Fresenius Medical Care AG

Ladies and gentlemen, thank you for standing by. I am Micola, your chorus call operator. Welcome and thank you for joining the Fresenius Medical Care Report on fourth quarter and full year 2022. 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 touch-tone 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, Nicola. 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. As always, I need 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 yesterday. For further details concerning risks and uncertainties, please refer to these documents and to our SEC filings. Due to the deconsolidation announcement, I have to add that we will be filing a registration statement with the SEC with respect to the conversion. The prospectus for the conversion will be available on the SEC website and will contain important information. You should read the prospectus and other documents we filed with the SEC for the conversion when they are available. With this Q4 results, we traditionally share an update on our strategic ambitions. Therefore, we have more to cover than in the other quarters. I'm aware that there is a lot of information from Fresenius and us to digest today. Given that we have only 60 minutes, we need to limit the number of questions again to two. in order to give everyone the chance to ask questions. Should there be further questions and time left, we are happy to go a second round. It would be great if you could make this work again. With us today is Helen Gieser, our new CEO and chair of the management board. Helen will start with insights in the new strategic aspirations, followed by a short review of the quarter and the outlook. Then we are happy to take your questions. I will now hand over to Helen. The floor is yours.

Thank you, Dominic, and a warm welcome to you all. It really is an honor to be speaking with you today as CEO of Fresenius Medical Care. And these are exciting times, for sure, as we embark on the next chapter in the company's history. And there is a lot I want to cover today, as Dominic already mentioned. Before I start with my prepared remarks, I would like to take a moment to recognize the hard work and dedication of our great teams around the world. We are all united behind our common vision of creating a future worth living for our patients worldwide every day. I would also like to express my special thanks to our teams in the Ukraine and in Turkey. My thoughts and prayers are with all of those affected, and I thank you for being on location, working tirelessly to provide aid and helping our patients. I will begin on slide five with our strategic aspiration. As the new CEO, my overarching strategic aspiration is to unlock value as the leading kidney care company and to drive up shareholder return. Today, I will introduce the key elements of the strategy roadmap and we will also host the Capital Markets Day on April 19th to delve deeper into these topics. The right corporate structure is key in our ability to unlock value, and we are taking important steps to simplify and optimize our structure. Since the first of the year, we have fully implemented our new operating model, reorienting to two globalized operating segments, care delivery, our healthcare services business, and care enablement, our med tech business. This new operating model not only provides increased transparency internally but it will also bring enhanced transparency to our external financial reporting. We will spend time detailing the new reporting structure along with historical figures and future expectations during our capital markets day. As you will have seen in yesterday's announcement, Fresenius is planning to deconsolidate Fresenius Medical Care. The necessary change in our legal form will create a simplified, more agile, and efficient governance structure, which will enable full independent decision making, and at the same time, strengthen the rights of our free float shareholders. I will speak more about that later. Another critical step is taking a more rigorous approach to capital allocation. I have implemented a disciplined financial policy to drive the much needed improvement in our return on invested capital. I am proud of what we've accomplished to date with our FME25 transformation program, and we will further accelerate and extend it within the new operating model. In addition, we are implementing operational efficiency and cost reduction measures beyond FME25. And with a disciplined lens of focus on the core business and improving profitability, we are further optimizing our portfolio. I will speak about what these measures entail for both care delivery and care enablement, respectively, in a moment. Firmly, I am a firm believer that culture eats strategy for breakfast. And none of these measures will be successful if we don't have a winning culture in place. This includes fostering a clear culture of accountability. And with the successful implementation of our global sustainability program through 2022, we have laid a strong foundation to drive integration of sustainable principles into our business. We have decided on new global sustainability targets for the coming years, focusing on enhancing quality of care and access to healthcare, reducing the company's environmental footprint, and building the best team to serve our patients. As part of this, we continue to promote diversity, equity, and inclusion, and I'm proud of the initiatives we continue to advance here. Next onto slide six. As I mentioned earlier, our new simplified operating model went into effect as of January 1st. Our two global segments now have complete end-to-end P&L responsibility. This new structure provides increased transparency and enables us to compare directly to our peers. It also provides the basis to drive targeted improvements of our business performance. With our globalized and fully allocated G&A functions, we have the flexibility to scale these functions as needed to provide an appropriate level of support to the respective segments. And for me, it's remarkable to see the difference the new structure has made already particularly around visibility and transparency. And it has opened up further possibilities to unlock value and improve profitability. This new model also positions us to truly realize the full extent of benefits from our vertically integrated business model. Next on slide seven. After simplifying the structure we are working with, the simplification of the structure we are working in is an important step. The announced intent by Fresenius to deconsolidate Fresenius Medical Care and the proposed corresponding change of legal form to a German stock corporation would significantly simplify the governance structure of Fresenius Medical Care. With this change, we would move from a controlled structure with several decision-making boards to a standard German two tier system with one supervisory board and one management board. This will strengthen the rights of the free float shareholders. One clear hurdle will be overcome with this proposed change. The KGAA structure has been a challenge for many investors. Turning to slide eight. In addition to the improved shareholder rights, there are important business relevant benefits too. This governance structure enables faster and fully independent decision making and it also provides more optionality on our future strategic direction. The change removes the operational and coordination burdens of us being part of a larger group organization. It frees up time and capacity of the executive and management team and enables them to focus solely on Fresenius Medical Care. It also avoids potential conflicts of interest within the group. The new legal structure enhances our flexibility to manage capital allocation and shareholder returns. It also provides us with an unrestricted approach to access capital markets from a financing perspective. With the conversion of the legal form, Fresenius will not be a controlling shareholder anymore. Consequently, as a large German corporation, we would move from an indirect co-determination via the Fresenius Supervisory Board to a direct co-determination, where all supervisory board members would be committed solely to the future of Fresenius Medical Care. With the separation, the credit ratings may not benefit from the group structure, which some rating agencies take into account. With our focused capital allocation priorities, to which I come later, and our strong track record of deleveraging, we expect only limited rating pressure resulting from the deconsolidation. As a well-known issuer, we are confident to maintain our good access to the capital markets. We will also need to carve out in some of the rather limited areas where we share services with Fresenius in Germany, such as G&A services for payroll, taxes, or treasury, which are already contracted at Arms Land. And there will be additional administrative activities needed to convert to the new legal form. An extraordinary shareholder meeting is required later in the year, currently assumed to be in July. The one-time costs associated and corresponding carve-out measures are assumed to range from 50 to 100 million Euro, which we will treat as a special item. and the final decision will require a 75% approval by our shareholders. We expect that the entire process of the conversion into a German stock corporation will be completed by no later than the end of this year. Next on slide nine. Additionally, we are working towards strengthening our financial position with a disciplined approach to capital allocation and improving our return on invested capital. Given our current leverage position and the high interest rate environment, deleveraging is our primary capital allocation priority. We are committed to maintaining our investment-grade status and to managing our net financial leverage in the self-imposed range of 3 to 3.5 times. Any potential divestiture gains from portfolio optimization will be used for deleveraging. We are committed to a dividend policy in line with our earnings development. Consistent with the decline in earnings in 2022, we are proposing a 17% reduction in our dividend. And finally, with a laser focus on driving organic growth in our core portfolio, our investment activities will be limited. We expect minimal acquisition activity and restrictively managing CapEx. Turning to slide 10. I'm very excited about what's been achieved to date with our FME25 transformation program, as well as the extended opportunities to improve profitability. With particular acceleration in the fourth quarter, our FME25 program delivered sustainable savings of 131 million euro, well above our expected range for the year. Additionally, we have increased the scope of the program, largely comprising of additional opportunities to improve the profitability of our care enablement segment that continues to be heavily impacted by inflationary pressures. We now expect sustainable savings of 650 million euro by 2025, with one-time costs of up to the same amount. We expect incremental 120 to 170 million Euro in sustainable savings in 2023, which would bring us to 250 to 300 million Euro exiting the year. And to achieve this, we now expect one-time costs of 250 to 300 million. Moving to slide 11. With our new operating model in place, we now have clear line of sight and the leadership accountability in place to drive performance, and run the segments like the two separate businesses that they are. This will allow for further operational efficiencies and portfolio optimization beyond FME25. On this slide, we have outlined our path to unlock value in each of our operating segments. In care delivery, our turnaround efforts are focused on productivity and efficiency measures, and in the US specifically, we have focused on labor stabilization, growth, and improving our operating leverage, and we have already started clinic closures. We have around 50 to 100 clinic closures in the U.S. in our first wave. We are streamlining our portfolio by exiting unsustainable international markets and divesting non-core service assets. In care enablement, our product margin has been severely impacted by macroeconomic inflationary and supply chain pressures, and is falling short of our aspirations. To improve profitability, we are focused on pricing initiatives, productivity measures, and reviewing our manufacturing footprint. We're also taking a hard look at our product portfolio and are in the process of rationalizing our global R&D programs and divesting non-core product lines. This will enable, in the future, a more focused capital allocation towards the areas of higher profitable growth in the core business. As I mentioned earlier, the proceeds from these disposals will be used to further deleverage. With the move to the new operating segments, a reallocation of goodwill and the recoverability of goodwill is required. The current estimate indicates no impairment risk. I have flagged throughout the last year that our products business has faced significant margin pressure. And as the evaluation also takes into account interest rates, WAC, and changes to the macroeconomic environment, possible changes to those factors may result in a goodwill impairment in care enablement in the future. To be transparent about a potential risk, I wanted to share this reorientation of the goodwill calculations. Before I turn to our financial performance, I would like to emphasize that our strategic aspiration and planned initiatives are tangible. We are actively implementing and executing on these initiatives already. This gives me the confidence for a recovery of earnings growth in 2024 and beyond. And I look forward to sharing more details during our Capital Markets Day in April. Now I'd like to change course and move to our fourth quarter business update on slide 13. In the fourth quarter, we continued to deliver organic growth. Currency effects extended our revenue growth to 8% reported and 2% at constant currency. In line with expectations, our operating income declined by 8% on a constant currency basis and before special items. Our net income declined by 14% on the same basis. In the fourth quarter, our headwinds and tailwinds developed roughly as communicated. And as expected, our business developments continue to be impacted by higher labor costs and macroeconomic inflationary pressures. While the U.S. labor market remains challenging, our labor stabilization efforts continued to drive gradual improvement in our labor KPIs. Next on slide 14. On a constant currency basis, healthcare services delivered revenue growth of 2%. This was mainly driven by organic growth in EMEA and Asia Pacific. The North American region delivered stable organic growth and improvement from the third quarter, despite the impact from accumulated excess mortality, staffing challenges, and capacity constraints in certain clinics. Revenue for the products business was flat for the quarter, as higher sales of in-center disposables were offset by lower sales of machines for chronic treatments, also resulting from delays from the lifted FDA shipment hold. Turning to slide 15. On a year-over-year basis, we experienced the largest margin contribution from business growth, including COVID effects. This was partly driven by reimbursement increases, as well as a negative humus site investment remeasurement effect in the fourth quarter of 2021. The most significant margin detractors were macroeconomic inflationary pressures, including labor cost increases, and the year-over-year headwind from Applied US Provider Relief Funds. These headwinds were partially offset by the acceleration of our FME25 program, which led to higher savings in the fourth quarter. The FME25 one-time costs, which we treated as a special item, was also higher in the fourth quarter. Other one-time costs consist of the remeasurement effect of our investment in humicides and impacts from the Ukraine war, which included the impairment of our production plans resulting from economic sanctions imposed on Russia. Next on slide 16. The year-over-year decline in our operating cash flow was mainly due to the lower net income. However, the focus on lower CapEx resulted in a stable free cash flow development year-over-year. At 3.4 times net debt to EBITDA, we were at the upper end of our target leverage corridor. and it is a priority for us to stay within this self-imposed range. For me, cash is king, and as I mentioned earlier, future deleveraging is at the top of our capital allocation priorities. Turning to our outlook on slide 18. With our new financial reporting structure, and in line with our DAX peer group, we will now change to an annual outlook for revenue and operating profit. It's important to me to continue to be transparent about the assumptions we are making, and for 2023, I really want to focus on the key assumptions and drivers of expected earnings development. Despite some stabilization, we are assuming a continued headwind of 200 to 240 million euro from the inflationary cost environment, resulting from the annualization effect from these costs, plus, although on a lower level, a continuation of the inflationary environment. This remains a headwind, in particular, in care enablement. As you know, we have many moving parts on labor. However, we are seeing gradual improvements in the challenging US labor market. And as outlined last year, of the defined labor cost headwind, a portion was expected to become a tailwind for 2023. And some of the permanent measures we implemented in 2022 we're always expected to have an annualization effect. We are assuming a merit increase of three to four percent across the group, and when we net all of these effects and assumptions, it results in a labor cost headwind year over year of 140 to 180 million euro. In the US, we are assuming a broadly stable dialysis treatment volume development for the full year, that could range from a plus 1% growth to a minus 1% decline. As I mentioned earlier, we are assuming sustainable FME25 savings of 250 to 300 million euro by the end of 2023. And last year, as we all know, operating income was supported by 277 million euro of U.S. provider relief funds. and we do not assume any additional funds will be made available in 2023. And to provide a comparable basis for our 2023 operating income outlook, we have adjusted the base accordingly. Next on slide 19. As always, our outlook is in constant currency and excluding special items. In 2023, we expect low to mid single digit revenue growth. On the adjusted basis that I just explained on the previous slide, we expect a flat to high single digit percentage rate decline for operating income in 2023. And from a phasing perspective, we do expect the low point in our operating income development in the first quarter. the first quarter is expected to provide only a mid-teens percentage share of the 2023 operating income. To help you with your 2023 modeling, we are assuming a tax rate of 25 to 27% and financial cost of 350 to 380 million euro at constant currency. While 2023 will be a year of level setting, we are confident in our path to unlock value as the leading kidney care company. We expect to come out of 2023 stronger and well-positioned to drive sustainable, profitable growth with a recovery of earnings growth in 2024 and by 2025 with an improved operating profit margin of 10 to 14%. And when you look at the 2025 margin aspiration, Please keep in mind that this includes the assumed strong revenue growth of our value-based care business, which comes with an incremental but lower margin, and therefore dilutes the overall margin. With that, I know I've covered a lot, and I imagine you have some questions for me, and I'll hand it over to Dominic to begin the Q&A.