Fresenius : Transcript

Transcript

Conference Call Q3 2022 results

October 31, 2022

CORPORATE PARTICIPANTS

Michael Sen, Fresenius SE & Co. KGaA - CEO

Sara Hennicken, Fresenius SE & Co. KGaA - CFO

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

CONFERENCE CALL PARTICIPANTS

Berenberg, Thomas M. Jones

Citi, Veronika Dubajova

Deutsche Bank, Falko Friedrichs

Jefferies, James Vane-Tempest

J.P. Morgan Cazenove, David Adlington

Morgan Stanley, Robert Davies

Redburn, Ed Ridley-Day

PRESENTATION

Markus Georgi: Thank you, Stuart. Good morning, good afternoon, depending on your time zone. Thanks, everybody, for joining us today on our Q3 earnings call. With me on the call today are Michael Sen, Chief Executive Officer of Fresenius Group, and Sara Hennicken, Chief Financial Officer of Fresenius Group.

Yesterday, late afternoon, we have published our Q3 figures and have adjusted our forecast for fiscal '22. Before kicking off, I would like to start this call by drawing your attention to the cautionary language that is included in our safe harbor statement on Page 2 of today's presentation. And without any further ado, I hand it over to you, Michael. The floor is yours.

Michael Sen: Yes, thank you, Markus. Good afternoon, everyone. This is Michael Sen. There has been a lot happening, and there is a lot to do. I thank you for joining us today on the call. Sara and I will review the third quarter and take questions, but I want to start by going over recent news.

By now, you have all seen the announcement from Fresenius Medical Care of their lowered forecasts for 2022. And obviously, FMC's news impacts the Fresenius Group's performance and expectations.

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In addition to the FMC effect, we, too, are operating in very uncertain markets, where patient and customer decision making has been disrupted. As a result, Fresenius Group forecasts have to be adjusted.

While we expect revenues for 2022 to grow, tough markets will continue. Year-to-date, our net income has declined by 8% against prior year. We now expect net income for 2022 to be down around 10% year on year. This is very disappointing, a disappointing announcement, particularly as it is not the first time we have lowered our guidance. I took the CEO position because I know, with our people and with our products, we can do better. And currently, we are far from realizing our potential.

This news only highlights what I've been saying. We need to hit reset. We are reviewing every business top to bottom and at fast pace. This will result in more rigor. And while this happens, we have to reduce costs to deal with a tough environment.

With that, let's discuss the third quarter, after which I will come back with my thoughts and priorities after 30 days in the job and our path to create #FutureFresenius.

Let's get right to the point. Two things stick out from the quarter. As is clear, the intensified macro headwinds impacted our businesses. But beyond this and more important is the need for what I have said a reset is needed also in terms of operating performance.

Top line came in at €10.5 billion, i.e., revenue was growing reasonably well with 5% year over year organically. But earnings, EBIT was €949 million, meaning our margin contracted by 210 basis points. Going all the way to the bottom line, the lack of earnings conversion also dropped through, with net income off by 19% versus Q3 last year.

And yes, material cost inflation, wage inflation, labor shortages, and supply chain disruptions all weighed on our profitability. FMC and Vamed were particularly affected. Increased corporate costs, primarily by lower absorption in our services, higher interest expenses, and a higher tax rate, hurt us.

So as a prelude, going into next year, we will have to intensify actions on driving out costs and increasing structural productivity in all of our segments with increased rigor. This is the self-help I see.

Considering the current economic environment, interest rate moves, and geopolitical developments, these will impact our individual markets. We can't expect much short- term improvement to patients behavior or customer decision making. We expect more volatility and that companies along the entire value chain as well as individuals will have to deal with more uncertainty.

Onto Kabi, all in all, Kabi had a decent quarter. Revenues exceeded €2 billion for the first time. Year on year, we were up 3%. And that is against some tough comps in 2021. Happy to see that all three growth vectors laid out in our Vision 2026 are contributing with incremental growth. So transforming Kabi strategically and in terms of operational rigor according to Vision 2026 is moving into the right direction.

Going forward, our job is to help the market understand better the makeup and dynamics of our Kabi businesses. Geographically, top-line growth is driven by Europe and rest of world, outweighing ongoing pressures in North America. The EBIT margin, excluding mAbxience and Ivenix, sequentially held up well despite the headwinds from cost increases we see in our industrial value chain. In a nutshell, I'd call it a decent quarter with healthy revenue growth and stable margin.

That brings me to Slide 7. Let me shed some more light on Kabi. This is important as we move forward. As a reminder, we launched Vision 2026 in October last year to enhance

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our presence, sustain relevance in the coming decade, and to spur growth, both in terms of top line and ultimately margin expansion. Our 3 + 1 strategy identifies clear growth vectors which are underpinned by structural growth drivers within the healthcare industry.

Let's go to some of the highlights. Biopharma: With mAbxience, we significantly strengthened our franchise but also changed the business makeup. This is a real business now. We're moving rapidly, launching Peg in the first European market, delighted to have received US approval, can tell you the team is energized to capture the growing opportunities.

Toci is on a good path. Excited to announce that we reached a settlement with Roche and its affiliates Genentech and Chugai. On top, local commercialization of IDACIO in Brazil has started, which will drive this year's topline.

mAbxience, great to have them since August. They are progressing nicely. mAbxience significantly enhances our profile in biosimilars. It's delivering benefits of scale, portfolio, and pipeline diversification as well as vertical integration. Execution so far is on track.

Onto MedTech: Ivenix. Remember this is really at what I call early innings. The logic was about industrializing a tech-focused IV infusion system offering, proven technology with clear customer benefits. Integration has started, especially on the backend in terms of manufacturing and taking over procurement to then have the right leverage on the cost position going forward. They're gaining traction in the market, with high visibility and growing mindshare.

A highlight on nutrition, Fresenius Kabi has become the leading provider of clinical nutrition lipids in the United States with a market share north of 60%.

Onto Slide 8, Vision 2026 also sets a clear focus on delivering structural cost savings. That includes a rigorous assessment of Kabi's operations. Based on our assessment, we did decide to divest noncore assets. Where we see businesses that are not contributing to our performance, we will exit. We call it cutting the tail. This is a continuing effort, no let up. You'll hear more in due course.

In terms of cost out, we're ahead of schedule. Year to date, we already delivered 50% beyond the pro rata savings target in fiscal '22. This is what I mean by moving fast and tapping into self-help.

Quarter 3 for Helios: I'd say yet another solid quarter. Revenues came in for the segment at €2.8 billion with strong organic sales growth of 6%. Earnings as in EBIT at €222 million, resulting in a margin of 8%, slight contraction yet probably peer leading in the current environment, and in line with the seasonality effects. As you all know, Q3 is traditionally a softer quarter due to the pronounced summer slowdown in Spain.

At Helios Germany, admissions are gradually improving, even though they are still below pre-COVID levels. Sales growth is further supported by a favorable case mix, growing by 5%. EBIT grew even with COVID-driven higher absenteeism rate and subsequently a higher proportion of temp workers. And all in all, this is a clear result of management taking actions decisively, also focusing on cost and on cost drivers.

At Quirónsalud, we see ongoing healthy activity levels translating into solid organic growth year over year with 8% and a good EBIT development. Margin basically flattish against the backdrop of higher energy costs, and also here, a clear reflection of decisive and active management actions to drive both clinical quality and financial results.

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The lower volumes at the fertility business were partially driven by a delay of treatments due to the uncertainty triggered by the macroeconomic environment. And the prior-year quarter was a tough comp, inflated by a positive special item.

Over to Vamed, as much as we appreciate the strong revenue number coming in at €570 million, i.e., growing by 10% organically year over year, in essence solely driven by the project business, the drop through to operating earnings is clearly below expectations.

The consequences of macro and COVID headwinds have taken their toll on operating earnings. Number of effects here, delayed customer decision making, hence projects slippage and higher input cost with then the respective ramification on operating earnings and accounting. And even though we traditionally expect a strong Q4, the impacts on the cost side and the expected uncertainty on the customer decision making will remain in Q4. And taking this into account and given the weak year-to-date earnings performance, we've adjusted our EBIT expectations for the remainder of the year.

With that I'll hand it over to Sara.

Sara Hennicken: Thank you, Michael. A warm welcome also from my side. This is the first time I'm communicating with most of you, and I appreciate your interest in Fresenius. I'm looking forward to meeting many of you personally over the coming months.

I'm excited to drive the transformation to a #FutureFresenius together with Michael. The current macroeconomic backdrop and related uncertainties will provide some extra challenges but will also provide opportunities to drive change. I'm a firm believer in the fundamental strength of Fresenius, its relevance for our patients and the societies we work for globally.

Over to Q3 on Slide 12, in a nutshell, we delivered a weaker-than-anticipated quarter against the backdrop of a more challenging macroeconomic environment. Our Q3/22 results are shown in our usual fashion, so before special items. As always, a comprehensive overview of all special items is provided at the back of our Investor News and in the Results Center on our Website.

Michael already summarized the quarter. So I will focus on selected P&L items that might be most relevant to understand the Q3 developments. Interest expenses increased by 4% in constant currency to a reported €141 million, mainly driven by overall higher interest rates.

Q3 was the first quarter where we saw the higher interest rate environment to start materializing in our results. For 2022, we now expect reported net interest expenses to be above the level of 2021. In constant currency, we expect interest expenses for the year 2022 to be slightly above the level of 2021.

Group tax rate before special items in Q3 stood at 25%. The higher-than-usual tax rate is due to an increase in the proportionate share of nontax-deductible expenses relative to taxable income at Fresenius Medical Care. For 2022, we now expect a tax rate between 24% to 25%, a 1 percentage point increase, mainly driven by adjusted tax rate expectations at Fresenius Medical Care.

Moving onto net income, where we have seen a decrease of 19% in the third quarter driven by the tough market environment, as a reminder, inflation significantly accelerated in Q3, leading to material increases in input costs across our businesses, including material prices, logistics, and energy costs. Labor shortages and wage inflation continue to persist, especially at FMC in the US.

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In addition, supply chain disruptions led to supply shortages and higher demand for inventory at Kabi and Vamed. COVID impacted our businesses, in particular at Vamed and Fresenius Medical Care.

Net income was further impacted by increased corporate costs due to one-time costs related to management changes as well as lower demand for internal services, in particular for IT. Additionally, it was affected by slightly higher interest expenses and an increased tax rate. Year-to-date net income decreased by 8% on a guidance-relevant basis.

Continuing with cash flow on Slide 13. A solid Q3 took the group operating cash flow to €1.3 billion, which brings us to a cash flow margin of 10.3% over the last 12 months. This is 2.5 percentage points lower compared to last year. It is mainly driven by softer EBIT developments across the group as well as working capital buildup, for example, at Kabi or Vamed, to mitigate supply chain disruptions. In addition, we saw an increase in receivables relating to delays in nursing budget negotiations at Helios Germany.

Capex for the last 12 months is, with 4.6% of sales, below the 5% level. This brings us to a group free cash flow margin, bottom right, of 5.7%. You will not be surprised that we will further reinforce our focus on cash flow with a clear aim to improve our cash conversion over the next quarters.

That brings me to our well-balanced financing structure on Slide 14. We ended the quarter with 3.74x net debt to EBITDA. Excluding Ivenix and mAbxience, we are at 3.64x. The leverage ratio is impacted by the overall muted EBITDA development in the third quarter, usual seasonality effects, as well as our M&A activities at Kabi. Given the ongoing headwinds, we now anticipate the leverage ratio to remain roughly at the same level at the end of 2022.

To spare you the question at the Q&A part of the call, I'd like to emphasize that we remain fully committed to our self-imposed leverage target range of 3x to 3.5x times. We also monitor our rating closely, as it is dear to us, and we are committed to our investment-grade rating. As we drive #FutureFresenius, its stringent capital allocation and a clear focus on balance sheet will be key components. Our short-term refinancing needs are limited. And as usual, we target to refinance upcoming maturities conservatively and well ahead of time. The debt structure is characterized by a defensive financing mix, with roughly 80% of our debt being fixed-rate instruments, helping us to protect against the rise in interest rates.

With that, let's turn to the 2022 outlook assumptions on Slide 16. Like most companies in our sector, we are facing a challenging macroeconomic environment with high uncertainties. As you will have heard from many other companies, it is outstandingly difficult to predict how cost inflation, supply chain disruption, labor shortages, and COVID will develop.

The war on Ukraine further adds volatility and muted visibility. We do not expect these headwinds to ease anytime soon. We are closely monitoring the overall development and potential future consequences, including balance sheet valuations.

For COVID, we assume a continuing impact on our operations in the fourth quarter. An unlikely but possible significant deterioration of the situation that could trigger containment measures with a significant and direct impact on the healthcare sector without any appropriate compensation is not reflected in the guidance.

For Fresenius Medical Care's contribution to Fresenius's numbers, the guidance assumptions of Fresenius Medical Care apply. Furthermore, special items, the acquisitions of Ivenix and the majority stake in mAbxience, as well as any future potential acquisitions are excluded from guidance.

Transcript Q3/22 Results, 31 October 2022 © Fresenius SE & Co. KGaA Investor Relations & Sustainability

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