Fresenius : Q2/H12022 Kennzahlen (PDF)

Transcript

Conference Call preliminary Q2 2022 results

July 28, 2022

CORPORATE PARTICIPANTS

Stephan Sturm, Fresenius SE & Co. KGaA - CEO

Rachel Empey, Fresenius SE & Co. KGaA - CFO

Markus Georgi, Fresenius SE & Co. KGaA - SVP IR

CONFERENCE CALL PARTICIPANTS

Barclays, Hassan Al-Wakeel

Berenberg, Thomas M. Jones

Credit Suisse, Christoph Gretler

Deutsche Bank, Falko Friedrichs

HSBC, Sezgi Oezener

J.P. Morgan Cazenove, David Adlington

Jefferies, James Vane-Tempest

ODDO BHF, Oliver Metzger

PRESENTATION

Markus Georgi: Thank you, Stuart, and good afternoon, good morning, depending on your time zone. Thanks for joining us. With me today are Stephan and Rachel. Please keep in mind that all published documents and today's call are based on preliminary and unaudited financials. The full set of final and audited Q2 numbers will be distributed on August 2nd.

Stephan will lead off, followed by a Q&A session. Today's discussion will include forward- looking statements, such as forecasts about Fresenius operations and future results. Please refer to the cautionary language and Page 2 of today's presentation.

And with that, I hand it over to Stephan.

Stephan Sturm: Thank you, Markus. Good afternoon, good morning, everyone. Thank you for joining us on such short notice. And as always, we appreciate your interest in Fresenius.

Let's move right to Page 3. And I'd like to focus today's call on the news release we set out last night. Detailed segment slides are in the backup of this presentation. Many of you will have had the chance to join FMC's call earlier today. So I'm keen to provide the group's perspective rather than repeating in detail what you've heard from Helen this morning.

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So what triggered yesterday's announcement? With COVID impacts continuing, both direct and knock-on, the cynic war in Ukraine going into its sixth month with no end in sight, and an ever more uncertain geopolitical and macro situation, we have experienced and continue to anticipate worsening headwinds significantly affecting our businesses. In particular, at Fresenius Medical Care, worsened labor shortages continue to drive wage inflation. And in addition, an accelerated cost inflation is putting a significant weight on earnings growth. As a consequence, also Fresenius Group second quarter results are below our earlier expectations.

At the same time, we firmly believe in the structural growth of the markets that we're operating in and the general effectiveness of our business models. But whilst we believe those macro headwinds to be largely temporary rather than structural, it would appear reckless to rely on a meaningful improvement during the remainder of this year. Much rather, we need to assume that the business growth that we had factored into our models and guidance is only going to materialize later. Thus, FMC has cut its outlook for 2022. Growing burdens rather than the modeled pickup, that in essence explains the magnitude of the guidance shift. Against this backdrop and despite the fact that, for all three other Fresenius segments we are confirming their respective outlooks, we have also revised our group guidance for this year.

As far as our medium-term targets are concerned, we confirm, yet specify our sales growth target. We now expect to deliver not more than the low end of the 4% to 7% CAGR range of the 2019 base. And that would call for broadly consistent revenue growth in 2023, as we have generated in recent years, which from our perspective is testament to the unabated volume demand for our products and services. For net income, however, we now believe our targeted CAGR range of the 2019 basis no longer achievable. The implicitly needed year-over-year net income growth in 2023 runs now at above 20%. In the current setting, that order of magnitude is just not realistic.

But again, I am firmly convinced that these macro headwinds do not affect the structural growth setting for Fresenius and, as such, have no bearing on our pursuit of the strategic agenda for the group.

As you will have seen in our release, Carla Kriwet will now take over as CEO of Fresenius Medical Care already on October 1st, so earlier than previously announced. And I'm delighted about that. And given my near-daily dialogue with her and me watching her go about onboarding, I am more convinced than ever that Carla is an excellent choice. Rice Powell will now step down as CEO of FMC on September 30th.

Furthermore, I'm pleased to announce that we will be hosting a virtual Fresenius Kabi "Meet the Management" event on October 7th. Our IR Team will follow up with details. Michael Sen and his team will be eager to present their plans to capture the structural growth opportunities in the Kabi world.

With that, onto Slide 4 and an overview of the main headwinds we are currently facing, shown as building blocks of a bridge from our previous to the now revised earnings guidance. My main takeaway is bottom right. We consider most of these challenges on profitability to be transitory.

We at Fresenius develop innovative, affordable, and profitable medical solutions to respond to the megatrends of health and demographics. No doubt, we remain leaders in our markets which provide for structural growth opportunities. And we can approach ways to refine and improve our business models from a position of relative strength.

Accelerated inflation currently leads to rising material, energy, and supply chain costs across the entire group and, frankly, across our and most other industries. In our case, though, with very limited short-term ability to pass those higher expenses through to payers and our hospital customers who are suffering themselves. But with a well-founded

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confidence that such inflation is bound to be reflected in reimbursement rates going forward, albeit with a certain time lag.

Underlying staff shortages and wage inflation are currently the largest negative impact on group net income. These headwinds are blowing predominantly at FMC in the US. The growth effect is masked by the government support monies FMC have received. But whilst that moderates otherwise rapidly growing wage inflation, it is no solution for filling an also rapidly growing number of open positions. And these staff shortages limit onboarding opportunities for new patients in our dialysis clinics.

FMC has the group's largest exposure to the US labor market, here, particularly in the patient-facing services subsector, where the shortages and wage inflation have been particularly acute.

At Kabi, we have a sizable yet meaningfully smaller US presence but, obviously, here, in the products business, where the labor market appears less dynamic. And even though Kabi generally also faces these challenges, the net impact has been much less pronounced.

At Helios, the European labor environment has been much more stable, and the reimbursement system in Germany also provides direct protection from any nurse wage inflation. As to potential knock-on growth constraints, I'm glad to confirm that we remain successful in attracting new nursing and doctor talent to our hospital businesses.

Now obviously, we are working hard to accelerate the implementation of measures to offset the various headwinds, for example, through very tight cost control, phasing of projects, and product price increases, albeit limited in scope and magnitude. And with that, we have been able to broadly offset negative effects, particularly at Kabi. So the offset bar in the waterfall chart also includes monies received by Fresenius Medical Care from the US Government's Provider Relief Fund.

In full transparency, our expectations for the second half factor in neither a short-term worsening of macro challenges nor of the COVID-19 pandemic. And thus, our guidance does reflect our current contractual and hedging status but does not consider a significant supply disruption to gas or electricity supplies in Europe.

So again, whilst this current situation is unprecedented, I am convinced that most if not all of these headwinds will ease and by no means become the new norm. And whatever is structural is bound to be, at least largely, reflected in updated reimbursement rates. And with the structural volume growth being intact, mind our recent and current top line, also earnings growth will follow and hence accelerate, additionally fueled by our well- progressing cost and efficiency program, where no doubt the current situation provides a massive incentive to further accelerate and expand that program.

Now moving onto Q2, and that is on Slide 5, starting with Kabi. I'd say a solid Q2 on a tough prior-year comp despite deteriorating macro trends. Sales grew by 2%, and EBIT decreased by 15% in constant currency. To be comparable with guidance, both figures exclude the acquisition of Ivenix.

Although the pricing environment remains challenging for Kabi, the pressure eased somewhat during Q2, particularly in the US. Nevertheless, China continues to be marked by significant national tender-related price pressure. But we are pleased that our market shares in these two crucial markets remain robust. As far as Kabi's Melrose Park plant is concerned, just recently, FDA inspected the facility, and we expect feedback over the course of the third quarter.

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Onto our biosimilars business, which is progressing well, preliminary figures show that we generated sales of €29 million in Q2, and hence slightly more than the €50 million in the first half -- more than €50 million in the first half, and that is well in line with our full- year target.

We are pleased to have closed the Ivenix acquisition during the second quarter. The mAbxience closing is eminent. The integration of Ivenix is running well, in line with our expectations. And the market entry of the new Ivenix large-volume pump is progressing well. We're receiving promising first customer feedback, and so we're making good progress with our Vision 2026 strategic growth initiatives.

Over the slides to Slide 6 and a brief update on Helios and Vamed. Helios has shown 5% organic sales growth in Q2, driven by a solid development in both Germany and Spain. EBIT increased by 1% in constant currency. At Helios Germany, we saw a 4% sequential and a 5% year-over-year increase in admissions, continuing the trend of the last quarters. In Spain and Latin America, the overall activity levels have continued to rise, and also, in our fertility business, we have seen activity picking up during Q2.

Now at Vamed, we have seen an organic sales increase of 1%. COVID and supply chain disruptions remained headwinds in the project business. The service business showed ongoing growth. EBIT was a positive €11 million, also here driven by the service business. As a leading indicator for the future potential in our project business, order backlog is yet again at an all-time high. So despite the macroeconomic challenges that Vamed is also exposed to, we believe the company remains on a good path towards pre- pandemic profit levels.

With that, let's turn to the 2022 outlook on Slide 7, where importantly, you see the six tick marks in the right-hand column. But first, briefly, on our assumptions. Obviously, the updated assumptions for Fresenius Medical Care's full-year '22 guidance are also fully applicable to our guidance. For Kabi, Ivenix and the eminent acquisition of the majority stake in mAbxience remain excluded. And as I mentioned, the guidance does not consider a significant disruption of gas or electricity supplies in Europe. We do expect COVID to continue to impact our operations in 2022 and unlikely but possible significant deterioration of the situation triggering containment measures that could have, again, significant and direct impact on the healthcare sector without any appropriate compensation. That is not reflected in our guidance for this year.

So all our business segments with the exception of FMC are confirming their respective full-year '22 outlook. However, all business segments have to cope with worsening macroeconomic headwinds. So we're looking at a generally increased risk profile where, therefore, we've launched additional compensating measures in all segments.

Brings me to group guidance on Slide 8. The labor shortage, inflation, and macro headwinds are predominantly a bottom-line burden. Nevertheless, we see a certain impact also on our sales growth guidance, predominantly driven by the effects at Medical Care. With 4% sales growth year-to-date, we now expect sales to grow in a low to mid- single-digit percentage rage for the full year. Given the outlook adjustment at Medical Care, we also have to adjust our net income growth guidance for the full year '22. We're now expecting net income to decline in the low to mid-single-digit percentage range.

As a reminder, we guide in constant currency. The current exchange rate development, particular that of the US dollar to euro, continues to provide significant support to our reported numbers.

And that brings me to our medium-term growth targets on Slide 9. In February 2019, when we had originally communicated our midterm targets, no one could've foreseen a global pandemic and related knock-on effects such as increased inflationary pressure or excess mortality among dialysis patients. No one could've foreseen the geopolitical

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tensions with the related knock-on effects such as rising energy prices. Moreover, back in 2019, no one was anticipating the magnitude of the impact of regulatory changes such as the carve-out of nursing costs in Germany and the tendering in China.

So as I said at the beginning, given the necessary revisions to our full-year '22 guidance, the required year-over-year growth rate in '23 appears unrealistic. And we therefore no longer believe that the net income CAGR of 5% to 9% of our 2019 base is achievement. But we expect to reach our medium-term sales target, even though we now expect to end at the low end of the 4% to 7% CAGR range. We don't expect the macro headwinds from this year to further worsen in 2023. And not least, we expect a significant acceleration of our biosimilars business.

To underpin what I just said, we are active in structural and resilient growth markets. Currently, we are, however, impacted by temporary headwinds which are beyond our control. But we have already implemented the right levers to accelerate growth over the next years and are convinced to revive earnings momentum and to occur even stronger out of the current situation.

With that, Rachel and I are happy to take your questions. Thank you for now.

Q&A

Operator: We're now starting the question-and-answer session.

Hassan Al-Wakeel: Hi. Thank you for taking my questions. I have a couple, please. Firstly, this is another FME-driven profit warning which has driven renewed investor focus on group structure. So is Fresenius better off without Fresenius Medical Care?

And could you provide an update comment on speculation around a Helios merger? And to be clear, if you look at doing anything to Helios, as you've talked about previously, would you still look to have a controlling stake in the business?

And then secondly, could you talk about your expectation in terms of returning to net income growth? Can you commit to this being a 2023 event, either on a group basis or at least on an ex-FMC basis?

And if I can squeeze one more in, could you talk about the US IV generic market and how this is shaping up into the second half? Are you seeing a greater degree of price pressure than previously talked about? And is that driving the weaker margin for the quarter? Thank you.

Stephan Sturm: Hassan, thank you. I believe those were five questions, according to my counting, but let's try and go with them one after the other. Look, I am disappointed, needless to say, with the development at Fresenius Medical Care. However, I believe it is fair to say that we are by no means on our own. I think there are very many other well- reputable companies who go through similar difficulties at the moment and also have to turn to profit warnings. My ultimate judgment on this is going to be informed by our relative performance within the sector and also within -- relative to our immediate peers. If I detect a pronounced underperformance, then in close collaboration and alignment with the incoming CEO, I'm sure we will take the appropriate measures.

Far as Helios is concerned, I don't think there's anything meaningful to add to what I have been saying in February. Yes, we continue to see a very positive performance at Quirónsalud. Against that backdrop, the idea of replicating such a situation appears appealing. So yes, we are continuing to monitor situations as they present themselves and would be generally open to do an acquisition/merger, however, with the knock-on question that you had, with the aim to retain a controlling majority stake in that business.

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