Fresenius Medical Care AG

Ladies and gentlemen, welcome to the report on the fourth quarter 2023 conference call. I'm Andre, the chorus call operator. I would like to remind you that all participants will be in this and only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominic Hege, Head of Investor Relations. Please go ahead, sir.

Thank you, Andrea. 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 2023 for the fourth time at 2 p.m. 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 earlier today. For further details concerning risks and uncertainties, please refer to these documents and to our SEC filings. With the Q4 results, we traditionally share an update on our strategic plan. Therefore, we have more to cover than in the other quarters. Given that we only have the 60 minutes, we need 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 Helen Gieser, our CEO and Chair of the Management Board, and Martin Fischer, our CFO. Helen starts with an update on our execution against our strategic plan. Martin will provide a review of the fourth quarter, and Helen will finish the prepared remarks with our outlook. Then we are happy to take your questions. With that, the floor is yours.

Thank you, Dominic, and welcome, everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care. I'll begin my prepared remarks on slide four. A year ago, we laid out our strategic plan to turn around and transform Fresenius Medical Care. This plan included ambitious structural, operational, and cultural changes. Thanks to the hard work and dedication of our teams around the world, we have successfully executed on our commitment of fundamental transformation, making progress against all facets of our plan. We have done what we said we would do. A lot of the change we have undertaken would not have been possible without the implementation of our new operating model at the start of 2023. With our two distinct global segments, care delivery and care enablement, we are now operating with an end-to-end level of transparency and accountability that has not been in place previously. The new operating model enabled us to introduce new financial reporting with enhanced transparency. And throughout 2023, our commitment to our operational turnaround initiatives helped drive organic growth in both segments and improving operational performance. Our FME25 transformation program delivered savings ahead of schedule while ensuring our company becomes stronger and more resilient in the future. We have also undertaken a cultural transformation with greater emphasis on accountability. To this extent, we made two important leadership changes on our management board, with Martin Fisher joining as CFO in October and Craig Cordola, our new head of care delivery, joining in January of this year. I'm very excited about the new perspective that they bring to our company and the impact that they are already having. In the fourth quarter, we finalized our change in legal form, and are now operating in a simplified governance structure with strengthened rights of our FreeSloat shareholders. We continued to execute against our portfolio optimization plan with several key assets divested by the end of the year and more underway and proceeds applied to deleveraging. And finally, our relentless focus on improving operating performance allowed us to upgrade our outlook for the first time in the company's history. And I'm very proud to say that we even exceeded our upgraded outlook, and we did a little bit more than we said we would do. Turning to slide five. Beyond our achievements on the strategic front, I'd like to quickly recap our operational performance in 2023. We achieved revenue growth at the top end of our outlook range and organic growth in the year, with mainly driven by favorable business development. As we still experience the annualization impacts of excess mortality from the COVID pandemic, volume development in the U.S. is an important KPI that we have been watching closely, and I know the market is as well. 2023, we assumed a minus 1 to plus 1% growth in same-market treatments in the U.S., and when adjusted for the exit of less profitable acute care contracts, we finished the year right at the center of that assumed range. This makes us optimistic for a positive growth development for 2024, which we have included with a careful assumption as the basis for our outlook for this year. As I mentioned, our earnings exceeded the top end of our upgraded outlook thanks to business growth, realized FME25 savings ahead of plan, and the TRICARE settlement. Contributing to the earnings growth were faster-than-expected labor productivity improvements in care delivery, as well as positive impacts from our pricing initiatives in care enablement. Regarding the portfolio optimization, the divestments closed in 2023 accounted for €214 million of revenue and €20 million of operating income. The strict commitment to our stringent financial policy resulted in significantly improved cash flow and an important decrease in our net leverage ratio. And we continue to make progress on our broader sustainability goals. Earlier this year, we submitted our commitment letter to the Science-Based Targets Initiative, underlining our goal to achieve climate neutrality in our operations by 2040, in line with the Paris Agreement. Moving to slide six. Although we are going through a significant transformation, first and foremost, we remain a purpose-driven company focused on patient-centric care of the highest quality. Patients' overall satisfaction with our services, measured by the Net Promoter Score of 72, was at an even higher level than in previous years. Our Global Quality Index is another important KPI in this regard. Throughout 2023, we saw sequential stability in our clinical performance at a high level. Next on slide seven. In 2023, we delivered 5% revenue growth at constant currency and 4% organic growth. Organic growth in care delivery was driven by the expansion of our value-based care booker business in the United States and higher reimbursement. Organic revenue growth in care enablement was driven by both higher volumes and prices. As a reminder, organic growth does not include the TRICARE settlement or the divestment proceeds. Along with the solid top-line growth, the successful execution of our turnaround initiatives translated into improved earnings. Our operating income increased 15% in constant currency, and our group margin expanded 100 basis points to 8.9%. We are making important progress towards our 2025 group margin target, which is supported by our FME25 program, where we realized €346 million in savings through the end of 2023, well ahead of our plan. The 181 million euro TRICARE settlement proceeds was another positive earnings driver for which we increased our outlook the second time in 2023. And we realized meaningful labor productivity improvements in care delivery that we originally only expected to realize in 2024. It is terrific to have achieved so much already in 2023. And as such, we would expect a lower incremental degree of improvement in 2024. In care enablement, our successful pricing initiatives and earnings improvement were diluted by continued inflationary pressures and foreign currency transaction losses. Turning to slide eight. As you can imagine, I like this slide a lot, as it confirms that we delivered against what we said we would, and more. In 2023, we guided for low to mid single-digit revenue growth, and we finished the year at the top of our outlook range with 5% revenue growth. While we started the year with an expected up to 9% earnings decline, we were able to upgrade our earnings outlook twice in 2023 and ultimately delivered operating income growth of 15%, exceeding our double-upgraded range of 12% to 14%. This approach of a realistic outlook combined with successful execution is something I intend to continue. Next on slide nine. Excuse me. To turn around our business performance, we need to reduce distraction and focus on our core and higher margin businesses. Since we laid out our portfolio optimization plan at our capital markets day last April, we have been moving at speed. We have announced and closed divestments of our clinic network and production sites in Argentina, our clinic network in Hungary, and NCP, our cardiovascular clinic network in the United States. We have announced additional divestments that are subject to regulatory approval and are in the process of closing. These include our clinic network in sub-Saharan Africa, Kira Day Hospital Group in Australia, and our clinic network in Turkey. We continue to work on a number of other divestments, and of course, we'll keep you updated. Turning to slide 10. We strictly adhered to our disciplined financial policy in 2023. We improved our cash flow, and we limited our capital expenditures. With our top priority to deleverage, we applied proceeds from divestments and the TRICARE settlement to reduce our debt. We reduced our leverage ratio from 3.4 to 3.2 times. And in light of fully being on track for our deleveraging, and as prescribed by our dividend policy, for 2023, the Supervisory Board and Management Board propose a dividend of one euro and 19 cents per share. The 6% increase is in line with year-over-year adjusted net income growth. Martin will walk through our improved cash flow and strengthened financial position in more detail later in the presentation. Next on slide 11, we believe that value-based care is an important element in the future of healthcare. While value-based care is not entirely new, it is still in its early development stages as a business or risk model. It needs to continuously evolve from a technology and scale perspective. Also, revenue and profit recognition is often more retrospective than in our core business. which creates some volatility, in particular during the financial year. We continue to lead the industry with our capabilities for both CKD and ESRD patients. We focus on clinical excellence, which also includes reducing hospitalizations, being a key indicator here. And, of course, as a dialysis company, we also have a clear focus on increasing optimal new starts for the dialysis treatment when patients progress to ESRD. For 2024, we expect that medical cost under management will grow by 20% and patient lives covered by around 10%. From a revenue contribution, we assume around $2 billion U.S., with a positive operating income contribution. Home is an important treatment modality as it offers qualifying patients the opportunity for more flexibility in treatments and an improved quality of life. This is also visible in lower hospitalization days, which is supportive in particular to costs in value-based care arrangements. Growth in home treatment is also an important opportunity for our business. as it is asset-light and requires significantly less labor hours. Although our home growth has recently slowed at around 16% penetration in the U.S., we remain optimistic in the opportunity for future growth, given the wide benefit it offers. With our new care delivery leadership, we will take a fresh look at the most optimal way to increase home treatments to get us closer to our aspirational goal of 25% by 2027. Turning to slide 12, we spent a lot of time talking about our strategic plan towards our 2025 targets. However, our thinking and planning does not stop there. As you will have seen from our press release earlier this month, we are on the verge of introducing a key innovation development in the United States with the potential to set a new standard of care for the industry. High volume hemodial filtration, or high volume HDF for short, is a technology that is already transforming how dialysis is done in many of our international markets and would present an important opportunity for our patients and our business in the U.S. following the CONVINCE study publication last year. Unlike conventional high slugs hemodialysis, which primarily employs diffusion to remove small molecules and fluids from the blood, high volume hemodifiltration incorporates both diffusion and confection techniques to eliminate larger molecules and effectively manage fluid replacement through convection. The CONVINCE study was a multinational research study that compared these two types of dialysis techniques. It was a three-year trial performed at 61 dialysis centers in eight European countries and included 1,360 patients. The results showed a 23% reduction in all-cause mortality in patients treated with high-volume HDF versus those treated with high-flux dialysis. In our own EMEA dialysis patient population, over half the treatments are already high-volume HDF, and we have been using this technique for a decade. Our 5008X hemodialysis machine received FDA clearance this month. It is the first machine capable of high-volume HDF to be approved in the United States. Along with our choral dialyzer, which is already registered in the U.S., The 5008X combines the latest device engineering and cutting-edge membrane technologies required to make high-volume HDF possible. This is a very exciting opportunity for the upcoming years as we plan a broad commercial launch in 2025. In the U.S., there is currently an estimated install base of around 160,000 in-center hemodialysis machines across all service providers that could be replaced to adopt this new standard of care. I'll now hand over to Martin to provide an update on the fourth quarter.