Fresenius Medical Care AG
XMUN:FME
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Fresenius Medical Care AG
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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care Earnings Call on the Second Quarter 2018. [Operator Instructions] I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.
Thank you, Stuart. We would like to welcome all of you to the Fresenius Medical Care Earnings Call for the Second Quarter 2018. We really appreciate you joining on such a hot summer day. As always, I'm happy to start out the call by mentioning our cautionary language that is in our safe harbor statement as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings.In the previous quarters, it turned out to be a good approach to limit the number of questions to 2. If there are further questions, we are happy to go a second round. I hope this works for everyone.With us today is Rice Powell, our CEO and Chairman of the management board. Rice will give you a business update, go through some of the highlights of the quarter. Of course, also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours.
Thank you, Dominik. Good morning, good afternoon, to everyone. We appreciate your joining us today. Let's go to Slide 4, and I'll begin my prepared remarks, if you will. We are on track to achieve our 2018 targets. Q2 is a good quarter and is an improvement from Q1 and we continue to see progress quarter-to-quarter, and we will continue that through the back half of the year. As you can see on Slide 4, we had 3% growth for all of our 3 key measures that we share with you: our clinics, patients and treatments, and our quality remains on a consistently high level. And if you turn to Slide 5, you can see that we are performing at a very high level on our clinics. You see the number of key indicators that we measure ourself against, and you can see it spread out across the regions. I'll make more commentary on that. If you have any questions, I'm happy to take those during the Q&A.Now turning to Slide 6. What are the highlights for Q2? Not a highlight, but a fact, the results continue to be impacted by strong currency headwinds. We've had solid organic growth across the board. Congratulations to the North American Products business, they continue to have a very strong performance. And each of the regions performed well in their product franchises and they made progress in their service franchises as well.Care Coordination margin improvement and revenue decline came in, as expected, in the quarter. Our margin for Care Coordination is 6.7%., and we'll have some more color to give you on that during the Q&A and during Mike's presentation. Calcimimetics, they continue to evolve. As you remember, we are moving from Part D in David to Part B in Barry, pharmacy to the clinics. We believe that we're probably 2 quarters in to a 3- to 4-quarter process in order to get this sorted out with great clarity and detail. Let's keep in mind that this is a medical decision. It's an algorithm based on focusing to the highest outcomes for our patients. And this is a titration or a step-up situation where we start with low doses and we move up over time in a very safe and effective way, as determined by our patients' physicians.We had a very efficient divestment of Sound. I know that a number of you have some questions on the gain, and Mike will be happy to take you through those details. But we're glad to have this accomplished and behind us.And the ESRD prospective payment system draft rule for 2019 came out on July 11, about 10 days later than we thought it would, but that's okay. It came out with a proposed increase of 1.7%. I personally thought we'd have a lot more favorable discussion about that. A little disappointed that we didn't talk more about it since it was such an overhang going into it, but we'll take it and we'll see where we end up in the early days of November as we move to the final draft. Now turning to Slide 7. I will cover this slide. What Mike and I wanted to do was to give you a reconciliation document that you could look at as we go through today's call. This originally was in, I think, Slide 30. It was in the backup, so we wanted to move it forward. So you have it, hopefully you can look at it as you need to. I will make my commentary on Slide 8, if you will.For the second quarter, our net income growth came as we expected. Yes, you will notice that there are 3 views or looks on revenue, 3 on EBIT and 3 on net income. We are consistent, if nothing else. I will speak to the comparable basis. So you can see constant-currency growth on the revenue, on a comparable basis, at 5%. We're looking at EBIT on a comparable basis at 4% constant currency. And then when you look at net income on the comparable basis line, we're up 22%. Now a little more commentary here. Obviously, the very large gain that you see has got the Sound divestment in there. We've backed that out, and that gives us the 22%. And then we've also taken out the tax savings effect, if you will, and you're looking at net income adjusted at 6% in the quarter. Looking at H1, which we're not really going to talk about, but we're at 7%. So just wanted to give you that color as to how the net income has unfolded over the course of Q2.Now if we turn to Slide 9, looking at the organic growth across the regions. Everybody had a hand in progressing over Q1 into Q2. You can see the numbers. I'm not going to read them to you other than to say Latin America is doing a very nice job at 10% constant currency, and you can see the contributions from the other folks. And I will say it, just to give you a reminder, the North America growth is impacted by the currency headwinds and obviously the lower expectation that we had for Care Coordination revenue.If we turn to Slide 10, looking at our organic growth. As I'm not likely to want to do is to take you through each of these numbers. We've laid them out for you as you can see. I would just simply say for North America, I think it's important to note that if you look at the dialysis care revenue that's buried in some of the other schedules we have for you, that's up 4% on a constant-currency basis. Then if we exclude IFRS 15 and the VA, you see a 7% constant-currency basis in our core business. And I think that is worth noting. I also think it's important that we just take a look and see how well Care Coordination in Asia Pacific is doing. About 20% of that is acquisition, the other 12% is organic. And we're happy with both those numbers. And with that, I think I will move on, and I'm sure we'll have some question-and-answer dialogue on some of the other pieces of this particular slide.Now turning to products. Solid growth continues. Let's go back and just let me make the comment that Mike and I guided you to 6% growth in the Dialysis Products for 2018, and we look to be right on schedule here. As you can see, 6% constant-currency growth. Again, North America at 10% is doing quite well. EMEA, Asia Pacific are doing well. Latin America is down at 2% constant currency, but let's give them some credit. In Q1 2018, they were at 25% constant-currency growth. And exiting Q4 of last year, they were at 15%. So I think we'll give them a little bit of a slowdown here in Q2, see what the remaining quarters bring us. I won't go through the details on the product mix, if you will, across the regions. If you have questions on that, feel free to ask me and I'm happy to give you some more color if you like.Slide 12. In conclusion, we have solid underlying business growth. Yes, we're going to have to accelerate our growth in the second half. We've forecasted that, and we expect that to happen. I would say the products franchise is moving solidly to delivering on what we have said they would, and the services businesses are accelerating around the globe. So we feel good about what we have to do. We'll be busy. We have work to do. But it would not be the first time that the second half of the year has been very busy for us. We still believe the NxStage closing is on track for the second half of this year. You've seen from our press release that we extended the merger agreement out 90 days. We moved it from August 7 to November 5, and we believe that's a viable time frame for us to see a closure of this business. We continue to work with FTC. I'm sure you'll have some Q&A on this. We are happy to speak to it there. So I would leave you with the fact that we're on track to deliver on our revenue and net income growth targets. And with this, I will turn it over to Mike.
Thanks, Rice, and hi, everybody. So continuing on Chart 14, and again, using the format that we started last quarter, just to give you a sense of revenue growth. And this would be on a comparable basis year-over-year. I'll talk about that further but we made some adjustments to the base period to make this comparable. So you can see, we've reflected EUR 131 million as an adjustment to the prior-year revenue figures to put last year on a consistent basis with regard to IFRS 15. This gets you to a base of EUR 4.340 billion, very small adjustment in the second quarter related to the translation effects of the VA settlement. And we had 5% constant-currency business growth in the quarter of roughly EUR 200 million, which is consistent with our overall guidance for the year. And then lastly, you can see the currency headwinds that we're facing with the EUR 320 million adjustment or about 7% in the quarter.Turning to Chart 15, and now looking at net income growth. With the 2 views that we've been describing at the top of the page, it's the net income as reported on a comparable basis. We guided for the full year at 13% to 15%. And when you look at the quarter's performance, you can see the business growth of EUR 58 million, which gets us to a constant-currency growth rate in the quarter of 22%, a little bit above what we had guided to for the year. This includes, obviously, the tax effect associated with the U.S. tax reform on 2018 earnings, and it reflects the currency developments we've seen in the quarter. In addition, you're seeing the net effect associated with the sale of Sound in the second quarter and the closure of that transaction. I'll come back and talk about that in a little bit more detail when I talk about North American's margin development. The view on the bottom of the chart considers the 2017 base earnings of EUR 1.204 billion. This was adjusted, as you know, for matters that we considered last year. The most important effect on a quarter-to-date basis -- or for the second quarter was the VA adjustment that we made in the first half of 2017.Continuing, you can see the business growth at EUR 17 million, roughly 6% constant-currency growth, just a little bit shy of what we've guided to for the year. And you see this coupled with 8% growth, excluding special items in Q1. So on a first 6 months' basis, we're still on track with our guidance at 7%. Currency effects of EUR 18 million and the divestiture gain, as I mentioned before, and as I'll cover in more detail in a few moments. So turning to Chart 16, and looking at the development of our margins on a regional basis. I would just say, overall, in terms of our global margins, what you've seen, excluding IFRS 15 and the VA settlement as well as the gain associated with Care Coordination activities, our margins, overall, were nearly flat at 13.5% compared to 13.6% in the second quarter of 2017.Now when you move into the regional developments, you can see in North America, operating income was up EUR 816 million to EUR 1.286 billion in the quarter. Obviously, this is a consequence of the gain associated with the Sound divestiture, which was EUR 833 million. This gain is slightly higher than what we announced back in June. The principal elements driving the change are an increase due to the cumulative foreign currency considerations, probably offset by a true-up of the net working capital as of the closing date.Excluding this gain, our margins were 15.2%, essentially unchanged from the comparable period last year. Our dialysis business operating margins increased 110 -- excuse me, decreased 110 basis points. And excluding the -- and considering the implementation of IFRS 15 and the VA agreement, the margins decreased by 170 basis points. Lower revenue per treatment from commercial payers, higher implicit price concessions, which as you know, is the new term under IFRS 15 for what you anticipate you'll collect with regard to your billing arrangements on the services side of the business; the implementation of the PAMA oral-only or the calcimimetics; a small cost increase in property and other occupancy costs. And these were partly offset by lower costs for health care supplies.Adjusted for the implementation of the VA agreement and IFRS 15, revenue per treatment increased by $13 from $341 per treatment to $354. Cost per treatment increased from by $14 from $272 to $286. As I have discussed in our Q1 call, we will see some volatility in the development of calcimimetics over the year, which is why I guided revenue and cost per treatment in the U.S. net of this effect.I indicated we expected the operating earnings effect of calcimimetics on a net basis to be around $1 loss for the year. I'm continuing to indicate that as our expectation for 2018. So our guidance still holds. We expect revenue per treatment will be flat to slightly down for the year and cost per treatment will be flat to slightly up excluding calcimimetics.Talking about the Care Coordination margins for North America. You can see in some of the supplemental material we provided, obviously, a substantial increase. This reflects the gain, again, associated with our Care Coordination activities. Beyond that change, the margin has improved in the second quarter, both year-over-year and sequentially. This was driven by the prior year effect associated with the valuation of our subsidiary share-based compensation. It was driven by our pharmacy services in the current year, the implementation -- partly offset by the implementation of the calcimimetics, lower bad debt and the effective reimbursement for our cardiovascular and endovascular businesses.While we are discussing Care Coordination, I would comment that with the sale of Sound, I would revise the indication that I gave you in February for the year. With Sound in the figures, I indicated our Care Coordination, globally, that revenues would decline from 4% to 6%. This was being principally driven by the change in calcimimetics as well as generic [ Sevelamer ].Now that Sound has been divested, I would indicate our revenue growth would reflect the decline of 9% to 11%. But then our margins should improve from the 7% to 9% we indicated in February to, I would say at this point in time, high singles -- high single digit to low teens in terms of margin in Care Coordination globally for the year.Turning to Chart 17, and looking at the profile of our other geographic regions. For EMEA, operating income was down EUR 8 million or about 7%, both in current and constant currency. Margins decreased from 17.6% to 16.1%. This was principally driven by lower income from equity method investees, higher personnel costs in certain countries and increase in bad debt, partly offset by a favorable effect of foreign translation.In Asia Pacific, operating income was unchanged at EUR 78 million, it's up 3% in constant currency. The margins were impacted by the unfavorable effects associated with foreign currency transaction and some increased costs related to our business growth in the region, partly offset by translation effects. Care Coordination margins in Asia Pacific improved from 9.1% to 11.8%, obviously, positively impacted by our -- the continued development of the Cura acquisition that we accomplished last year.Latin America operating income was slightly down from -- by EUR 1 million, with our margins unchanged at 6.8%. And this was essentially a wash of higher bad debt expense, which was nearly offset by currency translation impacts.Turning to Chart 18, and looking at cash flows. The cash flow in the second quarter was very strong. But compared to cash flows in the prior year, it has been affected by payment delays, especially by increased accounts receivable related to the addition of calcimimetics. And underlying this, we also had a reduction in our DSOs, which was larger in the second quarter of 2017 than the comparable period in 2018 from North America, which favors last year's cash flow from operations. And we had an increase in DSOs in our international business, which created a small headwind in the second quarter of 2018. But the result, once again, still very strong cash flows as a percentage of revenues at 15.6% for the quarter.The -- turning to Chart 19, and touching on our Global Efficiency Program. We indicated that we would update you twice a year on this. We continue to make progress in fiscal '18. Our goal is to generate -- continues to be to generate sustained savings of at least EUR 100 million by the end of 2020, with an upside potential of up to EUR 200 million. We have launched the projects in the organization, and I'm very proud of how the employees around the world are working together to contribute to the initiatives you see on the page. We are advancing with the program. I had indicated earlier in the year that I anticipated our sustained savings that we generate in fiscal '18 would likely be offset by implementation costs. That continues to be the case. I will provide an update in February with regard to progress we're making and particularly a view towards what we would expect in fiscal 2019 in this area.So with that, I would turn to Page 20, which is the basis for our targets with regard to the continuation of fiscal 2018. And very similar to the chart that Rice showed but did not discuss in detail at the beginning which related to the second quarter, this shows you the impact for each of the things we've guided to, both revenues and net income on a comparable basis as well as revenues and net income on an adjusted basis.So you see, for 2017, we continue to carry the impact of IFRS 15 on last year's numbers. That figure is unchanged. But we've now added the fact that with the sale of Sound in June, we have adjusted the base period to make it comparable to our expectations for the full year, taking out about EUR 559 million of Sound's revenues for the back half of 2017. And on that basis, we are continuing to confirm our guidance in the range of 5% to 7% constant currency for the year. With regard to net income, you see a similar adjustment to the base period for Sound of EUR 38 million to come up with a new baseline for net income on a comparable basis of EUR 1.242 billion. And we're confirming our expected growth of 13% to 15% constant currency. And then net income, as adjusted, you see the impacts associated with all of the elements from the prior year, including tax reform, to get to an operational level of earnings guidance of a growth of 7% to 9%, which we are also confirming for the fiscal year.So turning to Page 21, I have now more or less explained in detail the basis for the numbers that we're confirming on the page. For convenience, what you see now on the right-hand side of that page is the new adjusted base for fiscal '17. We're continuing to indicate that our targets for 2020 are unchanged. But as is explained in the footnote, we recognize that we have yet to close the NxStage transaction. We have now divested Sound, and we also have the impacts -- the longer-term impacts associated with the tax reform in the U.S. that will influence these numbers as we move forward.I would add just a couple of more detailed updates with regard to our guidance that came up in our Q&A in the February call. I had guided to interest for the year in the range of EUR 320 million to EUR 340 million. I would just slightly adjust that guidance, in part, as a consequence of the proceeds we have received on the Sound transaction. And I would revise that guidance to EUR 310 million to EUR 330 million, so a EUR 10 million change off the top and bottom of the range. And I would just indicate, we had a favorable effect associated with the Sound transaction from a tax rate perspective, so the underlying tax rate I would indicate is -- our range is unchanged, 23% to 25%. But I would tell you we're probably leaning more towards the low end of that range as we come into the back half of the year.So with that, I would open it up -- turn it back to Dominik, and we can open it up to questions.
Mike, thank you for the presentation. I hope you have preempted already a couple of the most pressing questions. And with that, I'm happy to open the Q&A for more insights now. So Stuart, can you open the Q&A, please?
[Operator Instructions] The first question is from Tom Jones from Berenberg.
I do indeed have just 2 questions, 1 for Mike and 1 for you, Rice. Firstly, for Mike, I was just wondering if you could just try and tease out a little bit more for us what the underlying IX calcimimetics revenue per treatment growth was in Q2, and remind us what it was in Q1. I'm just trying to get a sense of what you need to do in Q2 -- sorry, H2, to get to a kind of flat to slightly down revenue per treatment number on an underlying basis for the full year and perhaps what the key swing factors in H2 might be in that regard. And then the question for Rice, on the Medicare rate proposal. The rate, obviously, looked reasonable this period, much better than we've had in recent years. But my question was more on the potential methodology for drug add-ons going forward whether you've got any comments in terms of methodology that CMS seems to be proposing there. It seems to be aimed at the HIF inhibitors specifically, and so on that topic, kind of wondered what your general thoughts around the HIF inhibitor space are at the moment and how you might see those getting folded into your business if and when they become available.
Sure, Tom, I'll grab the first one. Yes. No, I was very transparent in the first quarter, so I'll do the same this quarter. So when you look at the influence of calcimimetics in Q2, and these are rounded numbers, because obviously, if I said I've got about $1 of friction, that can get lost in the rounding. But in the quarter, calcimimetics was worth about $16 for both revenue and cost per treatment, rounded. And that would give you roughly $13 revenue in cost per treatment for the half year. And just to remind you, Q1 was about $11 per treatment. So we saw a bit of an uptick in the second quarter. But we still -- because of the volatility, I'm more focused on the earnings estimate and that's why I guided for both revenue and cost exclusive -- excluding calcimimetics. Do you think that's helpful?
Sure.
Okay.
Tom, it's Rice. Yes, relative to the potential methodologies, I guess I'd have 2 comments. One is I think everybody is rushing the HIFs along at warp speed. I just don't think we're going to be looking at them getting approved as early as some other people do. Now having said that, it doesn't mean we shouldn't be thinking about the methodology and how that's going to work. I would tell you that this whole calcimimetic to [ DAPA ] thing that we went through was not well worked out, if you will. When it first came out, we felt like there's a lot of information that could have been more forthcoming. So we've kind of layered that in to the discussions we've had with certain pieces of CMS. So we're still kind of working on that. But we would like to have a little smoother process than we had going around on this first one. So let me stay tuned on that and we can chat about it probably next quarter or whenever you like.
The next question is from the line of Veronika Dubajova from Goldman Sachs.
I will keep it to 2. My first one is, Mike, just curious about that margin for Europe as you think about the second half. Clearly, there's some onetime impact around the Vifor JV. But I'd like to understand some of the investments that you're making into the business and what they might mean for margin. So if you can give us some color on that, that would be helpful. My second question is actually for Rice. If he can give us an update on where you are with ESCOs? And related to that, I'm going to throw in the 2 legislative acts in the U.S., which is the PATIENTS Act and maybe the MSP extension, what your expectations are for timing on both of those, that would be great.
Okay, Veronika. Yes, I think if I look at this big picture, I don't see -- I think we're going to continue to invest in the business in the back half with regard to the markets that we're continuing to expand to on the Vifor-Fresenius Medical Care joint venture. So I would say I'd expect margins to continue. The costs associated with the Vifor development is really the ramp related to the Veltassa developments in EMEA, if that's helpful.
So Veronika, ESCOs. So we're sitting in a place today where we're roughly at about 41,000 patients in the ESCOs, which we've been there for most of the quarter. We could see that going up a little bit potentially. But I think the better part of your question to answer is we don't really see this going up exponentially, if you will, in any significant degree until we get release from CMS or CMMI, that they're going to allow us to add more locations beyond the 24 we have today or they could do what they did this year, which is say keep your 24 locations, but we'll let you open up each of those locations or select locations of the 24 to grow. So we're going to have to kind of see where that goes. We are prepared and ready to continue growing, but we're going to have to have some understanding and some cooperation from CMMI on how they want to approach that. Now looking at the PATIENTS Act, is the last time I think I talked with you, we've got, I believe, I want to say something like 156 members of the house that have signed on to the bill. From the Senate side, I think we're at 9 or 10 senators that have signed on. But I think, realistically, from a timing standpoint, obviously, this is Rice's opinion, with midterm elections coming on, the fight over Supreme Court, I think we've really got to find a vehicle to attach this bill to. That could yet happen this year. But if not, I would think it would be very likely we could see that coming in the beginning of '19. But at this point, I just don't see a standalone PATIENTS Act getting done by itself. As you well know, that rarely ever happens. It's going to ride on another bill, and I just don't know how much focus we're going to get out of the Senate at this particular point in time, with everything that we've got going on. We'll have to see where it goes. And on the MSP extension, so MSP extension is in the House Bill for the -- paying for the opioid prices, as you know. The Senate had not put a bill together yet. We hear that's going to be worked on in the remainder of the year. We don't know what they're going to do about MSP in their specific bill. But my guess would be, once they get their bill done and they go to committee, members of both houses come together, we'll have a better idea of where this may go. But at this point, we don't know how to tell you to handicap that since we haven't seen the Senate take up a bill that would have the opioid situation in there. And we don't really know what they would do in MSP just yet. We're obviously pro. We'd like to see that, but we're going to have to kind of see what those 2 bodies do over the course of the remainder of the year.
The next question is from the line of Patrick Wood of Bank of America.
I just have a couple if I can. The first would be on the capitation rate for MA. I mean, I know it's a tiny market at the moment, but I'm just thinking long-term going forward. I've seen some rumblings from insurers where they feel, I'm sure they do, that they're being treated unfairly, the capitation rate that they're given by CMS. I'm just wondering how you expect that MA rate to evolve as that pool of MA dialysis patients potentially grows over the coming years? That's going to be the first one. And the second one is a little bit more short term. Just wondering if -- you guys were obviously very confident about this in terms of the investment, but should we be thinking about incremental investment within California, given that bill is on the ballot? And if you have an update also on the side of that on SB 1156, that would be helpful just to get a color on those 2, that would be great.
Okay, Patrick. What I would say on the capitated rates with the Medicare Advantage, there's probably never a time that I see the insurers are happy when it comes to things like this. But when we look out into the future, I think there's going to be a lot of time and room for discussion on how we structure this. I don't think there is a well-established playbook at this particular moment in time as to where this is going to go. But as you well know, as we come into January 2021 with Cures Act and what's going to happen there, this is all going to kind of come together. So we need to be very focused and active next year, in '19, trying to work through these things and see where they're going to go. But I don't know that I can really give you a good handicap or direction as to where it would go at this point in time. Looking at California, so what I would tell you at this point, and I've said this before, we have budgeted money to defend ourselves and to try to defend our patients, if you will. We have not put any of that in our guidance. We feel like we can manage the situation. But should it come to a place that we think we have to ramp-up our spend such that it would actually impact our guidance, we would obviously come tell you that. But we're not there at this point in time. When you look at the Senate Bill 156 (sic) [ Senate Bill 1156 ], we're obviously trying to educate people about this. We're trying to get them to understand, both in the general public, if you will, and then really in the legislative halls, that this is a real discrimination against patients that need premium assistance. It is too close to call just as the ballot initiative today. It's too close to call. We are watching and working daily. This is an industry-wide set of activities that are going on, but I don't know that I can really handicap it for you right now. I think it's going to take some more time to see where we are. But rest assured, we are active and busy each and every day with these 2 topics.
The next question is from the line of the Lisa Clive from Bernstein.
Two questions, first question or rather a clarification on the bundled rate rebates. So just to be clear, the 2019 CMS rate proposal that was published earlier also included a re-weighting of the dialysis market basket to reflect a more updated clinic cost structure. And this does effectively factor in much lower IPO pricing than what -- now that you've had Mircera in the market, correct? I'm just trying to understand because I think there's been some lingering concerns that CMS could have scope for another clawback. And so I'm trying to understand if that risk had been largely mitigated as lower drug costs have indeed been factored in now but it was offset largely by higher wages and whether that's just the right way of looking at it? And then the second is that the presentation mentioned lower reimbursement for cardiovascular and endovascular services. Is this a new round of cuts? I know you're in the process of transitioning the ambulatory surgery centers. How is that going? And is this sort of an incremental headwind to some of your Care Coordination activities?
So Lisa, how about I take 1, and Mike, if you would, just take 2. We think you're looking at this the right way. We do think that there's been some benefit of data, if you will, based on where we are in our ESA usage and how that's worked through our system. So we think you are looking at it the way we do similarly. And as you know is I made rounds earlier this year and I talked to people and they asked me about the clawback and when it would come, I pushed it out a couple of years. What I typically said, more has got to happen, i.e, Retacrit has got to come, some other things need to come if we're really going to affect this to a point that there needs to be a big re-base and I think people are harking back to 2013. But for next year, and the way we look at that, Lisa, I would agree with the way you're approaching that.
And Lisa, on your second question, yes, there's -- we're not seeing any significant change over the reimbursement rates. It's more associated with the ASC conversions and the timing associated with getting the approvals from the state inspectors on those and the rates we're seeing in the national -- the NCP side of the business, if that's helpful.
Just a follow-up on the NCP rates. Is this a temporary issue? Or are you just seeing lower rates going forward?
I think that -- I think the rates are -- if I think in terms of fiscal 2018, we may see a little bit more as we finish out this year and then that should stabilize in 2019.
Yes, we're fairly active talking about rates with folks. But you don't move that boat very quickly. But we do have ability to get in and complain, if you will, and try to understand why they think it should be the way it is. But I think Mike is right, we're not going to change that trajectory probably in the next 5 months or what's left in this year.
The next question is from the line of Ed Ridley-Day from Redburn.
First was a clarification on your guidance for Care Coordination revenue now that Sound has been divested. Just to confirm, the 9% to 11% decline, that is effectively still including the performance in the first half, not a pro forma guidance? Secondly, on the margin in Europe, which you have already made some comments on, can you give us a bit more color on the staffing pressures, where the staffing pressures are coming? And the balance of pressure there between the investment you've discussed and your increased staffing pressures.
Do 1, I'll do 2?
Okay. All right. I'm going to jump ahead of Mike. He's got to look something up real quick, Ed. Yes, so what the European margin pressure, from a staffing standpoint, really comes from 2 countries, Romania and Hungary. In the case of Romania, that was a decision we, as a company, made, that there should be some adjustment in nursing compensation, if you will. In the case of Hungary, that was more dictated by the government, which we don't really get to opt out of, as you can imagine. But those were the primary drivers in Eastern Europe, those 2 countries.
Yes. And Ed, just coming back to you on the first question. I just wanted to clarify because when you said pro forma, the 9% to 11% is the full year guidance associated with Care Coordination, excluding Sound, but we made the same adjustment in terms of our margin expectations that we did for the revenues and the earnings. We adjusted the base period the second half of last year for the Sound effects.
The next question is from the line of Gunnar Romer from Deutsche Bank.
Gunnar Romer, Deutsche Bank. The first one would be on cost per treatment, quite a nice development quarter-over-quarter, I think down $7 if you exclude the calcimimetics step-up. I'm just wondering whether you have some comments here on what's been driving that decline. And then secondly, on corporate costs, you keep on trailing significantly below what you indicated at the start of the year. Just curious whether you're still in position to confirm that guidance and what should drive the increase in the back half of the year.
Thanks, Gunnar. Yes, on cost per treatment, I think -- and I may have commented, I'd say at 60,000 feet, it's reduced medical supply costs that are some -- that are offsetting some of the property increases and the like and I'd say balanced labor costs. So no extraordinary developments on the labor cost side that's driving that. On corporate costs, we're just thinking -- yes, I think we'll just confirm our indication on corporate costs for the year.
Next question is from the line of Tom Jones from Berenberg.
I have a couple of sort of more general follow-up questions on your Asia-Pac business actually. The first was just the difference between the organic and the constant-currency revenue growth rate in Q2. There was a near 5 percentage point difference. Just wondered what you divested, but more specifically why, and whether that represents a change of strategy perhaps in Asia-Pac? Or it's just a bit of a portfolio trim? And then somewhere in the release you mentioned investments in growth in China, but didn't say much more. So just wondering if you could expand on what you're doing in that particular market at the moment.
Sure. So let me take 2, Tom, and then we'll come back up to 1 when -- and I'll let Mike handle that. So in China, I'd say there's really 2 places where we're seeing investment. One is we are putting production capability in for PD. We have been servicing the PD market in Asia Pacific out of EMEA. And obviously, that gives us some transaction concern. So to put it in-country we think makes sense, so there's some investment that will come into there. And as you well know, when you put production capacity in a factory, you've got to have volume and you got to get -- really get ramping in order to get your most ideal costs. And so we try to give you a heads up that, that will be some impact as we go through the next quarters. And then we've also put more people on the ground in China relative to helping us with our sales and business development and things of that nature. So it's just really us putting more resource into that particular country as we continue to go through the remainder of this year going into next year. And as I've talked before back on the production side of this, we don't know when. We don't think it's a matter of if, we think it's when we might be looking at an amount of content in our products that must be local in China. So we think we need to get ahead of that as we've done in other regions over the years.
So Tom, on your first question, just to help me out, were you talking revenue or EBIT?
It was on the revenue number.
On the revenue number. And organic versus constant currency?
Yes, it was 0.2% constant currency in the dialysis care businesses in Asia Pac and 4.8% on an organic basis.
Yes, okay. Fine. Yes, what's driving that is we did have some consolidation activity and some divestitures in India, which we anticipate -- that business is going to continue to grow for us. So it's a little bit of a timing issue with regard to the second quarter.
Yes. I think our peak, we were at 51 or 52 clinics, and we're down around 40 now because they were in some locations that didn't make sense and we're kind of rebalancing the portfolio. But that number will come back. But that's -- Mike's spot on.
Okay. So there's no significant change in strategy, just a bit of portfolio juggling, per se?
Yes, correct.
That's right, yes. People on the ground know better than Mike and I, so we're listening to them.
And if I could just slip one more cheeky question in. On PD products, you haven't launched much in terms of new meaningful upgrades since the Liberty cycler. And from memory, you had a JV with a, I think it was a Swiss design house. And then if my memory goes back even further, you were working on some sorbent dialyzer stuff. Is there anything you can add obviously without giving away too much competitively about your product pipeline in the PD space?
Sure. And you're correct, your memory serves you well, and the Liberty cycler has really been focused in North America. We have a [ Silencio cycler ], a little bit different that's in the rest of the world. That's the only one you missed. Yes, the JV with Debiotech is still underway. It's been a little harder than we thought it would be for some of the clinical things that we're being asked to provide, but we are continuing to work on that. And it's coming, it'll be there. And then on the sorbent side of this, we have good confidence in our cartridge. It's working really well. We're less happy with what we see on the hardware side, but we're working on that. We've got some plans. I don't think I can probably say much more than that. But we've got some new members coming into the family here down the road. They've got some great ideas about where they might can help us so I'll leave it at that.
Okay, good. So we have no further questions. I'll hand over to Stuart, and we say thank you for participating in the call. Have a great summer.
Thanks, everybody.
Thank you, folks.
[indiscernible] be safe.
Appreciate it.
See you in the fall.
Bye-bye now.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.