Fresenius Medical Care AG American Depositary Shares (Each representing 1/2 of an Ordinary Share)

Ladies and gentlemen, thank you for standing by. I am Emma, your chorus call operator. Welcome and thank you for joining the Fresenius Medical Care Earnings Call Report on the second quarter 2021. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Dominic, Head of Investor Relations. Please go ahead, sir.

Thank you, Emma. As mentioned by Emma, we would like to welcome you to our earnings call for the second quarter 2021. We appreciate you joining today to discuss the quarterly results. Now it is my pleasure, as always, to 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. We are aware that it is most likely us to keep you away from your weekend. Therefore, we try to keep the presentation short, leave time for Q&A. As always, we would like 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, of course, Reece Powell, our CEO and Chairman of the Management Board. Reece will give you some more color around the business development. And, of course, also with us is Helen Gieser, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Reece. The floor is yours.

Thank you, Dominic. Welcome, everyone, and happy Friday. I don't remember the last time we did an earnings call on a Friday, but it's almost the weekend. Hang in there. Thank you for joining us today. I'll begin on slide four. We continue to deliver organic growth for the quarter, despite the expected adverse COVID impacts. This affected the number of treatments in our dialysis business and compounds in the related downstream assets as dialysis patients are continuing to be missing in our clinics. And they do not need certain of our services, such as vascular access or the pharmacy. And additionally, if they're not in our clinics, then they don't need renal drugs or dialysis products. We continue to see excess mortality further accumulate in the quarter. but at significantly reduced levels as we had anticipated. The second quarter revenue and earnings were both adversely affected by exchange rate effects. Earnings development during the quarter was negatively impacted by phasing and a strong year prior base. This was driven by the CARES Act funding that we received in the second quarter of last year, as you know, to cover the COVID-related expenses from the start of the pandemic. We continue to make good progress on our strategic priorities in the quarter. First, patients in value-based arrangements accounted for approximately 10% of our total U.S. patients with end-stage kidney disease, and we have approximately 20,000 CKD patients in value-based arrangements. Secondly, home dialysis experienced continued momentum in the second quarter, with 14.8% of our treatments in the United States performed in a home setting. Thirdly, sustainability continues to be at the heart of our strategy. In order to further support our sustainability management, we recently joined EconSense, a network of companies united in the goal of shaping the transformation to a suitable economy and society. And in parallel to all the above-mentioned activities, there is the FME25 program to transform our global operating model and sustainably reduce our cost base until 2025. We are on track with this work. We plan to announce details on FME25 in the fall. While we are cautious and continue to watch the Delta variant and the increasing macroeconomic inflationary impacts, The overall development in the second quarter and first half of the year was in line with our expectations. We are therefore confirming our guidance. Thinking ahead of 2021, I'd like to mention the proposed Medicare ESRD prospective payment system rate for 2022. The proposed 1.2% increase is roughly in line with our expectations. Please keep in mind that this report is still in draft form. The comment period is open. We expect to see the final rate at some point in the month of November. Turning to slide five, for the first half of the year, we delivered over 26 million life-sustaining treatments to over 345,000 patients. Both the number of patients and treatments are down 1% from a year ago, as a result of the impacts of the pandemic on our patients' lives. The 2% growth in our clinic network reflects our international development, with the strongest growth rate coming from Asia Pacific, where we had 6% growth in the number of clinics in the quarter. Turning to slide six, we continue to see stable anemia as well as bone and mineral metabolism control. demonstrating that our patients are receiving high-quality, consistent dialysis care, even in light of the pandemic. If you would turn to slide seven. This slide compares the development of COVID infections worldwide to the number of incidences we have seen in our Fresenius medical care patient population. The comparison highlights the vaccination efficacy among our patients. As worldwide cases spiked in April, the number of cases for FMC patients declined over the same period and thereafter. Today, approximately 71% of our patients worldwide are at least partially vaccinated. In the U.S., approximately 71% of our patients as well are partially vaccinated. We also know that there are somewhere between 3% to 4% of our patients that are being vaccinated outside of FMC control. When that happens, we verify the vaccination. We look at that. It takes a little longer for us to get those numbers crunched, if you will, but we do believe we are somewhere in that 73% to 74%, but we quote 71% because we know that to be exactly in our control. While this figure is well ahead of the overall vaccination rate for adult Americans, it does simply reflect a higher degree of vaccine hesitancy than we typically see with our annual influenza vaccines. In normal times, we see about a 10% hesitancy for vaccination of just the regular current flu, if you will. So obviously we are working hard to try to lower this vaccine hesitancy rate, among our patient population as it relates to COVID. Turning to slide eight. As we anticipated, COVID-related excess mortality on a global basis continued to accumulate in the second quarter, but at a significantly lower rate. Thank goodness. The 1,489 excess deaths in the quarter were skewed to the start of the period. 635 deaths occurred in April, 449 in May, and 406 deaths in June. We are encouraged by this trend and continue to expect that we will get to a normalized excess mortality pattern in the second half of the year. It is not a perfect calendar, meaning that as of June 30, we will step into July and everything will be perfect. It will take a little time, but we are optimistic that over the course of third quarter, we'll see this come into the range that we have anticipated. These are global numbers, and the excess mortality in North America in the second quarter accounted for less than 25% of the international experience. And I think that's significant when you stop and think about the size and scope of North America and the fact that it is – a little under 25% of what we saw across the quarter. While the incremental rate of excess mortality is slow, the accumulation we have experienced will continue to weigh on performance. Globally, on a last 12-month basis, excess deaths further accumulated to approximately 11,200. And then looking at it from the start of the pandemic, we've accumulated to approximately 15,000. Moving on to slide nine. In the second quarter, we achieved revenue of 4.3 billion euro, reflecting 2% growth in constant currency. Our net income, excluding special items, declined by 31% on a constant currency basis. As previously announced, costs related to FME25 will be treated as a special item. And during the second quarter, we had 6 million euro in FME25-related consulting costs at pre-tax level. I mentioned already that the pandemic negatively impacted our top and bottom line, and we continued to face headwinds from foreign currency translation. Earnings growth in the quarter was negatively impacted by a high prior year base. Please recall that the second quarter of 2020 benefited from the recovery of COVID-related negative effects that we had experienced in the first quarter of last year. Moving to slide 10, we experienced negative exchange rate effects in all of our regions. Despite the challenges related to the pandemic, we deliver organic growth during the second quarter, driven by our international markets. EMEA, Asia Pacific, and Latin America all contributed with positive organic growth. Organic growth was slightly down in North America. Here, we not only faced negative impacts from COVID, but also lower reimbursement for calcium emetics as a consequence of them being placed in the bundle. And with that, I'll turn it over to Helen, who will give you more color on our development through the quarter. Helen, please.

Thank you, Rhys. Hi, everybody, and I hope you're staying well. As we move to slide 12, I'll pick up on the services development. In the second quarter, healthcare services delivered growth of 2%, a constant currency overall. Organic growth increased despite the negative impacts from the pandemic and from calcium emetics due to the organic growth in the international markets. This was more than offset by negative exchange effects. The adverse COVID impact on organic growth in healthcare services amounted to approximately 240 basis points for the quarter. While down year-over-year in the U.S., we did see sequential improvement in same-market treatment growth. It improved from a decline in time spent in the first quarter to a decline of 2% this quarter. This shows that the underlying fundamentals are intact. I will now move to the products business slide on slide 13. Our products business achieved 1% organic growth for the second quarter. On a regional basis, both EMEA and Asia-Pacific had a solid quarter, with each delivering 3% organic growth. Overall, products growth in the second quarter was driven by higher sales of incentive disposables in EMEA and Asia-Pacific, machines for chronic treatment, and renal pharmaceuticals. This positive development was offset mainly by negative exchange rate effects. The organic decline in North America was driven in particular by lower sales of products for acute care treatments compared to a strong prior year base. Turning to slide 14, for the second quarter, total group operating income amounted to 424 million euro, which is a decline of 30% of constant currency. The chart on the left illustrates the contribution from each region, as well as the corresponding regional margins. As we have discussed, we face an adverse impact from COVID, and we are comparing the Q2 margins against an inflated prior year base. In the second quarter of last year, we did recover the negative impacts from COVID that we experienced in the first quarter of last year. consequently, as indicated, a tough base to compare with. Additionally, we had a favorability in the phasing of our SG&A expenses in the first quarter of this year that we knew would reverse in the second quarter. Exchange rate effects were a headwind in all regions, but also particularly strong in our largest region, North America. And we experienced increased costs due to macroeconomic inflationary effects affecting both labor and raw materials. On the positive side, we saw an improved payer mix due to the growth in Medicare Advantage, and Medicare Advantage continued its growth at the usual intra-year pace in the second quarter and remained, like in the last years, our fastest growing book of business. Our Medicare Advantage mix now represents a percentage in the very high 20s relative to our entire U.S. patient population, and not just within the Medicare eligible patients. Our second quarter net income, excluding special items, declined by 31% on a constant currency basis, which includes a negative net COVID-19 impact of 74 million euro. I will now move on to slide 15. Although the big swing between Q1 and Q2 was expected, we thought it might be helpful to look at the margin developments for the first half of the year overall. I think the half one margin development gives a clearer view on where we are in this pandemic year. The biggest impact on margins for the first six months of the year relates to COVID, not surprisingly. The effects of excess mortality on both our core dialysis and downstream businesses are a large component of the COVID-19 impact. It is important to remember that the effect of accumulated excess mortality since the beginning of the pandemic will continue to impact our margins in the second half of the year, even if there is no further accumulation of excess mortality assumed. We also face higher costs for both labor and raw materials due to macroeconomic inflationary effects, and this is something we continue to monitor and we assume will not ease in the second half of the year. In 2020, the first half benefited from the gain we made from the sale of vascular and cardiovascular clinics. Consequently, this effect had a negative impact for the comparison of the margins year over year, but would not impact the development of H2. As previously mentioned, from the positive side, for the first half of 2021, the improved Medicare Advantage payer mix in the U.S. contributed to the margin development. Looking at the first six months of 2021 collectively, our development is very much in line with our H1 expectations and in the middle of our guidance range. For that reason, we are comfortable confirming our outlook for the year. With that, turning to slide 16. During the second quarter, we generated operating cash flows of €921 million and a resulting margin of 21.3%. The decline was mainly due to the U.S. federal government's payments in the second quarter last year under the CARES Act and the start of the recruitment of these advance payments in the second quarter of this year. €159 million were recouped during the quarter. The timing of the payment of labor expenses also contributed to the lower level of cash flow. Our net leverage ratio for the second quarter of 3.1 times is within our target range of 3 to 3.5 times. Earlier this year, we signed our first sustainability-linked financing instrument, further underlining our commitment to create value in ecological, social, and economic terms. The €2 billion syndicated revolving credit facility includes a component that links its margin development to sustainability performance.

The ratings presented at the bottom right have all been reconfirmed early in 2021 and support a solid financial position.

With that, I'll turn to slide 17. In light of the effects of COVID, the first six months of the year developed in line with our expectations. Our full year assumptions continue to hold, and we are confirming our 2021 targets as defined in February. For 2021, we expect to deliver low to mid single-digit revenue growth, and a decline in net income of high teens to mid-20s. Our guidance assumes a normalization of excess mortality patterns beginning in the second half of the year. And as Rhys noted, it may not be zero as of July 1, but we are certainly heading in the right direction. At the end of the second quarter, we are exactly where we plan to be relative to our guidance. And while we are very encouraged by the vaccination progress among our patient base, We are closely watching to see how the Delta variant develops in several markets, particularly where vaccination rates are lower. It is too early to say whether this will lead to accumulation of further excess mortality or not, but we are cautiously optimistic. We are also monitoring the increasing macroeconomic inflationary impact, which affects both labor costs, manufacturing, and distribution costs. So in summary, from what we know right now, we are on track with our guidance. And that concludes my prepared remarks, and I will turn over to Dominic to begin the Q&A.

Thank you, Rhys. Thank you, Helen, for your presentation. I'll hand it over to Emma. Please open the Q&A.

Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star, followed by one at this time. One moment for the first question, please. The first question comes from the line of Tom Jones with Barenburg. Please go ahead.

Oh, good afternoon or good morning. Thank you for taking my questions. I have two. The first, probably one for Helen, was just on slide 15, some clarification. The 120 basis points, sorry, it's Friday afternoon, hit the margins that you saw in H1 from higher costs for labour and supplies. Just to be clear, was any of that COVID-related or is it all of the COVID-related cost items included in the 230 basis point headwind that you talked of? And then secondly, a question for Rhys on the ESRD PPS proposal. Not so much about the rates, but about all the other stuff that was buried in there. What should we make of some of the changes or proposed changes to the ETC models? I mean, some of them look helpful, but they don't appear to have addressed some of the key flaws in that program. So I'm just wondering, you know, kind of what you thought about the proposals and what else you think you might be able to get done, you know, between the proposed rule and the final rule.

Hey, Tom, it's Reese. Helen, why don't you go ahead? I think Tom was looking for you to give him some guidance on your slide 15 comments.

Yeah, happy to. Hi, Tom. Hope you're well. So to avoid confusion, that is completely separate to any COVID-related increase. That is truly – that 120 basis points that you see is truly limited to wage inflation. You know that we estimate around 3% for that. and other increases that we're seeing, you know, kind of across the business. That is contemplated in the guidance. I think the watch out for us on inflation is truly these increases that we're seeing, and we're calling them macroeconomic, more, you know, kind of petrochemical, lumber, things like that, that have an impact on our economy. manufacturing costs and freight and distribution. But the 120 basis points that you see here is in our guidance and normal inflation rates and separate to COVID.

Okay, perfect. That's very clear. And then on the PPS?

Yeah. Hey, Tom. You know, I would say we've got work to do. We are working on our commentary. I'm guessing because we've known each other a long time, you're poking a little bit at the ETC models and What are they looking at when they say dual eligible to be preferred within home and transplant? We actually think that's sort of arbitrary, and I think you've got the CMMI folks looking at that versus the group of people that do the prospective payment work. They're two separate groups, and some of it's not logical. I mean, if you think about dual eligibles, are they really in the best place to do home therapy given the their station in life, et cetera, and is that really going to give them the best chance for good outcomes? So I think there's just socioeconomic questions we have about the way that reads, and, you know, it doesn't really make sense. So we're still working on it. We do get the sense that there hasn't been a lot of coordination between this branch, CMMI, and what they're proposing versus where the prospective payment system is and how they look at these things. So we're hoping to connect those dots in our commentary and get a better read on this.

Okay, that's very helpful. And on the subject of models, the CKCC model, anything additional you can share with us on that since the Q1 results?

Yeah, the only thing, and I'm happy to share that in the couple of conversations that we've had with Liz Fowler in the spring, they are absolutely committed that we will start January 1, and they're bullish on getting that started and seeing where it goes. So we are taking it at face value, and we'll be prepared and ready to go. As you know, we have infrastructure and everything we need. So we're looking forward to getting started to that in the new year. Okay, that's great, sir. I'll get back in the queue. Thanks, Tom.

The next question comes from Veronica Dubojova with Goldman Sachs. Please go ahead.

Good morning, Helen Reese. Thanks for taking my questions. I'll keep it to two as well, please. One, I just want to clarify a little bit the raw material commentary or cost inflation commentary, Helen, and I guess just to follow on Tom's question, just confirm the sort of 120 basis points that you saw in the second quarter is not outside of the sort of usual bound that you would have expected to experience in the business. And I guess maybe if you were willing to comment on what is assumed for the second half within the guide, that would be helpful just to push you a little bit more on that. Sorry, my second question is sort of trying to follow on from something that was actually said on your parent company's conference call. which is I think Stefan made some comments on the expected contribution from FNC to the Fresenius cost savings plan. And just backing out from the comments that he had made, it does suggest a fairly low run rate of cost savings from FNC in 2023. I think on my math, I get to about $100 million out of the up to half a billion that you're targeting there. Just trying to understand whether we should be reading something into that as you guys have done more work on FME25. Is this program really that heavily weighted towards 2024 and 2025, or are we not comparing apples and oranges here? Thanks, guys.

Thanks, Veronica. Go ahead, Helen. I think you've got one, and I'll take two.

Yeah. Yeah. Hi, Veronica. Yeah, so just to kind of keep clarifying maybe this raw material commentary, what we saw in the half one is in line with our expectations and the inflationary increases that we had built into our guidance range. You can expect that to continue through half two. I think the watch out for us, as I said, is if there's anything significant over and above that, that, you know, we're not seeing coming at this point. You know, some things have gone up and back down. Some things are still running higher. But I would say, you know, the call out year over year is not unusual from an inflationary increase. But obviously, as we kind of look at the current labor market and also these broader markets, economic increases that are being driven by supply and demand. We're just watching it out and being cautious. But nothing that would take us off our guidance at this point, Veronica.

Thanks, Helen.

Hey, Veronica. Number two, I would not read too much into that. And what I mean by this is we are not done with our work. And this program is not just cost cutting. It's operational model and looking at the business and how do we want to go forward with the business. And as we've talked with FSC about this, they would certainly like more concrete numbers, and I'm not giving them to them. because we are not where we want to be right now. So I would just say I understand where they are, but I would tell you when we come to you in the fall, you'll understand where we are, where we're going, and how this is going to play out. But just keep in mind, it's not a set cost cut. And so I wouldn't run numbers and try to figure out where it is, because we're going to tell you where it is when we do this in the fall, if you catch much of it.

Understood. That's very clear. Thank you, guys, and hope you have a good rest of your summer.

Thanks, Veronica.

The next question comes line of Oliver Metzger with Commerzbank. Please go ahead.

Oh, hi. Thanks a lot for taking my questions. The first one is on your reported vaccination level of 71%. So you made some comments, but for me at first glance, it looks not that high, particularly if you look for the age bracket. But it's on a global level, and I think there's clearly some differences from a regional perspective. So could you give us an idea where you are in particular in the US and in EMEA? And that's the first question. The second one is also on the slide. There are some metrics. Basically, patients are down. Year-on-year treatments are down. You reported some home dialysis on record level, but still I see the number of clinics is up by 2%. So is there anything which I do miss, or should I just read a stronger other utilization from the clinics? Then she can give us more color on the relation between these metrics. Thank you very much.

Sure, Albert. I'll take those. At a global vaccination rate of 71%, find me somebody doing better, because I don't think they are. And keep in mind, that's a global rate. So that incorporates places like South Africa, where there's very little going on, or Indonesia, Vietnam. So I feel very good about where we are at 71%. In the midst of, as I said in my commentary, a significant hesitancy in certain parts of the U.S. as well as in other markets, that people are not getting vaccinated. I think we'll see that reduce. I think it will get better when these vaccines are FDA approved. I think that will give some subset of this hesitancy population comfort that they're going to go ahead and vaccinate. And I suspect there are going to be some that no matter what we do, we won't get them there. But the U.S. is at 71%, a little bit higher if you take those that are not in our system. So they're probably 72%, 73%. And I think if you look at EMEA, they are in the high 60s, even incorporating those emerging markets where the vaccination rates are very slow, are very low, which tells you then in many, many parts of Europe they're seeing just as good vaccination rates as we saw in the U.S. So I actually think we're not doing as well as I'd like to. Don't get me wrong, Oliver, but I think we're doing pretty well, but it could be better, and we're working hard on that. On the number of clinics up 2%, that was predominantly driven by Asia Pacific. In the quarter, they were up about 6%, and their number of clinics. We had some new clinics in every region. As you well know, some of these have been, you know, we've been building and getting them certified and validated over an 18-month period, and some of those started a while ago, and they're just now coming on board. But the bulk of that 2% growth that we saw really sits in Asia Pacific in the international markets.

Okay, great. May I quickly ask one follow-up on the home dialysis record level. So could you share with us which part comes from PD, which part comes from HHD?

Oh, sure. I don't know the specific numbers, but what I will tell you is PD is consistently growing in the, you know, mid to high single digit, single numbers. And then we are still seeing double digit growth on the home hemo. And again, we had 14.8% of our treatments done at home in the quarter. But we are seeing PD fairly consistently of quarter to quarter. And then the HHD has grown faster. In some quarters, it's slow sometimes. But in this case, I think we're pretty comfortable with what we're seeing.

Okay, great.

Then thank you very much. Thank you, Oliver.

The next question comes from Michael Jungling with Morgan Stanley. Please go ahead.

Thank you and good afternoon. I have two questions on vaccinations. Firstly, can you comment where you think the vaccination number will end up by the end of this year? And then secondly, can you comment on how effective or whether you know how effective the vaccinations are within your ESRD patient population? In essence, I know it's a morbid topic, but do you have a sense of what the survival rate is of patients who get COVID but have been vaccinated? Thank you.

Sure, Michael. Good questions. Oh, wow. For me to speculate on where we could end up, I would hope that it would be a great outcome if we were at a 90% vaccination rate, which would mean it basically is equaling what we normally see when we do the annual as I call it, regular influenza vaccinations, that usually runs around 10% hesitancy. So I would love to see us get another 15% out of this. I think that we will get some pickup, as I said, when they get FDA approved. I think that'll make a difference in the U.S. I think we're going to continue to see the rates improve in the rest of the world short of some of the parts of the world that are emerging that we just can't get them, you know, vaccines. So I do hope that we get better. And then relative to the effectiveness, we've actually done a study within FMC. It's not a huge study, but, you know, even with the challenged health status of our dialysis patients, we do see that they are getting, you know, they're getting protection, that we are seeing effectiveness of the vaccines. Now, I think what is... Really, the question that I have in my mind, and we're talking about it with the medical office, is if you take the Delta variant, which we're all watching, and everything we read tells us for non-vaccinated people, it is, you know, three times more virulent than the others, which is very concerning. But in the few cases that we are aware of dialysis patients that have been vaccinated twice, and they had a breakthrough, And, you know, Delta variant is an issue for them. Generally, they have not had nearly the severity of symptom with that. So that's a very small sample size, Michael. But so I would tell you the real magic here is we just got to keep getting the folks vaccinated and hope that, you know, we're going to be able to withstand what, if anything, comes of the Delta variant. But that's the way we see it at this point in time.

Thank you. And maybe I can briefly follow up on this vaccination. Maybe I can ask the other way. How many, do you know what proportion of your patients have actually had COVID? COVID-19.

Yeah, I probably can get that data. I don't have it at my fingertips, and I don't know if anybody from the medical office on the call wants to shoot me a text. I'll come back to you. I don't know that right now, but we can easily get that number. It's just not at my fingertips, Michael. Great. Thank you. You bet. Thank you.

The next question comes from James Van Tempest with Jefferies. Please go ahead. Mr. Van Tempest, your line is currently muted. We move on to the next question is from the line of David Eiderlington with JPMorgan. Please go ahead.

Hey, guys, thanks for taking the questions. Two, please. So first, sorry to revisit again, but on the vaccination side, is there anything else you can do to try and accelerate the uptake? Is it just out to education or just some stronger leaders you could pull? And if it remains about 25 to sort of 30% unvaccinated rates, are you running any maths in terms of what that might mean in terms of the evolution of patient mortality from here? And then the second one is just on the cost evolution. I'm just wondering how sympathetic your customers slash payers are to your customers on the product side and the wider payers on the service side. How sympathetic are they to any sort of price increases from your side?

Thanks, David. Helen, I'll take one and two. I'll let you take three, if you would, please. So, relative to vaccination uptake efforts, we have particularly, well, globally, but certainly in the U.S., we have done a number of things to try to encourage people to vaccinate, educational things, videos where myself and other people have actually been vaccinated and talking about the importance of that. It's a little bit of this situation, David, that it's overly politicized in the U.S., so we're going to continue to work hard on trying to continue to see the number go up. At 75%, we have not tried to model at this point what that could mean for mortality because particularly It's just something that we're going to need a little more time to try to sort our way through. And quite honestly, I'm a lot more focused on let's see if we can't get 75% to 90%, which I said earlier. But those are mathematics that we can run and we'll consider. We just haven't done it at this point. And then, Helen, you want to talk about products and payers and how they feel about where we are?

Yeah, for sure. As you can appreciate, David, a lot of our pricing is already contracted and, you know, the kind of the burden of the increased COVID cost is obviously falling on us. There's not a lot of opportunity to pass this on or to get increases. Obviously, last year, a lot of those increases were covered from the U.S. government. This year, obviously, we are bearing that cost Some of that you hope will show up in future cost reports and go into the future increases. But, you know, where we have firm contracts with our customers, it's been quite challenging and difficult, I would say, to pass on any of that cost increase.

Understood. Thanks, guys.

The next question comes from Michael Friedrichs with Deutsche Bank. Please go ahead.

Thank you. Good afternoon. Two questions, please. The first one going back to FME25. Ries, could you update us on the timelines on when we will get the final details? Is that still with Q3 results, or do you plan to do a capital markets day around it? Any sort of timeline here would be helpful. And given that you mentioned you're sort of still working through everything, How focused should the market really be on this 500 million net income savings number? And how sure are you that it will actually be the 500 million, or could there be some variation depending on what you will find over the next few months? And then my second question is on value-based care. Thanks very much for providing the patient numbers in your prepared remarks. Is there any way you can also provide a very rough value number of revenue that is coming out of value-based care and settings, even if it's just a range or a ballpark figure.

Hey, Falco. Thank you for the questions. I will take number one. I think that's kind of an A and B part on the timeline and the focus on the savings numbers. And then, Helen, if you want to pick up the value-based care, that would be great. So I would do it this way. I would say fall to me is October, November, and I think you can think about if we did a Council Markets Day, we'd probably try to do it sometime in the middle of October, and then obviously we've got the earnings call I think on November 2nd. So it's a fairly small window within that timeframe, and I think we've just got to work our way through where we think it makes most sense and how we want to do that. So it's a pretty short window. So figure October to, you know, November, and, you know, I laid out those possibilities for you. Look, we are focused on the 500 million euro. We're going at this looking at that and wanting, as I said, and as we've talked about, a one-for-one deal. payback on that over the planning period, if you will. So we're looking at it from that perspective. We didn't tell you 500 and hope and be happy we're going to get 100. That would be a disaster. So we're going at this as hard as we can, looking to deliver what we've talked about, and if we can do more, we will. But that's the way we're approaching this. And, Helen, on the value-based care issue,

Yeah, happy to. Hi, Falco. So, as you know, obviously, we've stopped reporting the care coordination number separate because we feel as the business is changing and we're moving more into BBC and more towards the capitated model that it doesn't make sense to kind of keep that separate. It's very much a key part of our dialysis services business. I also don't think that reporting the revenue number is really that meaningful because it's you know, all the different models have, you know, the contracts have different models and some have passed through across some of the shared saving models do not. So, you know, I think for us, we are, as we're looking at the operating model work outlined with FME25, we're also looking hard at what that means for our reporting and what KPIs will make sense for BBC moving forward. So I think more to come, but recognizing that, you know, we're really going through this big change as this BBC part of our business continues to grow. So I think we'll have more updates as we move on our reporting.

Okay, thank you. The next question comes from James Vane Tempest with Jefferies. Please go ahead.

Taking my question, apologies, I had some technical difficulties before, so apologies if these have been answered. Firstly, on inflation, it's interesting on slide 15, I think it was, how the impact from inflation was more than the offsetting factors of Medicare Advantage. And you do mention how inflation is going to continue in the second half. So is it fair to say that the Medicare Advantage for the year will not be able to offset inflationary pressures? And then my second question on vaccinations, I think you said 71%. Just wondering if you can comment on your patient population in areas which have lower vaccination rates compared to the national average. And then a final quick question, if I can, is excess mortality. I think you said it was 406 in June. I know we're nearly at the end of July. I'm just wondering, you know, where we are at the moment. Is it sort of 350-ish or so or sub-300? It would be interesting to know where we are coming into the summer. Thank you so much.

Thanks, James. No worries about not getting in. Technical difficulties are a way of life these days. Helen, I'll let you take number one on the inflation and the slide 15, and I'll come back around on vaccination.

Yeah, happy to. Hi, James. It's good to hear you. The inflation, obviously, when we put out the guidance back in February, if you recall, I had a slide there that showed a lot of pluses and minuses, and obviously that's what we're tracking today. So without doubt, you know, the kind of the inflationary increases year over year were built in. And I think it is an important driver of the change from 2020 to 2021 that we shouldn't forget. And, of course, the Medicare Advantage is a kind of a positive offset to that. So, you know, I don't think anything untoward or we truly weren't trying to signal anything concerning in slide 15. In fact, it was trying to prove to be more, trying to show to be more helpful to kind of understand those increases. But, you know, I think, you know, obviously, as you may have missed my comment earlier to probably both Tom and Veronica earlier, that the, you know, we just want to be cautious and watch those inflationary increases in the back half. But, you know, we have a base increase built in already. And, of course, you know, we are happy with the Medicare Advantage performance with an offset to that, too.

Rhys? Yeah, thank you. So, James, I'm not sure I understood what you were asking me relative to vaccinations. what we're seeing versus other parts of the world. Can you just run that by me again? I just want to make sure I get it right.

Yeah, sure. So when you look at where your patients are located, say, particularly in the U.S., I'm just wondering where the concentration of your patients lie versus where you see in higher or lower levels of vaccination. So, for example, you have more patients in less vaccinated areas than the national average, which, you know, would basically mean, you know, it might be harder to get to that 90% level if there's sort of more than perhaps if you can take that in as well. Thank you.

Perfect. Thank you. That's helpful. So if we deal with the 800-pound gorilla, which is the U.S., I can tell you that the issue that we are seeing is in the southern states, Mississippi, Alabama, Louisiana, Arkansas, Missouri. that is where we are finding the most hesitancy among those people. And so if we're going to appreciably get close to 90%, we're going to have to get some of the folks that are in that southeastern U.S. region. There's some far out west, Montana, Wyoming, Idaho. But we're going to have to see some number of those folks, when these get FDA approval, come into the program, if you will. And I suspect there'll be some that won't, just based off of political, whatever you want to call it, ignorance, whatever. I think when you look in the rest of the world, there is no question that if you take EMEA, we've got to continue to get more vaccination in developed markets and what I'd say is kind of some of the medium emerging markets, but there are some places that we don't like it, but we don't know that it's going to get appreciably better, such as South Africa, or if you think about India or Vietnam, Indonesia. So we have to get as much as we can from those places that are vaccinating and they have the ability. We have tried to get vaccines into South Africa and some of these other countries and we're working on it, but it's not an easy thing to do. And then on your last question, I would tell you that we don't have a read. on if we were at 406 in June, what will be July. I hope to heck it's well south of there. But we'll get a view of those numbers probably around the mid to latter part of August. It takes us somewhere between two to three weeks when we close the month to be able to get those numbers. So we're just not in the right place to do that just yet.

That's great. Thanks so much.

You bet.

The next question comes to mind of Christoph Gretler with Credit Suisse. Please go ahead.

Thank you, Operator. Good afternoon or morning, Rhys, Helen. Nice to speak to you. I still have one question, actually, kind of. It's on wage inflation in the U.S. specifically. When I listened to some of the U.S. hospitals, they called out quite some substantial increase in wage inflation they expect and the ESRD PPS rate looks a bit backward looking in this respect. What's your thoughts about that? How much room do you have to accommodate more wage inflation, accelerating wage inflation? Is there any discussion going on in BC? maybe kind of to give something extra for this year, which still seems to be kind of a very high inflation year specifically. Maybe if you could elaborate on that and just on general kind of on the labor market situation for dialysis clinic personnel, maybe that would be great. Thank you.

Sure. Happy to, Chris. Nice to hear from you. So a couple of things I would say. We are looking and we have planned for wage inflation in this year at around 3%. So I think we have some of that covered. I do think that the SRD population and, if you will, our clinic staff, our nurses, I'm not sure we are a perfect example. equivalent to what you're seeing in the big hospital systems in the U.S. I actually think they may be experiencing things a little different than we are. Their rates may be a little higher. But we believe that we have planned accordingly for this. What we have done is, as we were in the pandemic, we utilized temporary help to help us get through spots because we've had some employees that had to go out and they were ill as well. So I think we've gotten through that okay. What I would say to you is, yeah, at a 1.2 PPS drafted number, I would have loved to have seen it higher. It was within the range that we thought it could be. I think there are two pieces to the answer to your question. One is that there's still $24 billion in provider relief funds that are sitting in D.C. unaccessed, and to the degree that those funds would be available for us in relative to PPE and potentially some labor health there. You know, that's out there. We continue to talk about that. But D.C. is pretty focused right now on infrastructure, but we continue to see if there's a possibility for that. And I think that the overall labor situation in the U.S., particularly in health care, I think that's going to get discussed in D.C. as well, and we would certainly weigh in on that. But I think I'm less worried about where we are for the back half of the year and how we plan that. It would certainly be nice to get some PPE help, as I've been a broken record on that every quarter. But at this point, we've not had any more active, detailed conversations on that. Hopefully that's helpful for you.

Very good. Thank you. I appreciate your comment and have a great weekend later on.

You as well.

There are no further questions at this time, so I hand back to Dominic for closing comments.

Thank you, Emma. Thank you, everyone, for the lively discussion and for limiting to two questions. That's highly appreciated. I hope you all have a good summer, as good as you can have it at the moment, and we'll Hope to have enough time to speak to all of you during the third quarter, and looking forward to speak to you again. Take care.

Stay safe, folks. Enjoy the rest of your summer and your weekend. Take care.

Bye, everybody.

Thank you.

Bye-bye.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.