FMS

Business Context and Reporting Period

Company: Fresenius Medical Care AG & Co. KGaA (FMC)

Reporting Period: Nine months ended September 30, 2022 (Interim Report)

Overview: FMC is the world's leading provider of products and services for individuals with renal diseases. The company operates through four geographic segments: North America, EMEA, Asia-Pacific, and Latin America. The reporting period was significantly impacted by the war in Ukraine, global inflation, supply chain disruptions, and labor market challenges in the U.S. Notably, on August 24, 2022, the company completed a three-way business combination creating InterWell Health, a value-based care entity.

Key Financial Metrics

Note: Revenue growth was driven by foreign currency translation (+9%) and organic growth (+2%). Operating income declined primarily due to inflationary cost increases, labor shortages, and special items.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 11% (2% at constant currency). Health care services revenue grew 12%, while health care products revenue grew 8%. The North America segment contributed the majority of revenue (€10.0 billion).
• Profitability Decline: Operating income decreased 17% (24% at constant currency). Gross profit margin contracted from 29.0% to 27.5% due to higher personnel expenses, inflationary supply chain costs, and excess patient mortality rates from COVID-19.
• Segment Performance:
  • North America: Operating income fell 10% (20% at constant currency) due to labor market challenges and the Humacyte investment remeasurement, partially offset by the InterWell Health remeasurement gain.
  • EMEA: Operating income dropped 27% (26% at constant currency) driven by hyperinflation in Turkey, war impacts in Ukraine, and FME25 program costs.
  • Asia-Pacific: Operating income remained relatively stable (-1% at constant currency).
  • Latin America: Operating income increased 17% (driven by favorable currency effects and lower bad debt), though treatment volumes declined.
• InterWell Health Transaction: The company recognized a €147 million remeasurement gain on its prior investment in InterWell Health LLC upon the business combination closing.

Guidance, Outlook, and Risks

• Outlook: Management expects the net leverage ratio to return to its self-set target range of 3.0x - 3.5x by the end of 2022. Capital expenditures for 2022 are anticipated to be between €0.8 billion and €1.0 billion.
• Key Risks:
  • Geopolitical: The war in Ukraine has increased risks related to energy costs, supply chain disruptions, and potential asset impairments, though assets in the region represent less than 1.5% of total assets.
  • U.S. Labor Market: Unprecedented staff shortages and high turnover rates in the U.S. are driving up costs and limiting treatment volume growth.
  • Reimbursement: Continued pressure on U.S. Medicare reimbursement rates (including the resumption of the 2% sequester) and potential changes to the ESRD Treatment Choices (ETC) model.
  • Regulatory: Ongoing compliance monitorship related to the FCPA non-prosecution agreement (expected to conclude end of 2022) and various False Claims Act investigations.
• Unusual Items: Costs associated with the FME25 transformation program, hyperinflationary accounting in Turkey and Argentina, and bad debt provisions related to the Ukraine war.

Investor Verification Checklist

• InterWell Health Integration: Verify the financial impact and integration progress of the new InterWell Health entity and the sustainability of the €147 million remeasurement gain.
• U.S. Labor Costs: Monitor the trajectory of personnel expenses and contracted labor costs in the North America segment, which is the primary revenue driver.
• Net Leverage Ratio: Confirm the company's ability to reduce the net leverage ratio from 3.6x back to the 3.0x-3.5x target range by year-end 2022.
• Reimbursement Policy: Track CMS final rules for the ESRD PPS and the ETC model for 2023, as these directly impact the North America segment's margins.
• Goodwill Impairment: Review the sensitivity analysis regarding goodwill impairment, particularly for the North America and EMEA segments, given the macroeconomic headwinds and increased discount rates.