Fresenius Medical Care AG & Co KGaA
XETRA:FME
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Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care Earnings Call on the Fourth Quarter and Full Year 2021. [Operator Instructions]I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead.
Thank you, Natalie. As mentioned by Natalie, we would like to welcome you to our earnings call for the fourth quarter and full year 2021. We appreciate you joining today to discuss our recent performance and our outlook. Some of you might have already joined our press conference earlier today. I will, as always, 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 our materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. We would like to limit the call to 60 minutes because you had a long day already, I guess. Therefore, we would like to restrict the number of questions in the Q&A again to two in order to give everyone the chance to ask questions. Should there be further questions and time left, we can go a second round. It would be great if you could make this work. With us today is, of course, Rice Powell, our CEO and Chairman of the Management Board; and Helen Giza, our Chief Financial Officer and Chief Transformation Officer for FME25. Rice will give you some more color around the strategy and business development; Helen will provide to you a detailed update on the financials as well as on our targets for 2022. And with that, I will hand over to Rice. The floor is yours.
Thank you, Dominik. Welcome, everyone. Thank you for joining our presentation today and for your continued interest in our company. I would like to start with thanking our entire team at Fresenius Medical Care, our frontline workers in the clinics, production sites and distribution centers their continued tireless work and what is an extraordinary situation that we've encountered over the past 2 years. It is inspiring to see the amount of energy mobilized by our employees for our patients. I'll begin my prepared remarks on Slide 3. In 2021, we delivered our financial targets for the year despite a stronger-than-projected headwinds from COVID-19 in the second half of the year as well as increasing macroeconomic inflationary pressures relating to both labor and raw materials. We all know that the pandemic and its impacts cannot be forecasted. We expect these challenges will continue to be a significant headwind in 2022. We will have to work with our best assumptions, as we've done previously. During the fourth quarter, COVID-19-related excess mortality continued to accumulate, but at a lower level than the spike we saw in the third quarter. We continue to execute on our strategic priorities, and I look forward to sharing the progress we have made with you later today. Finally, we will propose a dividend of EUR 1.35 at our Annual General Meeting in May. Turning to Slide 5. The impact of COVID-19-related excess mortality on our patient base has been an unprecedented development for us. In the near term, this is a challenge for our business that we must manage. At the same time, the key underlying drivers of our core dialysis business for the medium to long term remain solid and have not changed. As the global population continues to age along with increasing incidence of hypertension and diabetes, we project more than 6 million people will require dialysis by 2030. We continue to see solid new patient starts, confirming that these drivers remain intact and indicated the potential for a strong rebound in growth once COVID-19 is once and for all behind us. Turning to Slide 6. We continue to believe that our midterm strategy prioritizes patient needs and quality of care, aligned with the key drivers and developments for our industry, and positions our business to deliver attractive, sustainable, profitable growth over the medium term and beyond. We are executing on this strategy despite challenges with the pandemic. Within the Renal Care Continuum, our goal is to extend our patient reach by treating patients holistically as they move through different stages of kidney disease and different treatment modalities. In the past year, we have expanded our treatment of CKD patients and appointed a Head of Transplantation Medicine. This is a newly created position within our Global Medical Office. In Critical Care, we have recently expanded our portfolio by offering an innovative ad sorter, which can be operated with our acute equipment. And with Unicyte, we have established a vehicle that allows us to extend into CKD therapy with regenerative medicine approaches. Turning to Slide 7. On this slide, we highlight two key examples of how we are not only delivering on our strategic priorities, we're also leading the market in doing so. As a leader in value-based care, we are able to build on our experience from having supported 500,000 Value-based Care program participants and managed risk for more than USD 20 billion in medical expenses over the past 7 years. We have also built the largest database of CKD patients in the industry. Today, we manage care for approximately 80,000 CKD and ESRD patients in both private and public Value-based Care arrangements. This includes approximately 24,000 ESRD and 28,000 CKD patients that are part of CMS' Kidney Care Choices model that started this January. In 2022, we expect to generate approximately USD 1.1 billion in revenues and manage more than USD 6 billion in medical costs. We expect to realize an operating income margin of around 1% of medical costs under management on top of the operating income we generate from the related dialysis treatments that we perform. We are also excited about the progress we have made and the growth potential we see for home dialysis. After achieving our 15% plus target for home dialysis treatments in the U.S. a year ahead of schedule, we have now set ourselves an aspirational target of 25% of treatments at home by 2025. We managed this growth during challenging times and are encouraged by the potential for further growth, especially once the pandemic and labor shortage is behind us and we are able to put full force behind training the growing pool of patients that are interested and desire home dialysis. Moving to Slide 8. Our commitment to sustainability is integral in our strategy and is another area where we continue to demonstrate progress. We are consistently advancing our global sustainability activities with the goal to drive the integration of sustainability principles into business activities and assume even greater accountability. In 2021, we've reached further important milestones of our Global Sustainability Program in areas such as patients and employees, environmental protection, combating bribery and corruption and respect for human rights. We measure it on a global level how we are progressing, how satisfied our patients are with our services and the level of engagement of our employees. Moving to Slide 9. Combating climate change is a challenge for all of society, and we are taking action to be a part of the solution. The management Board of Fresenius Medical Care set the goals for our company to become climate neutral in our operations by 2040 while we continue to grow. To achieve this ambition, we have developed a decarbonization roadmap and set our targets in line with a 1.5-degree centigrade science-based scenario, a major milestone we'll be achieving our midterm target to reduce our absolute Scope 1 and Scope 2 emissions by 50% by 2030. The ultimate lever for carbon dioxide reduction here is the transition to renewable electricity. Our roadmap to climate neutrality will be a multiyear journey, and we are at the beginning. We will continuously review opportunities to improve. We will assess options for -- from investing in energy efficiency and opportunities that come along with new technologies. We will continue to look at the entire life cycle of our product portfolio. We will report on progress each year. We will continuously review the relevant impact of Scope 3 emissions or inclusions in our targets at some point in our future. Our carbon management is part of our global sustainability agenda and closely linked with our company strategy for long-term sustainable success. Moving to Slide 10. Last year, we announced FME25 and the transformation of our operating model in order to better execute on our strategy 2025, while creating shareholder value and establishing the basis for sustainable profitable growth beyond 2025. We have taken some important steps toward transitioning to our new operating model with only two future global operating segments. Helen, in her capacity as Chief Transformation Officer, will provide further details on how FME25 is advancing later in this presentation. Moving to Slide 12. During 2021, we delivered approximately 53 million life-sustaining dialysis treatments to approximately 345,000 patients. The decrease in the number of patients and the number of treatments directly relates to the tragic impact COVID-19 has had on the lives of our patients. The 2% clinic growth mainly relates to growth in North America, due to acquisitions and newly opened clinics initiated prior to the onset of the pandemic. Turning to Slide 13. We continue to see stable anemia as well as bone and mineral metabolism control, demonstrating that our patients are receiving consistent high-quality dialysis care even during this terrible pandemic that we continue to deal with. Looking to Slide 14. This slide compares the development of COVID-19 infections worldwide to the number of cases we have seen across our Fresenius Medical Care patient population. In the most recent and very significant surge in January, we have seen very high numbers of COVID-19 cases matching the emergence and spread of the Omicron variant. The Omicron variant is highly contagious, albeit, with less severity than prior variants or the original virus itself. We know that vaccinated and boosted patients suffer less risk of severe or catastrophic results from COVID-19. We are continuing to advocate that all of our patients be vaccinated. We have seen increases in vaccination rates since our third quarter results at the beginning of November. At the end of January, approximately 80% of our patients in the United States have been at least partially vaccinated and 57% of all fully vaccinated patients have already received their booster. On a global basis, approximately 81% of our patients have been at least partially vaccinated and 58% of all fully vaccinated patients have already received their boosters. Turning to Slide 15. During the fourth quarter, COVID-19-related excess mortality among our patient population declined to around 1,800 excess deaths. Globally, on a 12-month basis, excess deaths amounted to approximately 10,000. Pandemic to date, 20,000 deaths have occurred approximately, and again, pandemic to date, 20,000 deaths. Given the 4- to 6-week lag time from infection to passing away as well as the delay in recording of deaths that occur outside our facilities or outside of our control, it is too early to have a concrete data plan on the development of excess mortality so far in 2022. We all know that the pandemic and its impacts are not predictable, so we can only make assumptions. We currently assume for the full year 2022, we could see as many as 5,000 to 6,000 excess deaths globally. With the spike in cases related to the Omicron variant and the vulnerable nature of our patients, we expect excess mortality in the first quarter to be rather high. Turning to Slide 17. In the fourth quarter, we achieved 3% revenue growth in constant currency, supported by positive growth in both Health Care Services and products. Our net income, excluding special items, declined by 32% on a constant currency basis. Costs related to FME25 will be treated as a special item. And during the fourth quarter, we had EUR 43 million in FME25-related costs pretax. Our fourth quarter net income included a negative net COVID-19 effect of EUR 76 million. We continued to face macroeconomic inflationary pressures related to both labor and raw materials. We see in labor cost development in the U.S. is unprecedented at this time. In my 25 years with Fresenius Medical Care, I never remember seeing a market as hot, if you will, or as turbulent as we see it today at this time. Turning to Slide 18. For the full year 2021, we delivered revenue of EUR 17.6 billion, reflecting 2% growth in constant currency. Our net income, excluding special items, declined by 23% on a constant currency basis. We were able to achieve the lower end of our guidance range despite some unanticipated and substantial headwinds, including: a significantly higher-than-expected impact from COVID-19; a higher-than-expected wage inflation; and the negative effect from the fair value remeasurement of our investment in Humacyte that accounted for around EUR 40 million for the full year 2021. Please allow me one comment regarding 2022, so that you do not have to waste one of your two questions to ask me about it. For the first 6 weeks of this year, the convergence of ongoing and well-documented worker, raw material and transportation shortages with historically high absenteeism rates due to the Omicron variant presented significant challenges for FMC and the industry. This impacted our ability to meet customer demand for dialysis concentrates and had a knock-on effect with our disposable supplies for certain geographies within the United States. We have worked with all providers in the United States to prioritize deliveries in order to build up inventories in provider clinics and within our own warehouses. Patient care remains the highest priority for us as we work to navigate this unprecedented and challenging situation. We applaud the collaboration among all kidney care providers in the United States, which ensured that patient care remains the highest priority as we worked together to navigate this unprecedented and quite challenging situation. Moving to Slide 19. At our upcoming Annual General Meeting in May, we will propose a dividend for 2021. The proposal targets to ensure continuity of our dividend payments despite the unprecedented with temporary effects of COVID-19, we believe that the fundamental drivers of our business and growth remain unchanged, and the experience that we are seeing with COVID is temporary in it's lasting. This underscores our commitment to delivering shareholder return. At this point, I'd like to turn it over to Helen, and she'll take you through the financials as well as our outlook for 2022.
Thank you, Rice. And hi, everyone, and welcome to this day of Tuesday, as it's being called. I'll pick up with our fourth quarter revenue growth from Slide 21. During the fourth quarter, we realized solid revenue growth of 6%. Despite significant negative effects from COVID-19, we delivered 2% organic growth with positive contributions from our international markets. Moving to Slide 22. In the fourth quarter, also, Health Care Services delivered organic revenue growth of 2% despite negative COVID-19 impact from all regions, and lower reimbursement for calcimimetics in North America. In Health Care Services, the adverse impact from COVID-19-related excess mortality on organic growth amounted to approximately 290 basis points for the fourth quarter. Asia Pacific stood out as a strong regional contributor in the fourth quarter, delivering positive same market treatment growth of around 3%. Turning to Slide 23. Revenue for our products business increased by 3% in the fourth quarter and delivered 1% organic growth overall. Growth was driven by higher sales of machines for chronic treatment, home hemodialysis products and in-center disposables. This was somewhat offset by lower sales of products for acute care treatment. Continuing with Slide 24. Here, we show the operating margin development for the fourth quarter, the largest negative impact on margins related to inflationary cost increases on the materials and supply chain side as well as higher personnel expense. Rice already referred to this unprecedented situation in the United States. In the U.S., we continue to have an increasing number of open positions that are taking time to settle. The fair value remeasurement on our investment in Humacyte was the second biggest negative driver of our margins with an operating income effect of EUR 77 million. As we do not have significant influence in Humacyte, we account for the investment in the financial instruments at fair value through the P&L, and have to record any change in the fair value of the investment in our earnings. This was set up many years ago, and we're not in a position to change this approach. Excess mortality continued to accumulate, and strict PPE protocols remained in-place with the emergence of the Omicron variant. COVID-19-related costs continued to have a negative effect despite a positive contribution of U.S. federal relief funding of EUR 51 million for our joint ventures. We incurred EUR 43 million in costs related to FME25 in the quarter, and a favorable impact from equity method investees in the prior year was also a headwind in 2021. On the positive side, we benefited from a low base with the absence of EUR 195 million impairment in our Latin America business that we had in the prior year. And margins were also positively driven by an improved payer mix due to the growth in Medicare Advantage following the introduction of the CARES Act in 2021. Turning to Slide 25. We also wanted to provide some color on the margin drivers for the full year 2021. I won't go into as much detail here, but you can see that the largest negative impact on margins for the full year relates to inflationary cost increases and higher personnel expenses, followed by significantly higher COVID-19 net effects than initially anticipated in our guidance. If you recall, when we set out at the start of 2021, our outlook assumed a return to normal mortality levels in the second half, which did not materialize. Again, the remeasurement effect in our investment in Humacyte of around EUR 60 million, FME25-related costs of EUR 63 million and higher bad debt expense with other net negative drivers in 2021. The largest positive margin drivers in the full year were the absence of the prior year impairment in our Latin America business as well as higher reimbursement driven by growth in MA. Moving on to Slide 26. During the fourth quarter, we generated operating cash flows of EUR 669 million, which equates to 14.4% of revenue. The increase was mainly due to improved working capital, including contributions from some FME25 cash unlock initiatives and U.S. federal relief funding. This development was partially offset by continued recruitment of the U.S. government's payments received in 2020 under the CARES Act and lower tax payments related to COVID-19 relief from the prior year. EUR 510 million was recouped in 2021. And with the recruitment of funds and driven by our lower EBITDA, our net leverage ratio of 3.3 is still within our target range of 3 to 3.5x. I will now move to the outlook on Slide 28. Looking ahead to 2022, I will walk you through what we see as headwinds and tailwinds and our related assumptions that tie into our 2022 outlook. In 2022, we are assuming that the effects of excess mortality accumulated in 2021 plus the further 5,000 to 6,000 excess deaths related to COVID-19 will have a negative impact of roughly EUR 100 million compared to the level of 2021. We are projecting that excess mortality among dialysis patients will decline sizably against the overall level of 2021. However, for the first quarter, we are assuming the biggest impact of excess mortality. As Rice already said, we cannot make projections but only assumptions in respect to the excess mortality for COVID-19. As indicated, we continue to face staffing shortages, the need to employ temporary labor or provide overtime pay and manage through this unprecedented situation in the U.S. healthcare market. We anticipate costs will be around EUR 100 million above the average 3% wage inflation that we typically budget for. Should we receive any further government support, we would apply this to ease at least some of the pressure on the labor market situation in excess of the labor cost assumption I just outlined. As we did not have costs related to a ballot initiative in 2021, the potential ballot initiative in California could translate to a EUR 20 million to EUR 30 million headwind. And additionally, the unfavorable macroeconomic inflationary environment and the experienced elevated cost of supply chain are expected to impact us with around EUR 50 million more than last year. While these headwinds are substantial, we also anticipate strong positive tailwinds, many of which are longer term in nature. I'll discuss the tailwinds on Slide 29. We have seen a further improvement in our payer mix to start the year. We expect our Medicare Advantage mix be in the mid-30% across our entire U.S. patient base during 2022, following the most recent open enrollment periods. And for Medicare featured service patients, we benefit from the 1.9% increase in the PPS rate. We are anticipating positive organic growth driven by further penetration of home treatments and the expansion of our Value-based Care arrangements. Within this category, we also assume that the fair value remeasurement of Humacyte will be volatile, but neutral on a full year basis in 2022. While we continue to use highly elevated volumes of PPE, we were able to mitigate cost impact against last year. This is expected to provide a tailwind of around EUR 50 million. We already expect sustainable savings of EUR 40 million to EUR 70 million as we advance our FME25 program. Moving to Slide 30. Based on these headwinds and tailwinds I just described, for 2022, we are expecting a return to growth and low to mid-single-digit revenue and net income growth on a constant currency basis. As a CFO, I would like to flag that we do expect the low point in our net income development to be in the first quarter. The first quarter is expected to provide only a mid-teens percentage share of the overall 2022 net income. This is driven by the following effects. We assume a low point of operating leverage due to the highest impact from excess mortality annualization effects from 2021 and further accumulation of excess mortality in Q1. We do assume to significantly improve the operating leverage throughout the year. We've seen high costs from managing an unprecedented labor situation in the U.S. healthcare services market, covering temporary labor, extra shifts, retention payments as well as higher medical benefits, and an unprecedented supply chain cost in the first quarter that are expected to moderate in the second quarter and beyond. We're also expecting to see cost inflation from materials and supplies. As you can see, some of these effects will remain with us throughout the year, but will be most pronounced with that impact in the first quarter. In anticipating your modeling requirement for 2022, I'd like to share some other relevant assumptions. We anticipate corporate costs in the range of EUR 480 million to EUR 500 million at constant rates. Around half of this relates to R&D, including our Global Medical Office. For our financial results, we expect a range of EUR 270 million to EUR 290 million at constant rates. And we assume a tax rate of 24% to 26%, excluding special items. Next on Slide 31. As Rice mentioned, we have already begun to make some important steps with our FME25 program. In December of last year, we announced our new management Board, which went into effect at the beginning of this year. The new leaner structure reflects our future globalized operating model, and we have now also named the next level of leaders below the management Board. In the fourth quarter, we progressed with the transformation of the finance organization, which was already in slide. And in line with our program plan, we have kicked off a number of our FME25 initiatives, which also includes identifying initiatives to improve gross margins, reviewing manufacturing footprint and supply chain opportunities as well as the product portfolio and pipeline. These include some of the most more time-consuming initiatives like the global optimization of our infrastructure, which includes areas like clinic network or IT infrastructure and other future global systems. Including the program and consulting costs, we spent EUR 63 million on FME25 in 2021. The impact from these initiatives had a de minimis cost reduction in 2021, but we expect to have an effect moving forward. We will make significant progress in the transformation to our new operating model in 2022, which will continue to be a very important transition year. Of the planned EUR 450 million to EUR 500 million of onetime costs to sustainably reduce our cost base by EUR 500 million by 2025, we expect onetime cost of my EUR 175 million to EUR 245 million in 2022. We also anticipate EUR 40 million to EUR 70 million in sustainable savings in 2022, as I outlined earlier. And by the end of 2023, we still anticipate having made 80% of our investments while realizing around 50% of our savings. And by 2023, we expect to implement the new operating model, along with new external reporting that should provide greater transparency into our operating segments. We are planning to report revenue and operating income for each of the new operating segments. We also plan to provide a revenue split in U.S. and international revenues for each of those operating segments. And as we move along our transition journey throughout 2022, we will continue to update you on the progress and our plans. Turning to Slide 32. Whilst, certainly, the COVID-19 and inflationary challenges continue into 2022, we are confident about the mid- and long-term drivers of our business. With the support of the FME25 program and the progress we're already making on our strategic priorities, we plan to deliver on our mid-term targets for 2025. That concludes my proposal remarks, and I'll now hand it back over to Dominik to begin the Q&A.
Thank you, Helen. Thank you, Rice, for your presentation. I apologize that there seems to be some issue with the line, which we can't hear here, so this room is very quiet. But, Natalie, I hand back to you to open the Q&A.
[Operator Instructions]And the first question is from the line of Veronika Dubajova from Goldman Sachs.
I will keep it to two. One, just would love to get an update on where you see MA penetration. I think, Helen, you might have mentioned something around mid-30s. I know you measure it differently than the [indiscernible]. Anyway, they've been talking about something in the low 40% range in terms of their Medicare population. If you can give us a comparable number, that would be helpful. And I don't -- just related to that, a quick update on how the MA rates are developing versus last year, and if you're seeing any payer pressure or rate pressure in that segment as it's quite an important driver of tailwind -- of positive mix for you guys. And then second question, slightly controversial. This is probably more for each, and I apologize for the bluntness of it, but I -- so we had heard from your majority shareholder earlier today that they would be willing to dispose of their stake in your business. And I'm just curious, Rice, how do you feel about that, and to what extent your change in ownership would impact how you run the business and what might that mean for FMC.
Thank you, Veronika. Thank you for giving me that question in particular. Now go ahead, Helen. Why don't you take the first one?
Veronika, thank you for the easier of the two questions. Regarding MA penetration, we ended the year right around that -- in the kind of low 30%. We are expecting to be mid-30% through 2022. And obviously, we're just coming through the open enrollment. You are right, we do measure it slightly different to our competitor. Well, our 35% or mid-30% in the -- as a percentage of our total population, whereas I believe our competitors are just as a percentage of our Medicare population. So we don't have the comparison of percentages, but we have been consistent with it being as a percentage of our total population. And Rice, hand over to you.
Rate pressures, I can speak to that. Yes. Yes. So at this point, not feeling a ton of pressure at the moment. It's always going to be there, but we are still working and dealing with the payers and having our conversations. But I can tell you, it's not down drag out, I would say, as we've undergone the beginning of this year and it will evolve for the rest of the year, Veronika. Question two. So FSE considering selling their stake in us, their choice, their money. Doesn't hurt like feelings. I mean, we are totally focused, not just me and Helen, but the entire organization, on getting past this dam pandemic, delivering and unlocking value through FME25. We are going to stay focused on our job and doing what we need to do. Now we're not naive. If it comes to a point that something happens with that stake and whomever it may be, I'm sure I might have a hit list who I'd like it to be but I'm not even going to lose 5 minutes worrying about that at this point. We're just going to continue to do what we need to do to take care of our patients, to give a good return, unlock value and run the business. And then we'll see where this goes down the road, Veronika.
The next question is from the line of Tom Jones from Berenberg.
I think I've got one for each of you. First one for Helen. On staffing and vacancies, I think you mentioned at the Q3 that there was actually a little bit of a P&L tailwind in some respects from the fact that you had so many open vacancies. So it would be useful just to get a flavor of where you sit on the open vacancy front and whether actually filling those vacancies creates a little bit more of a in H1 than it might do in H2 once those employees have bedded in. And then a second question, fairly -- hopefully a fairly straightforward one for you, Rice. But the home growth that you're anticipating. I assume that's all coming on the HD side rather than any sort of structural changes or faster growth on the PD side. And then maybe as a sort of sub-question to that. Between now and 2025, how should we expect that to develop? Is it kind of a linear thing or do you expect kind of slow start and a fast finish in terms of getting from where you are now, which is as a total in home, to getting to that 25% number?
Thanks, Tom. And I'll take the question on labor. And as you can appreciate a lot of moving parts on this. We continue to see a high level of open positions more than we would like to see. We have consistently talked about seeing around 6,000 open positions. And that's kind of increasing as time goes on, really due to the shortage of labor in the available market. I think last year, we were able to cover some of this increasing pressure on costs with the open positions. I would go more for 2022 as obviously to fill those positions as quickly as we can. But I would argue that there's a number of moving parts here. Clearly, as we try to sell them, we don't know what the ramp up is going to be there on filling the position. So we are covering that with some additional costs, which hopefully are more temporary in nature, in terms of overtime, contract labor, traveling nurses, retention and so on. But then, as you can appreciate and what we're all seeing and reading in real time and what's happening in the labor market in the U.S. is this significant pressure on wage compression and higher wage. And obviously, for us, we want to fill these positions. We don't want to have any interruption in supply and making sure that we can get in -- get the staff trained. We are focusing our effort on kind of all kinds of ways to try and kind of attract people into the roles that we have opened. But as you could see from the headwinds, we do expect a year-over-year increase there not surprisingly with all that we're trying to manage. But our goal is to keep focus on filling the positions. The team are doing a terrific job, balancing kind of the labor challenges that we have. And as we've mentioned, quite unprecedented for anything that we've seen in quite a long time here. And I mean, with the shortage as well the inflationary increase above what we would have seen historically.
Do you think...
Tom...
Sorry, Rice.
No. Go ahead, please.
Sorry, I just have a quick follow-up there for Helen. Do you think that there's any potential for the sort of broader macro inflation pressures being felt at the consumer level to actually start to have some positive effect for you in terms of kind of making your employees willing to work longer at pushing sort of semi-retired people back into the workforce because it feels like we're in the foothills of the consumer getting hammered on inflation, although corporates seem to have felt it earlier. So I just wondered if, ultimately, that kind of starts to balance, swing back the other way in your direction because I know the nurse market can be somewhat fluid in terms of people dipping in and out of the workforce.
Yes. It's a great question, Tom. And as we've gone through the investor meetings over the past quarter, what I've spoken to at length is, is this a temporary exit of health care workers out of the market because of people just bummed out from COVID. We are seeing, I would say, people retiring. And so, maybe the opposite of what you are propose. But I think it will depend from the younger generation in that market coming back in and selling those positions, so they end up working longer because, to your point, the cost of living and inflationary increases. But it's too early to tell, I think, of whether this is transitionary in nature, and it will -- the available pool of labor will increase again, but we've definitely seen a significant contraction in that available pool and it's across the board, but we had seen early on this increase of people with hiring and just the general feeling of being burned out and exiting the marketplace. Time will tell, Tom.
Tom, so let's talk about home, my favorite topic. So when we look at home hemo growth, generally speaking, we are seeing home grow at a faster clip than PD. PD is in the mid-single-digit range and HD is growing much faster than that. We've been at low double digit, a little higher depending on where we are within the pandemic, if you will. We would obviously like to see this be ratable. But I would tell you, I think we're going to have a slow start and then it will pick up as we accelerate in '23, '24. And the real issue there is with that are in the transitional care units that are doing the training. If we have an in-center clinic around the corner, down the block, wherever it may be, where we've got a lot of staff out due to COVID, particularly Omicron, if we need to borrow that person, we will certainly do that to be able to provide the treatment. And so that gives us a little bit of tension as we're trying to look at how we're going to do this. I would also say, the other thing, Tom, to think about, we all know that PD patients are not going to stay on PD forever. They are going to hit a point 3, 4, 5 years, whereas that is not going to work for them, they're not going to get the clearance they need. We need to do a better job and we are, but we've got more we can do to have those home patients on PD stay at home, change their access out, get a blood access for hemodialysis and then stay with us via HHD on the next age equipment, and we're making progress there. But that is another bit of growth that you see because, as you know, PD tends to be transitory. Nobody really stays on PD forever. So I think we will see a back-end acceleration, but we need to be training more and we need to do that. And I think the sooner we get through this pandemic, the better off we're going to be in order to try to get that growth to be ratable.
The next question is from the line of Lisa Clive from Bernstein.
One question on home dialysis and then one on CKCC. As we think about you shifting to potentially 1/4 of your patients on home dialysis, how will that affect your clinic infrastructure given this trend? How should we think about CapEx? Are you going to be consolidating clinics? It would just be helpful to think through that. And then, second on CKCC. Can you remind us how you are accounting for these patients? Are you going to book the revenues right away? What about EBIT, or will it take a while to get an idea of what the run rate will be for revenues and EBIT? Obviously, ESCO was a bit of a disaster from that perspective. So just remind us of where you are on the accounting front there, Helen. That would be great.
Lisa, it's Rice. Hope you're well. I'll take your first question. So as we see this shift, to 25% at home, what does clinic infrastructure look like? Look, here's the way we think about this. As I believe you know, we lease our clinics. They're not brick-and-mortar, per se, that are sitting on our balance sheet in the classic sense of the word. So we have ability to move from certain locations as we need to. We can let those leases expire and we can move in different places. I would say that we certainly will see some movement in our clinics. We will probably have some clinics that we're not going to need as we go through time. But sitting here today in the pandemic until we bury this darn thing and get it out of our hair, we would not be looking at trying to do anything like that even if we were 25% today, because we're using those clinics as overflow. As you know, we're using them for COVID positive clinics, trying to keep our separation, if you will. So I think that we will move in that direction over time, but we certainly want to make sure that we're well past COVID and the issues that it's created for us. The other thing that I would say is there will always be a need for clinics. We're always going to have patients that are going to want to be in-center simply because they don't have the wherewithal or the capability or the desire that their physician is comfortable that they are going to be able to do their treatments at home. We do have hemodialysis patients today that are at home, they love it. But at some point, in a year, they don't want to be on vacation and dialyzing at home. They want to go into a center. We try very hard to accommodate them. it is tight sometimes depending on utilization. Now that world has changed some, given what's happened with pandemic. But we're going to also want to have extra utilization capabilities in our clinics for people, particularly as home grows. And they're going to decide, "Hey, I'm taking a month off, I'm going to be in Florida. I really don't want to go do this in the hotel or the condo. Can I get in one of your clinics?" And we certainly want to be able to accommodate that.
Yes. And then Lisa, on your CKCC question, a little bit different to the ESCO, in that revenue recognition would be delayed until we actually get the report. So we are thinking that we would get the feedback on the results against the benchmarks probably at the earliest in half 2 of 2022, and then with a lag to then going into 2023. Obviously, we've all learned a lot from the ESCOs and both in reporting and analysis. But as soon as we get those reports we will true up the revenue rack that goes with that.
Great. And Rice, just one follow-up. I mean, should we just assume then that you'll just have lower utilization in your clinics, at least for the next 2, 3 years?
I think it's something you should be aware of. I don't want to speak exactly for my team in North America because they tell me I'm not going to get it right. But I think that's something that we should consider and you should expect there'll be some of that absolutely as we're trying to come out of the panic and moving forward in a post-pandemic world, yes.
Yes. And maybe the other thing I would add is as we think about our clinic infrastructure and our lease renewals, we are restricting those to shorter timeframes now to allow us for maximum flexibility in producing the exposure there, too.
The next question is from the line of Oliver Metzger from ODDO BHF.
Two questions. The first, Rice, you mentioned this 1% incremental margin for the Value-based Care programs. So thanks for providing this number. For being more specific, is this the targeted margin and therefore, the maximum potential or is it your estimated positive net contribution coming from these programs? Second question is on the tailwinds you've described of around EUR 250 million for '22. So there are different factors. You have mentioned, in particular, the PPS rate increase. Just to clarify, the rate of -- or an increase of 1.9% never disproportionately high nor it appears as a very positive outlet. So I'm surprised to see this as a tailwind. Is it fair to say that Medicare Advantage brings the biggest tailwind and from the home treatment have also more coordinated to that?
Oliver, I'll take one and I'll give Helen two. So it's an estimated figure for us, not the target. It's our estimated as we look at that. And -- yes, go ahead. Of course.
Yes. So Oliver, on the tailwinds, as you see that there's a lot going into that business grows. But obviously, the any increase in reimbursement is an increase for us. It helps us offset some of the tough of course. So we do see that rate increase as a tailwind overall. But as you will probably see that the Medicare Advantage met along with the VBC growth in home helped drive that to grow $250 million. So a lot of moving costs as you can appreciate there, but ultimately, all having being about the returns driving the growth here net positive return on operating income. Yes, by far, Medicare Advantage would be the biggest driver there.
The next question is from the line of Patrick Wood from Bank of America.
Perfect. I'll give it to one actually. Just curious, and I think I know the answer anyway, but do you think there's any implications from the DaVita Supreme Court case going on with the Marietta Memorial Hospital and what that could mean for the MSP situation, or just kidney care in general? Just curious, if you think there's any implications for a ruling there.
Patrick. Well, look, anytime something ends up in the United States Supreme Court, I tend to think there's probably implications somewhere along the way for the entire industry. So I think that, in my mind, I am watching this with great interest to see where it ends up. But obviously, we can't, how shall I say this, comment on this intelligently until we see what comes out of the Supreme Court, what rulings they have, and then we'll go from there. I know a lot of people think this is going to be settle very quickly. And I don't mean settled in a legal sense, but we're going to get to this very quickly. I think there's a March date for this. I'm just going to sit and listen and we'll see what comes out of it, and we'll go from there. But I think you can't just dismiss this would have some implications for the industry potentially.
The next question is from the line of Falko Friedrichs from Deutsche Bank.
I have two questions, please. Firstly, could you provide an overview of all the ballot initiatives in the U.S. in 2022 that you are aware of and that could potentially pose headwinds if they were to go through? And then secondly, on your tax rate, Helen, the indication you gave us for 2022 is a good amount above what you trended in '21. Is there any specific reason why the tax rate should increase that much again?
Go ahead. I'll come back.
Excellent Yes.. So Falko, yes, so we are guiding at 24% to 26% for the tax rate. You will have seen for '21 that we came in at 22.4%. We did have some favorable true-ups for tax audits and some uncertain tax position. So I would say that was a little bit more unusual, but I feel comfortable with the 24% to 26% that we're guiding here, excluding those adjustments in 2021.
Falko, it's Rice. So ballot initiatives. The only one that's really on our radar screen, there could be a couple of other minor things that we will probably have our folks at the state government affairs probably can tell me about, but the one we're watching is obviously California. It's the state it just continues to give when it comes to ballot initiatives. Where we are with this is they have to get signatures to be able to get on the ballot. I think they've got to produce those signatures sometime in March in order to get -- or maybe the first of April to get certified to go on the ballot, which will then be in November for the state of elections in California. So there's a way out. Obviously, we've been through this before. And so we're watching it closely. We have people on the ground looking and watching and learning. Our outcomes have been good. for this. It's not without spending money from time to time, but we're on this, and we'll be paying attention to it. But that's the only one that I think warrants us having a conversation about it in the earnings call at this point. The others I'm not aware of, it could be a couple of minor ones out there.
The next question is from the line of David Adlington from JPMorgan.
Yes, just on your headwinds on the cost side. I think you're totally looking for about EUR 100 million in wage and EUR 50 million from sort of other cost inflation. That's only about 1% of your total cost base. So I suppose the question is that does seem a bit light and how confident are you that it could be 1.5%, 2% more? And assuming that does come through how likely do you think you are going to get additional government supports, I mean, you've hinted us towards in those slides as potential for government support or where that was coming from?
Yes. So David, we're doing our best at kind of forecasting the assumptions that we're seeing them as we have them now. Of course, anything that we have on cost increases, we're always trying to offset with efficiencies and cost reductions. But I think labor is probably the most unpredictable one at this stage where we are trying to size it based on what we're seeing an incredible pressure in the marketplace. But obviously, trying to balance that the best we can. With regard to relief, it's kind of a multi -- it seems to be a multiphase approach with the government. We did receive around EUR 100 million at the end of last year for joint venture provider funding. We were able to apply about half of that to the costs in '21 and about half of it will roll into '22. Now it is JV, so the fall-through as a minority interest isn't as great. We did apply for large provider funding, and there is still government -- our -- or there is still government funding available. But we do not have line of sight into how that will be allocated and how much, when. So what we're doing right now is kind of excluding it from our guidance because we just don't know what, and then balancing that against the ongoing labor pressures. So it's why we try to keep it quite discrete in how we have laid it out in our assumptions. And as you guys tend to see it as quickly as we do when it pops up on to the website that we've got funding. So you'll know when we know if there is more available and then how we can apply it. But right now, year-over-year, the fund -- the release is neutral because we got some in '21 and already have some going into '22. I think the bigger question is on this provider funding that we we're waiting to -- still waiting to hear about it.
Yes. And David, the government has done what they said they would do. Their first priority was the rural providers, the smaller providers and many of our joint ventures we're in that bucket, if you will, so that has come and gone exactly as Helen laid it out. We're now looking at the wholly owned subsidiaries. It is a one massive application that we apply for. And you know as well as we do, if it starts to pop on their website, the beginning of fund flow, then we will know or we'll start looking at that. But that's where we are at this point, waiting to see when that will happen. We're told it will. And so we're waiting to see when that's going to commence.
Okay. And then, could I just ask a tricky follow-up on the [ diazylate ] situation because I was wondering if you could just sort of clarify the source of the challenges there and how that's going to impact both in terms of sales and costs, particularly in the first quarter?
Yes. So what I would say is we really kind of walked right into the perfect storm here, meaning that we've had issue with distribution relative to drivers and the cost of drivers and physically finding people to do long-haul and short-haul drives. I think what really exacerbated this was that with the Omicron variant and all of the schools being open, if you go back to Delta variant where many of the schools were shut down or they were doing virtual school, and so we felt pretty protected in our factories and our warehouses in addition to our clinics. But with Omicron and the schools being open for the first time, we saw much higher absenteeism simply because kids were getting infected. They were coming home, parents were getting it. And then you're in that, what I call that, downward spiral of absenteeism that you have to deal with. Fortunately, it's not as fatal or fatal for those that have gotten it but you're still out 6, 7, 8, 9 days. And so that's created some habit for us. It will have some knock-on effect into first quarter. I'll let Helen speak to that. But clearly, we are still at a higher level guess at a big time high, and this is pretty much U.S.-focused in what we're dealing with. We expect we'll get well over the course of first quarter going into second quarter. We're making progress as we go now. Key to that is going to be keeping people at work and not having a reoccurrence of the Omicron variant knocking people out. And then we've just got to get caught up on production, distribution and making that work. But I would tell you, I'm always amazed at how this industry can compete and then how we all come together when there's an issue to make sure that we're helping one another and taking care of everybody getting their patients treated. And Q1 impacts?
Yes. So clearly, we expect to have this bigger impact in Q1 as a result of all that we've been experiencing with Omicron. I wouldn't be surprised that we would see a bit -- either of the EUR 50 million headwind that we've highlighted for inflation and supply chain impact, about 1/3 of that to impact us adversely in the first quarter. So disproportionately, as we've mentioned, kind of recovering from that over the course of the year.
The next question is from the line of James Vane-Tempest from Jefferies.
Just a follow-up to the industry dialysis for playing headwinds question. Has this impacted the products business? I understand some of the industry logistics issues may be more specific to FMC. So I was just wondering whether there's just been any benefit to your competitors on supply, and has this also caused any reversal in home care if patients haven't been able to get their supplies and they'd be going to the clinics? And then my second question is the EUR 40 million to EUR 70 million savings. Can you help us bridge the gap to the EUR 250 million or so in 2023, that's when the half of the full benefit will be delivered? Can you give us a color of the type of projects, which are expected to deliver, please?
James, it's Rice. I'll take the first one. So this is truly an industry-wide issue. Other product manufacturers are having issues as well. It's just that trucking, labor, all of those things are in play. And so it's been difficult for everyone. I'm happy to say we have not had a situation where people couldn't get treated. They had to go into the ER to get their treatments. Everybody has worked hard to prevent that. We have certainly been hand-to-mouth a couple of times, but we've been able to avoid that. Some folks are doing heroic things on this. And so we've been able to stay up with this. No one likes being at this level of frenzy, if you will, James, but we've been able to manage that. But as we had our own issues and we looked at and reached out to other manufacturers to see could they take any slack. There was no slack for them to take either. So part of what we've done is we have facilities in Mexico and Canada that used to produce concentrate, they don't any longer, we were able to get them up and running again, and they're now helping to supply. So we've been able to kind of pull this up from our own bootstraps. But I'd say it's more of an industry-wide situation, and we will help any other manufacturer if we can, if we have something that we can spare that someone would need.
And then, James, your question on the ramp-up of savings for 2023, as you can appreciate we're moving at pace to 2022. You know the kind of headcount reductions we're targeting. Some of that, obviously, is a slower start as you kind of get engaged in consultation with the workers' council and so on, on what we can and can't do without an agreement. But I would say all the projects that we've identified that kind of initiated and underway and they span a whole host of initiatives from our optimization of our IT systems and infrastructure finance transformation in terms of moving to the new model and outsourcing to shared services, some office space consolidation and manufacturing footprint and clinic optimization. So of all aspects of our operating model, I would say that there's initiatives identified and moving. Some of it looks a little -- maybe a little slower or smaller if you look at the '23, but some of that is just the ramp-up due to people and initiatives and the time that some of these complex projects take, but we still stand behind our kind of a calendarization of it and expect those significant savings as you identify over the course of '23 so that it's not all back ended, but still really proud of what's been accomplished by the organization at large, to date.
That's great. Just a quick follow-up, if I can. I'm going to David's question. The labor cost increase beyond 3% and to the EUR 100 million, I know you don't specifically break out the labor cost per se, but should that get it to a double-digit increase or extra kind of mid-single digits? Just to help us kind of qualify relative to an absolute number which you provided.
Yes. And you can appreciate there's a lot of moving parts, but I can probably tell you like that, the 3% base, those increases translate to 4.5% to 5% net. But of course, that net is a lot of moving parts on open positions, temporary labor, overtime, traveling places, retention, sign-on bonuses, wage compressions. So probably the most complicated piece we've had to sign. We've gone through this guidance discussion. But I would say, between 4.5% to 5% net increase is what you could put into your modeling for 2022. The other thing I would say, and it's something that we're very mindful of is that isn't all permanent. A number of the initiatives that I pointed out were temporary. So obviously, there will be some permanent increase here on the inflationary cost values even in the base as we join our salary line, which obviously we will continue to work to offset in the months and years ahead, but there's a temporary and permanent nature to that, which I think is important to contemplate as well. So hoping that gives you the color there.
The next question is from the line of Sezgi Oezener from HSBC.
Mine was just on the competitive picture actually, where we've heard from some competitors how they're bringing together home dialysis with patient monitoring systems. Do you have any initiatives on that front, or how do you see that going forward?
Yes, this is Rice. So I would tell you that how you connect that home patient to their lifeline, be it physician, nurse, supplies, all of those things, is critically important. We have been out on the market for over a year, maybe 18 months now with our Kinexus system, which does exactly that. It allows our patients to tap into check rooms where they can talk to their home nurse. They can talk to the physician. They can have telehealth visits with either one of them. They can actually get a hold of their driver that's going to be delivering product to their home to be able to redirect them or change the delivery time if it's inconvenient. So is the competition out there? You bet. Why? It's because this is going to be critical to making this work. And I think we're in a very good position with what we've been able to get accomplished there. And just like on the consumer side of our lives, these systems are going to continue to change and evolve, get easier to use as we go through time. But it is really necessary to be a link for these patients to know that they can electronically get a hold of someone or something that they may need. So it's real world and it's there, and we're happy to compete and we feel like we've got a competitive product.
Okay. So thank you, everyone. We are out of time or 8 minutes above time. I thank you for your interest, and I'll hand over to Rice for the closing remarks.
So thank you, Dominik. I just wanted to say a few words. It's been an interesting day for us. A lot going on today with our press conference on top of our earnings call and spending time with you. I just want to make sure you all understand where our minds are. Our minds are on going forward doing what we need to do. We know that we need to do better on unlocking value, generating better growth, more profitable growth, and that is what we're going to be all about. We're not going to get overly concerned about all the noise that may be out there on what could be, might be, maybe who knows. I've learned over time that, that usually doesn't deliver great results if you're sitting there, speculating. So we're going to do our job. We're going to continue to focus on where we need to focus and continue to go forward. We will see you -- well, we'll see many of you on the road show, I think, and in conferences, and we'll be back talking about earnings in early May when we conclude in Q1. Thank you very much. We appreciate your time. You all stay safe and be well out there.
Thank you. Bye-bye.
Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.