We were able to hire more than 1,000 nurses that will also give us the capacity to treat the patients that we continue to see knocking on our door. I created a bit of a surprise in Q3 when I was -- all of a sudden starting to talk about reemerging acquisition or consolidation opportunities also in the German market. We continue to see those. However as expected, it is primarily those very small and small hospitals that find it difficult to cope with the minimum case numbers that have been imposed on them by the regulator. Therefore, I feel encouraged by this. This is going to lead to a streamlining of the overall hospital platform in Germany, which eventually is going to lead to a higher market share for us. When it comes to evaluating and potentially acting on these acquisition or consolidation opportunities -- I make that difference because if there was something to be done, it would be in a minimal purchase price, if any, then I want to reiterate that we will continue to be extremely disciplined. We will not use these 2 small hospitals to enter any new area in Germany. But if any of these small hospitals were in the vicinity of 1 of our existing hospitals or ideally hospital clusters, then we would be more than happy to look at that. For Spain, we have seen very solid volume growth, coupled with a bit of reimbursement growth. We are looking at revenue growth that is actually slightly above our structural guidance in the mid-single digits. We continue to see a very good expansion in our occupational risk prevention business, which is a very nice business because it is much more predictable, much more stable, has a lower capacity intensity -- capital intensity, I'm sorry, but at the same time, leads to a bit of margin dilution for our Spanish hospital business as a whole. Nothing to worry about for the business lines within Quirónsalud, our Spanish hospital business. I very much work on the assumption that we're looking at margin stability. Organic growth opportunities, I continue to see going forward just as well, even though just in line with my comment on clinical nutrition for Kabi in Asia Pacific. Whenever we get too far ahead of the 5% organic growth, I start to feel a bit comfortable -- uncomfortable about the sustainability of that pace. Lastly, Latin America. And you may have seen that we have added yet another hospital to our already small chain in Colombia. We made that announcement just before Christmas. I think the sketch of a Colombian nationwide hospital chain is already a bit more visible. That is something that we continue to work on. We like the Colombian market for the payer dynamics. We like the Colombian market also for the undersupply with hospital capacity to the population. I do believe that this is a very interesting market that we will continue to work on. However, for the avoidance of doubt, this is something that really should be viewed in perspective, when we're looking at our German business with around EUR 6 billion of revenue, our Spanish business with about EUR 3 billion of revenues. Then in Latin America, with quite some imagination. I can see, at the end of the day, somewhere between EUR 0.5 billion and top, top, top, up to EUR 1 billion of revenue. So this is always going to be a relatively small franchise. And therefore, final comment on this is by no means a surrogate for a further expansion in Europe, where we remain open and in line with the stability of our German business. We'll look at a third country market over the course of this year with a view to potentially doing a transaction in 2021. Let me wrap up with 5 minutes left by making a few comments about 2020. I am very much determined to take a very close look at the most recent developments and therefore, please spare me any quantitative comments about 2020 for now. We will give you a very reliable guidance at the time we publish our Q4 results on February 20. At the same time, we are determined that whilst some of the investments that I was referring to will continue also into 2020 to return to earnings growth this year. It is, I will cautiously say, not going to be a very pronounced earnings growth, but it is going to be positive earnings growth, both on the EBIT line and on the net income line, again, currency adjusted. In my mind, it is going to come from Fresenius Medical Care. It is going to come from Fresenius Kabi, ex-North America. For North America I will want to see a bit more data for the first weeks of this year before I am prepared to say something predictable. It is going to come from Helios Spain. It is going to come from Helios in Colombia. As far as Helios Germany is concerned, first of January of this year, a very major regulatory reform has kicked in. We are going to get separate reimbursement at cost of whatever we incur in terms of nursing costs. Now that has been one of our key strengths. We had invested in the past in more efficient buildings, more efficient processes and therefore, by and large, we are getting by with substantially lower nursing costs than the rest of the industry and as foreseen in our DRG reimbursement. Therefore, taking -- carving that nursing cost out has a gross impact on our business of a high double-digit million euro amount. That is the starting point that we're up against. But mind you, that is something that we have been talking about already for the last 12 months. Also, already for the last 12 months, I have said that we feel comfortable to about half that gross effect and that in combination with other efforts that we're going through, and in particular, in combination with a favorable reimbursement that we have now seen, I feel comfortable that for Helios Germany, we will be able to maintain the absolute EBIT level that we will have delivered for 2019, which frankly is quite an accomplishment given the regulatory effect that was imposed on us. On a good day, I may even be drawn to say that I see a chance to maintain our EBIT margin in 2020 relative to 2019. But again, I want to firm that up with the latest view on the small print of the regulatory reform before I get you something definitive end of February. But all in all, I would say we continue to see a very favorable volume environment across all of our businesses. We see a bit more price pressure temporarily, but structurally as the volume market leader in most of the areas that we're active in, we stand to benefit structurally from the changes that we're currently seeing. In closing, just because it's David's favorite topic, a word on capital allocation. We will continue with our CapEx program even though at a somewhat lower pace than in the investment year 2019. We are working right now more towards the top end of that self-imposed net debt-to-EBITDA target corridor of 3 to 3.5x net debt-to-EBITDA that is including the IFRS 16 effect. Therefore, for the time being, I have little to no appetite going about share buyback. But at the same time, irrespective of us not showing earnings growth in 2019, it remains our intention to grow our dividend, to grow our dividend, frankly, for the 27th consecutive year, and that is also going to be our aspiration for the medium term. Thank you for your attention. Questions in the breakout room, where is it?

Yorkshire.

Yorkshire. Thank you very much.