Fresenius Medical Care AG
XMUN:FME
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Fresenius Medical Care AG
Earnings Call Analysis
Q2-2023 Analysis
Fresenius Medical Care AG
The company reported a solid 6% increase in revenue on a constant currency and organic basis. Care Enablement operating income rose to €19 million, attributed to FME25 savings and positive business growth, which factored in the negative effects of currency transactions. Despite these gains, inflation remains a significant challenge, exerting pressure on operating income, although margins have seen year-over-year improvements according to plan.
The company experienced robust cash flow growth compared to the previous year, spurred by better invoicing seasonality and improved cash collection. This was in contrast with a weaker comparable period influenced by CMS clawing back advanced payments made under the Medicare program in 2020. As a result of disciplined capital allocation, the quarter saw strong free cash flow conversion, and with a leverage ratio of 3.4x, within the target range of 3x to 3.5x, the company has made deleveraging its primary capital allocation focus.
Looking forward, the company expects a low to mid-single-digit percentage rate in revenue growth. Initially, it was anticipated that operating income might decline by a flat to a high single-digit percentage rate. However, following stronger-than-expected earnings in the earlier quarters, the company has revised its guidance, indicating a more optimistic outlook while still facing operational headwinds such as labor costs and currency impact.
The leadership is confident in the company's strategic direction, aiming to solidify its position as a leading kidney care provider. They have set an ambitious target to improve the operating profit margin to reach between 10% to 14% by the year 2025, reflecting a commitment to long-term value creation and operational efficiency.
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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care report on the second quarter 2023 Earnings Results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions].
I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead, sir.
Thank you, Emma. As mentioned by Emma, we would like to welcome you to our earnings call for the second quarter 2023 from a cold and rainy Bad Homburg. We appreciate you joining us today to discuss the performance for the second quarter. 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 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.
We will try to keep the presentation short and leave time for questions. As always, we would like to limit the number of questions 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 again. Unfortunately, we are limited to 60 minutes for the call.
With us today is Helen Giza, our CEO and Chair of the Management Board and until the first of October, also our acting CFO. With that, Helen, the floor is yours.
Thank you, Dominik. Welcome, everyone. Thank you for joining our presentation today and for your continued interest in Fresenius Medical Care.
I'll begin my prepared remarks on Slide 4. Earlier this year, we laid out our strategic plan to unlock value as the leading kidney care company. We are actively executing against this plan and today, I am very pleased to be able to highlight several meaningful proof points that demonstrate tangible progress to date.
At the beginning of the year, our new operating model was implemented. And last quarter, we rolled out the corresponding new financial reporting. This leaves the simplification of our governance structure as the one outstanding structural element and our extraordinary general meeting in July was an important step towards completing this aspect of the plan.
Following the 99.88% approval by voting shareholders in support of our change in legal form, all necessary administrative compliance and regulatory steps are moving forward, and the entire process is still expected to be completed by the end of the year. At the same time, we continue to advance our operational efficiency and turnaround plans.
Our FME25 transformation program is well on track to deliver €250 million to €300 million in sustainable savings by the end of the year. And in the second quarter, we realized an additional €75 million in sustained savings. This is positively impacted by the 53 net clinic closures in the U.S. that we have completed in the last three quarters, and we plan to close up to 100 clinics as part of this program.
It's very encouraging to see the execution against our strategic turnaround plans has resulted in visible productivity improvements, most notably in care delivery. This contributed to achieving a second quarter margin of 10.4%, which is promising as it is already at the bottom end of our 2025 target margin band for the segment.
Our strategic plan also includes a careful reassessment of our portfolio assets and R&D efforts as we focus on sustainable profitable growth assets and seek to divest noncore assets and dilutive assets. In the previous quarter, we decided to discontinue the development program for a PD cycler, and more recently, we announced the strategic divestments of clinics in Sub-Saharan Africa and Hungary. These exits demonstrate progress against our portfolio optimization strategy. It is also important to us that we have found reputable and well-established partners to ease the continuity of care to the patients who had entrusted us with their care.
As a reminder, portfolio optimization effects are excluded from our 2025 target margin band since the timing of the execution is dependent to a large degree on various external factors. This played out difference to our expectations, for example, in the second quarter. Since our Capital Markets Day, we have received many requests to size the impact of our divestitures. Therefore, I would like to give you at least of an idea of how it could impact our revenues, should we execute on everything under review through the end of 2025. In this case, we could see a negative impact from the overall portfolio optimization on 2025 revenues of up to €1.5 billion. Under the same assumptions, we expect a positive impact on margins.
As you heard me say before, the resulting cash proceeds will be used towards deleveraging in line with our disciplined financial policy. I am also proud of the fact that as we execute against those strategic plan, we are simultaneously driving a winning culture focused on accountability, along with an ongoing commitment to sustainability. We remain a mission-focused company with our patients front and center in everything we do. Turning to Slide 5.
To that extent, we are continuously monitoring our clinical performance to enhance care. An important KPI in this regard is our Global Quality Index. The quality index considers dialysis effectiveness, vascular access and anemia management. Through the second quarter, we continue to see sequential stability at a high level. I will move to Slide 7 to review our second quarter business performance.
In the second quarter, we saw an acceleration in organic revenue growth driven by both operating segments. This includes sequentially stable treatment volumes in Care Delivery U.S. I'm encouraged to see proof of strong underlying trends beginning to translate into improved financial performance. The execution progress I have mentioned in the beginning is also clearly visible when looking at the second quarter.
First, the execution against our strategic turnaround lands has resulted in visible productivity improvements in Care Delivery. Secondly, our performance in the second quarter was also supported by savings resulting from our FME25 transformation program. Thirdly, we continue to execute on our portfolio optimization strategy with the announced divestments of two international markets and are actively working on divestments of other dilutive and noncore assets. Given our stronger than planned earnings development through the first six months, we are narrowing our full year 2023 operating income guidance range, which I will speak to later on. Turning to Slide 8.
In the second quarter, we delivered revenue growth of 6% at constant currency and we continue to deliver accelerated organic growth with positive contributions from both segments. This development is driven by favorable pricing in both segments by positive volume development and Care Enablement and growth in the value-based care business within Care Delivery.
During the second quarter, operating income on a guided basis improved by 44%. This results in a group margin of 8.3%. Earnings development in the second quarter was bolstered by reduced personnel expense resulting from improved productivity as well as from improved business performance supported by FME25 savings. Although we have seen a degree of stabilization, our business still faces the expected inflationary pressures. That particularly impacts our care enablement segment. Next, on Slide 9.
This slide shows the contributions to the operating income development by operating segments compared to the prior year second quarter. Starting from the left, you can see how we get to the starting point of our guidance basis. From the contribution of the two operating segments, Care Delivery represents 88% and Care Enablement 12%. The €44 million special items in the quarter relates to €25 million in FME25 costs and the remaining €19 million relate to charges associated with our legacy portfolio optimization, the humor site investment remeasurements and costs associated with the conversion of legal form. Turning to Slide 10.
Revenue growth for Care Delivery was driven by organic growth, which was supported by a positive impact from our value-based care book of business in the U.S. reimbursement rate increases in both the U.S. and international markets and a favorable payer mix in the U.S. In Care Delivery U.S., same-store treatment growth was virtually stable on a sequential basis and at the midpoint of our volume assumption of minus 1 plus 1 for the year. This reflects mortality trends effectively at pre-pandemic levels and still muted new starts as we move through the annualization of COVID-19-related excess mortality in the late-stage CKD and ESRD populations.
Earnings were positively impacted by lower personnel expenses resulting from improved productivity with a meaningful contribution coming from the continued optimization of our clinic network. Also savings from FME25 and business growth contributed in a meaningful way. In Care Delivery International, organic growth was supported by the effect of hyperinflation in various markets. As I highlighted earlier, we also executed on our portfolio optimization strategy with international market exits in Sub-Saharan Africa and Hungary and continue to progress further divestment decisions. Next, on Slide 11.
On this slide, we show how these trends have translated into financial performance. Care delivery revenue increased by 6% on a constant currency basis, driven by a 6% organic development for the reasons I just outlined on the previous slide. In addition to positive business growth and FME25 savings development, Care Delivery also experienced a net positive labor and inflation development in the quarter. The tailwind is mainly driven by a low prior year comparable in the second quarter and by improved productivity.
While we experienced a labor tailwind in the first half of the year, we will face a different prior year comparable in the second half. Overall, while the market is stabilizing, we are still monitoring and managing key hotspot markets and implementing measures as needed. Therefore, for the full year, we still expect a labor cost headwind in line with our guidance assumptions. Turning to Slide 12.
Care Enablement revenue was supported by higher sales of machines for chronic treatment, critical care products and home hemodialysis products as well as increased average sales prices driven by the first impact of our targeted pricing measures. On the earnings side, second quarter business growth is muted by the negative currency transaction effects. The inflationary pressures are developing as expected. In the second quarter, Care Enablement saw a positive benefit from FME25 savings driven by organizational as well as manufacturing and supply chain initiatives. Next, on Slide 13.
Here, we look again at how these trends have translated into financial performance in this operating segment. Care Enablement revenue increased by 6% on a constant currency and organic basis. This was driven by the reasons I outlined on our previous slide. On a guided basis, operating income for Care Enablement increased to €19 million. The improved operating income was driven by FME25 savings as well as positive business growth, which already includes the negative currency transaction effects I mentioned earlier.
Operating income was partially offset by inflation, which, as assumed in our guidance continues to be the biggest headwind for this business. Year-over-year, the margin has improved as planned. As laid out at our Capital Markets Day, the measures we are taking in Care Enablement to get into the 2025 target margin band will take time. Turning to Slide 14.
In the second quarter, we experienced a strong cash flow development compared to the prior year period. The increase in net cash provided by operating activities was driven by seasonality in invoicing and improved cash collection as well as a weaker prior year comparable due to CMS' recruitment of advanced payments previously received under the Medicare accelerated and advanced payment program in 2020 in the second quarter of 2022.
Supported by our disciplined capital allocation policy, the quarter delivered strong free cash flow conversion. Our leverage ratio was 3.4x remained in our target corridor of 3x to 3.5x. As it is still at the upper end of this self-imposed range, deleveraging remains our top capital allocation priority, with any proceeds from divestments to be used for deleveraging. I'd like to finish with our update to the outlook on Slide 16.
For 2023, we continue to expect revenue to grow at low to mid-single percentage rates. For our earnings outlook, we initially guided for a flat to high single-digit operating income decline for 2023. Based on those stronger than assumed earnings development in the first quarter and again in the second quarter, we are confident to narrow our operating income guidance range from a flat to high single-digit decline by around 600 basis points. We now expect operating income to remain flat or decline by up to a low single-digit percentage range. It's important to me that we provide a realistic but careful guidance that we have a clear path to achieve.
Operating income improved sequentially and year-over-year, due to stronger-than-expected operational performance. But we carefully need to take into consideration the many moving pieces, like labor headwinds, continued impact from inflation and potential currency transaction impacts in the second half of the year as well as a higher comparable in the prior year.
Even after considering all these moving parts, I feel confident with our new considerably narrowed operating income guidance range. And of course, we are fully confident in our path to unlock value as the leading kidney care company and to achieve an improved operating profit margin of 10% to 14% in 2025. Concludes my prepared remarks.
I'll now hand it back to Dominic.
Thank you, Helen, for your presentation and the insights. Before I hand over for the Q&A, I would like to remind everyone to limit your questions to two, please, so that everyone has a chance to ask questions.
And with that, I'll hand it back to Emma to open the Q&A, please.
Thank you. Ladies and gentlemen at this time, we will begin the question-and-answer session. [Operator Instructions]. One moment for the first question please. First question is from the line of Victoria Lambert with Berenberg. Please go ahead.
Thanks for taking my question. First one is just on geographies as medical care now want to stand. So you guys are out of Hungary, you're out of Sub-Saharan Africa. What would you consider your core geographies in the U.S., obviously?
And then my second question is just on the outlook for the business how we can expect margins to develop in H2, given the margin performance between Q1 and Q2 was pretty volatile. I would just like to get a steer on how we should think about that.
Hi, Victoria. Thank you for you questions. On your first one regarding geography, rather than getting into specific countries and geographies for obvious reasons, I think I would just come back to how we are thinking about the countries in CVI. And as I've outlined previously, I would put those into three buckets. There's kind of the core markets that we feel are reimbursement friendly profitable and that we feel that we can continue to grow those markets. Then there's a middle bucket of markets where they are profitable, we feel that we can improve the performance with a bit more focused efforts and maybe run those out over time with a tail as needed if we don't see a way to kind of improve the profitability over time. And then there's a third bucket, which are either unprofitable, they're smaller in scale, we don't feel that we can do anything with them, and there is likely a better owner than us for those markets.
So clearly, you can see with Africa and Hungary, they were kind of falling into that third bucket, and we will continue to move those forward at pace. As you probably all appreciate, we can only communicate once we have definitive signed agreements, so the timing of these is difficult to project. We know what we have in flight, and I think that's the way we're trying to size it. But at the same time, kind of be very clear in the focus there.
Look, on your second question about the outlook for H2. I'm not going to give you margin guidance by CE and CD, we've obviously guided for the total company. There are swings in that margin, obviously, as you've got the year-over-year comps on the respective quarters. But obviously, we have a full-year guidance out there. As we -- I think, advised at the Capital Markets Day, with CE, obviously, that is a longer climb, but we do expect to be above our 2022 number, which was 1.9%.
Great. Thank you.
Next question is from the line of Veronika Dubajova with Citi. Please go ahead.
Hi, good afternoon. And hello Helen and Dominik. Thank you for taking my questions. I will keep it to two, please. First, I want to just go back to the guidance for the full-year, and I appreciate your comments about conservatism, but just maybe to push you a little bit. I think historically, the seasonality in new business is the second half EBIT was always higher than the first half. Are there any reasons whatsoever for that not to be the case this year, because obviously, the guidance seems to imply that. I'm just trying to understand why that would happen?
And then my second question is just to drill down a little bit, in particular, on the North America care delivery growth range. Clearly, some very notable benefit from revenue per treatment. Just if you can quantify to what extent that's mix versus underlying rate increases? And how durable you think that is into the back half of the year? Thank you.
Hi, Veronika. Thank you for your questions. Look, on your first question on guidance, there's a lot to unpack there. What I would say, yes, clearly, you've heard my language. I want to make sure that we are delivering this quarter by quarter here, which we have done sequentially now for the last three quarters.
If you take our 2023 half one guidance and then you look at the kind of the implied guidance, you're doing the math correctly, it would on the surface, assume that we have a lower H2 in 2023 than we did in 2022. What I can say is we are expecting a half two on an EBIT level to be higher than half one, but there are some moving parts in that.
In 2022, half two, we did have some, I'm not going to call them one-timers, but special items, but we did have some operational improvements, maybe operational one-time then we call it that, rather than special items. We had some NCP deconsolidation gains, and we did get an additional consent payment in half one -- sorry, half two 2022.
As we look at half two 2023, we also have to take in the increase from the stock price on stock incentive compensation. So we are taking that into account for our half two outlook. In addition to that, as you can see, we do have kind of a nice beat in half one, but we're also -- and we don't expect some of that not to continue. But we are watching, in particular, I would say, the transaction effects that we are seeing in some of these maybe more volatile countries.
So underlying operational performance, I'm very confident about when you start to see the comparable half two over half two '22 to '23, there are some nuances in there. But I feel really confident in our ability to continue to drive half two growth over half one. So hopefully, that helps unpack some of that. Once you strip those out, the underlying is indeed quite favorable.
In terms of your second question on North America CD growth. Really excited with that growth, and it's actually both rate and mix improvement. Obviously, the reimbursement rate is coming through. And then on mix, mainly driven by Medicare Advantage, which is now sitting at around 40% -- right at 40%, actually. So nice to see all of these metrics going in the right direction.
That's very clear. Thank you so much.
The next question is from the line of Richard Felton with Goldman Sachs. Please go ahead.
Thanks. Good afternoon, Helen. Good afternoon, Dominik. Just a follow-up on what you're seeing in terms of labor costs in the U.S. market. In particular, I'd be interested to hear an update on your reliance on sort of contract labor and general levels of wage inflation in that market? I mean it looks like from your numbers that H1 was pretty good, but your comments into H2 sound a little bit more cautious. So an update on what you're seeing would be very helpful.
And then my second question, just a follow-up on Veronika's question on the payer mix in U.S. care delivery. Is there any reason why that sort of tailwind or mix that you saw this quarter, is this sort of a one quarter anomaly? Or are some of those shifts kind of a little bit more durable and maybe duration more than just one quarter? Thank you.
Yes. Thanks, Richard. Look, labor has continued to be a lot of moving pieces. I feel the assumptions that we called at the start of the year are holding. We do talk about labor stabilizing and the availability of labor, obviously improving. The reduced volume of temporary labor and the rates like really dropping kind of back to normal levels. What we saw in Q1, we saw continued in Q2 and very de minimis now compared to what it was last year.
I think the bigger driver on labor, I mean not just the fact that costs and wages are in line with expectations is the terrific job the U.S. operations team are doing on driving productivity. So that obviously helps and that's what we're seeing, the beat on that we saw some in Q1 and even more so in Q2. So I feel we've got our arms around labor.
When you say -- when I talk about the caution going into half two, I don't need to remind any of us at the hot mess we were in last July when we did our profit warning and the kind of the labor cost spiraling out of control or availability of labor and impacting our operations. The reality is that we see a lot of that labor cost showing up in half two of 2022. So we have, obviously, an unfavorable comp for '23.
So the full-year that we are calling, we feel okay about -- I mean maybe we feel good about. I think the watch out that we have is the high -- what we're calling hot spots. So for the majority of the country, we've got this well under control. But as you can appreciate, in some states, some metro areas and hotspots, we are seeing some of those areas still a little bit more difficult to sell.
And while we are seeing this longer improvement and labor productivity, we are expecting to have to invest a little bit in these hotspot areas. Nothing outside our guidance range. And if we don't want to be full issue and not invest to kind of continue to drive the growth in future periods.
So that's just a bit of the moving part, and that caution is just that we are very, very carefully managing kind of every clinic, every location accordingly. This isn't a throw the kitchen sink at it, like maybe we had done historically, but very, very targeted view on these areas.
We're seeing wage inflation still around that 4%. The -- we do go into the holiday period here, so we do use a little bit more temporary labor just to cover regular normal seasonality. That will be a little bit of a tick up in open position as we go through that seasonality. But overall, I think we've brought our arms around it quite well, and the team has done an incredible job here.
On your second question on payer mix in the U.S. No anomaly there. I mean, we -- I think we've got our arms around the mix rates, and we're seeing that kind of pull through. So we are confident for that to continue in half two as it did in half one.
Okay. Thanks very much.
Next question is from the line of Hassan Al-Wakeel with Barclays. Please go ahead.
Hi, good afternoon. And thank you for taking my questions. I have two, please. Firstly, on rate, what is your take on the preliminary ESRD PPS for 2024, which looked to be more modest, an increase than many expected. Do you expect the final rule to land here? And could this present a challenge at all to your 2025 margin targets, and do you still think the 2025 PPS rate should accelerate meaningfully from here?
And then secondly, could you update us on the portfolio side and your progress on divestitures. You highlighted the €1.5 billion of revenues that are addressable if you do all you set out to, which is helpful, thank you. But could you help quantify the rough margin differential or indeed tailwind, all else being equal? Thank you.
Thanks, Hassan. Clearly, we're disappointed with the 1.6% proposed rate, we obviously don't know what that is going to look like in the final weight. I don't have that crystal ball, unfortunately. Obviously, we continue to put our case forward for an improved rate, but we'll see where the final weight comes in.
As I've said previously, we have forecast and guided for moderate rate increases. And I think that is consistent with how we have thought through the 2025 targets but obviously, we will continue to advocate for a higher rate for the cost increases that we've experienced. We have no reason to believe that the reimbursement model shouldn't hold true. But clearly, we've seen a disappointing reaction to the current inflationary environment in that rate. And clearly, it's not just an issue for us, it's for all service providers.
Look, On the portfolio, and we do listen, we do take note of the many questions we got about that. So we thought it was helpful to try and size it. Obviously, we're not trying to get an unpacked 2025 detailed guidance because we're trying to be moderate with how we roll that out, and that's why we're kind of focusing on the margin bands. But as I said, if we execute everything, it could be up to $1.5 billion of lower revenue.
Clearly, we are, and if you go back to my Capital Markets Day slide, that was quite deliberate. If you go back to there, and you can kind of look at the things that or either lower growth or lower strategic value, you can assume that they're all in scope. And what we are seeing, if we execute on everything and there are some that we would lose absolute EBIT, but there are others that are loss making. Our current assumption is that it would be margin accretive, and it wouldn't take us out of the margin band.
Thank you.
Next question is from the line of Oliver Metzger with ODDO BHF. Please go ahead.
Yes, good afternoon. Thanks a lot for taking my questions. The first one is you specified value-based care contribution as a positive driver of Care Delivery. Is there any chance that you can quantify the positive contribution to a certain extent at least? And also whether we should expect the same magnitude for the next quarters?
Second question is, sorry for over your -- again, on your guidance, and I've understood all your words. So I appreciate the narrow guidance spend. Moving [indiscernible] some misunderstanding to be honest and that's particularly labor cost. So initially you had your labor cost and your assumptions of €140 million to €180 million. In first-half now you have a positive €49 million. You still stick to the guidance and stand also in facing argument. But I look for the whole guidance and understand that the lower end is not realistic anymore. Therefore, you increase -- you narrowed it. So -- but you stick to one the most -- or basically the most important point of your input cost, the labor cost and you say, okay, that's will not change. So could you help me to understand what are the other moving parts, which at the end, drove your guidance update? Thank you.
Thank you, Oliver, for your questions. We're not going to disclose the relative contribution for the BBC part of the business. Obviously, we don't go into the subsegments here. What we are working through, and Dominik and I have been chatting about this is how can we give more metrics and more KPIs into this business as it continues to grow, both across our ESRD population and CKD population. You know kind of projections on the medical costs under management and you know that margin. We do have now 125,000 lives covered with the biggest number of patients from CKD, but let us -- we're taking that as a follow-up to try and work through how we can disclose some supplemental KPIs on that, and we'll come back in Q3.
On the guidance question, yes, you're right. Our labor cost assumption is still €140 million to €180 million of a headwind, and we are favorable through half one. We obviously have some additional productivity, but we also know that we've got this additional phasing in the back half of the year and our merit increases kick in, in July. So that's also in half two.
Obviously, as you can appreciate, we're working through kind of the overall guidance with a lot of moving parts, positive and negative. And I am encouraged by the positive that we've seen in half one, but also trying to be kind of cautious about half two and obviously, as I mentioned in my answer to Veronika, we obviously have some other things to navigate in the guidance that we didn't see when we gave guidance. I mean, I think the incentive stock comp is a piece of that as well as watching this exchange rate.
Even with those negative impacts, I hope you are encouraged as I am that we are still able to improve our guidance and we'll see how some of this plays out in Q3. But I feel confident with what we're doing today, but obviously, watching some of these moving parts and how they play out.
Okay. Thank you. One quick follow-up on value-based care. Is it the payment of the money you have got, is it more a one-time or characteristic? Or should we expect, let's say, homogeneous cash inflow over the next quarters, basically in line with the overall assumption?
Yes, I am. I'm sure some of my team are listening to the call and they're smiling as you asked that question. I think this is one of the hardest things to forecast in terms of the phasing of the revenue and even internally, we refer to it as the lumpiness of the BBC revenue. I mean I think some of this depends on kind of when the contract is signed, the terms of the contract, then when we get the profit sharing or the risk sharing coming out of these contracts.
So while we're doing our best to forecast what we expect on a revenue line from BBC, it is playing out quite lumpy even against our own forecast. So we have to find a way to -- we're doing our best to forecast it the best we can, of course, but I think we then just need to come back with some explanations around that. But yes, it's absolutely not a straight line, unfortunately.
Okay. Great. Thank you very much.
Next question is from the line of James Vane-Tempest with Jefferies International Limited. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. Two, if I can, please. And firstly, just to follow-up on the divestments of up to €1.5 billion. Just wondering, Helen, you've given some scope in terms of the different buckets and where they could possibly get to. But I'm sort of wondering, looking at those in aggregate, it's possibly around 7%, I think, of 2025 revenues. But if this is just the international care delivery sort of ex-U.S. is potentially up to 40% of that business. So I was just wondering, is that focusing on the right area where those divestments could be? Or are there in other areas?
And I think related to that, I guess there's a question on the potential margin impact, but these are below group margin, I'm not asking for a point estimate, but just in terms of how to think about it potentially, those are essentially breakeven, and that would add around 70 basis points to a margin roughly or around 5% margin, it could be around 30 bps. So I was just wondering whether that's a good quantum to think about where those could be and what the impact could be to 2025 targets, which exclude those.
And then my second question is, I'm just curious what it would take for you to raise the upper end of the EBIT guidance range to above zero? And what is the impact to EBIT growth from divestments closed or that could happen this year? Thank you.
Yes. Thanks, James. I think I spent a little bit of time laying out the CDI buckets for Victoria because she asked specifically about geographies. Obviously, there are other assets in play and in scope. So you should look broader than just CDI. And again, I would maybe have you go back to the Capital Markets Day Chart where you maybe see some of those assets and where they sit on the chart.
In terms of the margin impact, I mean, basically, what we're seeing with everything overall, it's why I can kind of say it'd be margin accretive. The net of all of it washes out pretty flat to a small kind of EBIT number. So -- and maybe that's the best way to think about it because we will be focused on some noncore assets that we deliver but also on other assets that are negative in EBIT. So when you take it all into account, it's probably a very low single-digit EBIT percentage impact, the best way I can size it right now. It's hard to do that because I haven't given you the guidance budget through '24 and '25. And I know -- I know, I know that. But I think that's the best way to think about.
That's very helpful. That gives a little more color. Thanks for that.
Okay. And then your third question actually was about -- question two after 1b. Raising the -- what would it take to raise the upper part of the guidance?
Look, I think the -- I'm very encouraged by what we're seeing with the labor productivity. I think how labor will develop in these hotspot markets and what we might need to invest if those don't need as much investment, I think that could play a positive role. And if we continue to get productivity here at an accelerated rate, I think that's something we'd like to see and the team are managing it well.
I think the biggest unknown for me as I look at all the assumptions going into half two. And I think we have a really, really robust view on H2 is really this foreign exchange transaction. And this volatility in exchange rates. And obviously, we look at what we can hedge and what we can't, but this difference in kind of invoice currency versus local currency. We've got China, we've got the ruble, we've got these hyperinflation countries.
So if that stabilizes and it's not as bad as maybe we are looking at right now, I think that could also drive an improvement in kind of in the guidance. And I think overall, everything is on track. It's going really well. Our spend levels are under control, FME25 is delivering quite nicely. So look, I think we're just, and maybe that's the caution. You all know me by now, just delivering this quarter-by-quarter.
And of course, if we see the signs that we have the confidence to change it, we will. I mean also I don't need to remind everybody that we're coming off a very volatile prior year. And I just really trying to take this a quarter at a time, which I think you said this morning in your report.
Thanks very much.
Next question is from the line of Lisa Clive with A.D. Bernstein. Please go ahead.
Hi guys, just two questions. One on reimbursement increases ex U.S. Could you just kind of give us a sense of what proportion of those are sort of tied to inflation CPI, et cetera? And what proportion of those are kind of a bit sort of at the discretion of health and ministry to just sort of raise at a certain point in time.
And then second question is just around the Care Enablement margins over the long term. For med tech sector, especially where you're positioned a 40-plus percent market share. Compared to other med tech sectors, you would think that you'd have a high teens, maybe margin even in the 20s. We think really long-term, is there any reason why this is sort of structurally not possible in dialysis? Is it around the reimbursement model? And what would really need to happen in terms of transforming how that business operates. Is it a more active product cycle? Is it better price discipline? Just sort of high-level thoughts on that. Thanks.
Lisa, I will try and pull it here as I'm talking, but the reimbursement ex U.S. is very much a mixed bag. What we have been seeing, where we've got reimbursement increases in Europe, for example, we are seeing that, that is tied to wage inflation. And obviously, we'll get the reimbursement increase, but then we are kind of having to invest that back in the labor in the clinics. I don't have a number to hand.
I'll have Dominik follow back up on that one. But it's nothing -- we're getting our fair share of the reimbursement rate increases, but they don't fall through straight to the bottom line. I think the message here is it is, for the most part, needing to be reinvested in labor and wage inflation because of the countries we're operating in. But there's nothing else that's remarkable, I would say, ex U.S. on reimbursement.
Obviously, hopefully, you picked up my comments on CE that we are -- one of our critical initiatives is pricing, and we are starting to see the first benefits of those price increases across our products portfolio kick in, in Q2 as we thought. Which maybe then leads into your second question, Lisa, on the long-term view.
Obviously, sitting here with a 2% margin, we've got a long way to go to get into our margin band but confident that we can get there by 2025 with the initiatives and projects that we have in place. But clearly, we are still battling headwinds there. So we have to work much harder I don't think there's anything that would say we shouldn't be kind of at a med tech margin.
As Katazina spoke to at our Capital Markets Day, we have a mixed bag within that portfolio, and there are some markets that are hugely profitable and are above that average margin. So I think our focus is really kind of teasing out those that aren't there, and then deciding what we need to do with that. Obviously, as we're working through FME25, always taking a look at our structural overhead and seeing if there's anything more dramatic that we can do and do it faster.
But I think the message here is we need to deliver on what we've got in hand, and I'm confident the team well and then continue to look at the individual components in the portfolio. And then if we have to make different decisions on those, we will in time.
Thanks very much.
Next question is from the line of David Adlington with JPMorgan. Please go ahead.
Hi guys. Thanks for the questions. First one, I was quite interested to hear about your talking about muted new starts still. I just wondered what -- if you could give us some further color there on which what's start to accelerate again why that was being muted? And then second, just on the later side, again, the €45 million tailwind, I think, in the second quarter you pulled out. I just wondered how much of that was because your agency costs have fallen. If you could quantify that at all? And as we look into the second half, do you have a similar sort of comp in terms of agency. And then are we rebased back to normal agency levels in terms of a comp next year? Thanks.
Thanks, David. It was a little hard to hear you, but I think I got your questions. One around muted new starts and the second around the labor tailwind.
No, look, there's nothing -- the muted new starts, that's something that we've just been seeing, right? There's nothing new or unusual there. I think just this annualization of COVID, as we had discussed really still working its way through the end stage of CKD population. So nothing new or alarming just the timing of this being worked through. We are encouraged by the fact that the overall mortality is on a pre-pandemic level now. So I think it's just the color we've been saying we know we will return to growth, just the trajectory of that, and we're sitting literally right at zero right now. So -- which overall is encouraging.
On your second question on labor, yes, look, there is a -- when we put our guidance out there, we obviously had a forecast for what we thought that the temporary labor would be -- we obviously have kind of really reduced our contract labor in 2023. And obviously, there would have been contract labor in the challenging Q2 from last year. We -- and then on top of that, we've got the productivity, which is reducing that headwind. So look, I think for me, the Q3 labor number is going to be the key on, okay, is it where we thought it was going to be? Or is it continuing to drive improvements and of course, we've got this weird annualization quarter-over-quarter with all that was happening on labor and the merit increase that kicks in, in Q3. So hopefully, that helps explain. We haven't been talking about labor productivity for a while. So it's really, really nice to be talking about that.
Thank you.
Next question is from the line of Christoph Gretler with Credit Suisse. Please go ahead.
Thank you operator. Hi and hello. Just actually one question left. And I think you mentioned that transactional effect on the product business could be an element that holds you back on the margin -- on the guidance upgrade. Could you actually discuss how meaningful that is, especially since assets moved so much? And I think your manufacturing footprint is pretty kind of higher wages and higher cost countries like Germany, the U.S. And we have a lot of no inflation in this -- sorry, a lot of devaluation in these emerging market currencies.
Yes. Chris, happy to do so. Look, to give you a sense of size and maybe I haven't done this in any of the questions yet or in my voice over. But to put it into perspective, the exchange impact was about half of our margin in CE in the quarter. And it is these countries with hyperinflation, whether that be in Argentina and Turkey, but then seeing the kind of the ruble, India, China. So it's the main -- those are the main currency that drove us in the -- countries and currencies I guess, in the quarter.
And obviously, we're taking a hard look at that on what we can get under and both in contractual currency and hedging. So I think that's also -- I mean, we do hedge, of course, but the volatility here has had a more sizable impact than we were expecting. So I think when I talk about the guidance, we're expecting some of that to continue whether it stabilizes or improves, I think will be kind of the key driver. And again, we'll know more about that as we go through Q3.
And this manufacturing footprint optimization that you have as part of the plan FME25, does this not take into consideration in any respect is a challenge, which, I guess, is an ongoing challenge [indiscernible]?
Yes, of course. So we are looking at the manufacturing footprint, but you have to remember that there is -- we do have 44 manufacturing plants and there is a reason that we have some of those manufacturing plants local. But obviously, as we think through that footprint and where we can consolidate, obviously, where and the cost does get taken into account. And then obviously, looking at the currencies we contract in as well.
Thank you. Appreciate your comment.
Next question is from the line of Falko Friedrichs with Deutsche Bank. Please go ahead.
Thanks a lot. Two questions, please. The first one, going back to the same market treatment growth. Helen, what's your best guess when this could inflect and turn positive? Could this be in H2 this year? Or is this rather something you would expect next year?
And then my second question, can you just very briefly update us on your home dialysis efforts and whether there's anything new to report on? Thank you.
Hi, Falko. Look, my best guess, I wish I had some crystal balls here. Look, we're as flat to zero as we can be, right, at zero -- minus 0.1. My hope would be if we start to see this continued trend, it could go positive in Q3, of course. But that -- my guess is as good as yours. I mean I think the trend is going the right way. Let's hope that it does. And that's why we've guided minus 1 plus 1. But you take the midpoint you zero, obviously, if you backed out the acute contract cancellations that we spoke about last quarter. We have the same impact this quarter that would have a slightly positive. So it's going the right way.
On Home, obviously, that's a key strategic initiative for us for a whole host of reasons. We continue to stay focused on that. We are still hovering around the 16% mark in Q2. I think we were -- if I get numbers right 15.7% in Q1 and 15.9% in Q2, so a slight improvement. But obviously, some of the labor stabilization and everything else is helping that so we can drive trainings again. So I think we're seeing our training volume up, which will, in turn, obviously translate into a higher home percentage. But we know that we've really got to kind of turn the corner on this to get to our 25% goal.
Thank you, Helen.
Next question is from the line of Hugo Solvet with BNP Paribas Exane. Please go ahead.
Hi, hello. Thanks a lot to taking my question. I have one on FME25. You're at about like €60 million, €61 million benefit in Q2, you were at about the same level in Q1. So just wondering as we think about timing and phasing for Q3 and Q4 to reach that €250 million, €300 million by year-end? That would be my first question. And second on China, I remember you said it was an anomaly of strong growth in Q1. Just wondering what you saw in the Q2. Thank you.
Yes. Thanks, Hugo. Yes, look, we're very, very encouraged with what we're seeing on FME25. We've had a good half one, we're on track, I mean, obviously, we're still sticking to the guidance that we have out there for 2023 full-year. So no reason to change that at this point. We had €136 million in the first half, €75 million in Q2. So that's fully on track.
In terms of China, we had a really strong Q1, as you recall, stronger than we were expecting. We do see continued good growth there in China. I think what we have to kind of we expected Q1 to be a pull forward from what we would normally see in Q4. So I think that's obviously what we're expecting.
The Q1 was strong, we still had a strong April, it's obviously dipped off now as we kind of go into these next quarters. And with that pull forward, and obviously, that's now reflected in our outlook for half two. But of course, we're really excited about that high higher acute sales that does come with a higher margin compared to some of the other products.
Thank you.
In the interest of time, this concludes the Q&A session. And I would like to hand back to Dominik.
So thank you very much for your interest. We appreciate you joining after a long day with many reporting companies. Thank you for hanging in there with us and for your questions. And while we are drowning in rain here, we'll wish you all a great summer. Hope to here see meet you after the summer break. Thank you.
Thank you, everybody. Have a good summer. Take care.
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