Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Fresenius Medical Care AG (FMS, Financial) delivered organic revenue growth of 2% in the second quarter, with positive contributions from both Care Delivery and Care Enablement segments.
- The company achieved a meaningful margin improvement of 70 basis points, bringing it closer to its 2025 margin target band.
- FME25 program contributed EUR57 million in additional savings, positioning the company to hit the top end of its full-year savings target range of EUR100 million to EUR150 million.
- The company reduced its net financial debt and improved its leverage ratio within the lower end of its net leverage target corridor.
- Fresenius Medical Care AG (FMS) entered into virtual power purchase agreements for renewable energy, supporting its goal of becoming carbon-neutral by 2040.
Negative Points
- The company continues to face elevated mortality rates in the US, which have negatively impacted volume development.
- Revenue development was negatively impacted by the successful execution of the portfolio optimization plan, with divestitures accounting for a 170 basis point reduction in growth.
- Operating income for Care Delivery declined by 7% compared to the high prior year basis, impacted by labor and inflationary cost increases.
- The company is facing challenges with elevated bad debt reserves due to higher accounts receivable associated with a vendor change post a cyber incident.
- The proposed 2.1% reimbursement increase for services is lower than desired, given the level of inflation the industry is facing.
Q & A Highlights
Q: Helen, on same-market treatment growth rate in the US, can you elaborate on what June looked like relative to the quarter as a whole? And how do you feel about the guidance range for the back half of the year?
A: In June, we saw improvements in our admission time and missed treatments. June treatments per day were the strongest this year and since June 2023. We are assuming mortality levels stay where they are for the rest of the year. The trends are encouraging, but we have adjusted our expectations for US same-market treatment growth to be in a range of flat to 0.5%.
Q: On the Care Enablement margin, can you discuss the contribution from pricing in Q2 and your thoughts on maintaining this momentum in the back half of the year?
A: About two-thirds of the Care Enablement margin improvement in Q2 was due to pricing. We are delivering on our plans and expect continued improvement.
Q: Regarding treatment volume growth, do you still see a plausible path back to the 2% to 3% volume growth for US dialysis in the strategic period?
A: Yes, we are confident that we will return to the 2% to 3% growth rate once we see normalization of the COVID effect. We still stand behind our neutral effect for the new drug class and expect to reach 2% to 3% growth by the end of 2025 as an exit rate.
Q: On leverage, given you are near the lower end of your self-imposed corridor, what are your capital allocation priorities?
A: We will continue to de-lever and use proceeds from divestitures for further deleveraging. We are comfortable approaching the lower end of our target corridor, especially given the current environment.
Q: What is the volume rate that makes the business work optimally, and do you need at least 2% growth to achieve the upper end of the midterm margin range?
A: When we see 2% to 3% growth, we can maximize operating leverage. We have been prudent in taking costs out and driving efficiencies, so even at the low end of 2% to 3%, we can achieve beneficial operating leverage.
Q: How are you thinking about the deviation from today’s flat growth to a more normalized growth rate in terms of share losses, mortality, CKD mortality, and other factors?
A: It’s a combination of improving operations, normalizing mortality, and maintaining our neutral impact on SGLT2s. We expect these factors to play out over the course of this year and next, driving improved volume and operating leverage.
Q: Can you provide an update on your clinics in the US and whether you have added any during the quarter?
A: We have added some clinics this quarter, being very targeted in our approach. We are adding clinics where we see growth potential or are at capacity in a particular region.
Q: On wage inflation and staff costs, have you seen better staff availability and falling contract labor costs similar to large hospital groups?
A: We are still standing behind our net 3% labor number, managing within the overall numbers. We have seen an incremental improvement in nursing staff, which is positive for our clinics.
Q: On value-based care, can you help us understand the revenue and earnings contribution in the quarter and how we should think about it for the back half of the year?
A: We saw a positive contribution in the quarter, driven by our CKCC program. We expect continued positive contributions for the full year.
Q: On the CMS rate increase, how much of a shortfall would the 2.1% increase be relative to your expected cost increases next year?
A: We have always planned for moderate increases. The 2.1% is in line with our expectations, and we will provide commentary during the comment period. We continue to look at the spread between reimbursement increases and cost increases.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
