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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 Report on the Third Quarter Earnings and FME25. [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 third quarter 2021 and for FME25. We appreciate you joining today for an extended session and hope that all of you are equipped with food and some water. We will start with our third quarter presentation, followed by a Q&A session focused on the quarter only. At around 4:30 CET, we will then pick up on FME25 with a separate Q&A session to follow. I will 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. [Operator Instructions] 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. I will now hand over to Rice. The floor is yours.
Thank you, Dominik. Welcome, everyone. Thank you for joining us today, not only for the first call, but for the second call. Before I begin my prepared remarks, I'd like to say and tell you how proud I am that we have been recognized as #2 of America's most loved workplaces and health care services as determined by Newsweek. Our employees all over the world do a fantastic job in caring, innovating, producing and delivering products for our patients even during this pandemic situation. And please, each and every one of you out there, please accept my gratitude and thanks for the incredible jobs that you do. I will begin my prepared remarks with the third quarter presentation, and let's start with Slide 4, if you will. During the third quarter, we faced a stronger-than-projected headwind from COVID effects as patient excess mortality reversed trend and significantly increased as a result of the global spread of the Delta variant. Despite this significant headwind, our business delivered organic growth in the quarter of 1%. We've seen a very solid number of patient new starts around the world, which tells us that the underlying drivers are, in fact, intact. We are confirming our full year 2021 guidance. However, we now expect to come in at the lower end of our revenue and net income ranges due to the significantly higher-than-projected excess mortality. COVID is a challenge for our industry right now. Significant resources are rightfully focused on ensuring that our patients continue to receive the life-sustaining dialysis treatments that they need. That makes the continued progress on our strategic priorities all the more impressive in the quarter. First, we are extremely excited about what FME25 will mean for the future of our business, not just in terms of savings but really unlocking value and further growth potential for our business. Helen and I both look forward to discussing FME25 following this Q3 update. Please, hang in there with us. Secondly, in the third quarter, we have crossed the 15% level of treatments performed in a home setting in the U.S. This is a great achievement by our team and even more so when you consider all of the efforts spent on managing the pandemic within the quarter. We are very optimistic about the continued growth potential for home, especially as we're able to shift resources from pandemic management and back to training the many patients interested in home treatments. This will continue, obviously, to be a very important priority given the current labor situation that we are experiencing in the U.S. Thirdly, we are continuing to move the market with our leading value-based care capabilities. Alone, in the U.S., the addressable market for chronic kidney disease patients in Stage 4 and 5 is more than USD 20 billion. We've built up significant experience and have managed medical cost of around USD 20 billion since 2016. While this year, we managed around USD 2.4 billion of medical costs and covered roughly 32,000 lives, with the CKCC models on track to start in just a few months, we expect our medical costs under management to exceed USD 6 billion. Fourthly, we are making important progress with our global sustainability initiatives. On November 18 at 4:00 p.m. CET, Dr. Frank Maddux, our Global Chief Medical Officer, and Charlotte Stange, our Global Head of Sustainability, will host an expert call on sustainability in patient-centered care. I'll leave the sustainability update for that time and hope that you are able to join us and spend some time with Frank and Charlotte.And then finally, last Friday, the final ESRD prospective payment system rule for 2022 was published by CMS. With $257.90 per treatment, this will be an increase of 1.9% or $4.77. The final rule has improved against the original proposal. CMS finalized the proposal to eliminate the QIP penalties for 2022 in light of the ongoing COVID-19 public health emergency. Turning to Slide 5. During the first 9 months of this year, we've delivered over 39 million dialysis treatments to around 345,000 patients. The decrease in the number of patients and the number of treatments directly relates to the tragic impact of the COVID-19 pandemic and the many, many lives that its touched in a negative way of our patients. The 2% clinic growth mainly relates to growth in North America due to acquisitions and newly opened clinics that were initiated about 18 to 24 months-or-so ago. Turning to Slide 6. 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 the pandemic. Please turn to Slide 7. This slide compares the development of COVID infections worldwide to the number of cases we have seen across our Fresenius Medical Care patient population. As seen with the general population, the fourth wave of COVID, with the Delta variant, has extended the pandemic phase of this viral illness, leading to increased morbidity and mortality despite the protection and mitigation that the vaccines have provided. However, we have seen infection rates declining since the end of last quarter. We continue to advocate that all of our patients be vaccinated. We have seen increases in vaccination rates since our Q2 results at the end of July. Today, both in the United States and globally, around 78% of our patients have received at least 1 dose. And in the United States, the majority of our patients are fully vaccinated with both doses where necessary. The vaccines have provided distinct benefit to our patients despite known breakthrough cases. We see vaccinated patients with only 1/3 to 1/2 of the rate of COVID compared to our unvaccinated patients in the same communities. We are encouraging our vaccinated patients to receive boosters. Now that the U.S. has approved the boosters for Pfizer-BionTech, Moderna and J&J vaccines, we are starting to see a pickup in booster rates as well. We have an active campaign in the U.S. to have all of our vaccinated patients receive a booster dose by November 11, 2 weeks before the Thanksgiving holiday when the indoor holiday season, as we like to refer to it, does begin. While it is hard to predict how the pandemic will evolve, there are signs that the COVID pandemic will ultimately become endemic. This will make COVID a more manageable medical condition. In the general population, more and more people will have been infected and developed their own immunity. And at the same time, it looks to be vaccine approval for children 5 years and older is becoming a reality. This should support broader community-based herd immunity. Moving to Slide 8. During the first 6 months of the year, excess mortality had trended downwards, never reaching the pre-pandemic levels as we had hoped. With the global spread of the Delta variant over the summer, we saw a reversal of this trend with excess mortality increasing again throughout the third quarter. Excess mortality reached approximately 2,700 globally within the quarter. The background local rates of infection and mortality mimic the curve seen in the general local population at both the state level and country level throughout the globe. During the third quarter, the impact was particularly pronounced in North America and, to a lesser extent, in EMEA. Globally, on a last 12-month basis, excess deaths further accumulated to approximately 11, 500. Since the start of the pandemic, we've seen them accumulate to approximately 18,200. As we saw new COVID cases declining, we are projecting excess mortality in the fourth quarter to be somewhat below the level of third quarter. Turning to Slide 9. In the third quarter, we achieved revenue of EUR 4.4 billion, reflecting 1% growth in constant currency. Our net income, excluding special items, declined by 21% on a constant currency basis. Costs related to FME25 will be treated as a special item. And during the third quarter, we had EUR 5 million in FME25-related costs pretax. As already mentioned, the pandemic negatively impacted our top and bottom line. Our third quarter net income includes a negative net COVID effect of EUR 108 million. Excluding this impact, our net income growth in the third quarter would have been approximately 7% above the 2020 base. We are also continuing to face macroeconomic inflationary pressures related to both labor and raw materials in the quarter. Our third quarter earnings were slightly impacted by a negative foreign exchange effect. Turning to Slide 10. Despite the challenges related to the pandemic, we delivered organic growth during the third quarter with North America, Asia Pacific and Latin America, all contributing positively. In EMEA, organic growth not only faced negative impacts from COVID, but growth in the region was also hindered by the timing of some export sales. With that, I'll turn it over to Helen, who'll take you through the development in greater detail.
Thank you, Rice. Hi, everyone. I'll pick up on the services on Slide 12. In the third quarter, Healthcare Services delivered revenue growth of 2% at constant currency overall. The adverse COVID impact on organic growth in Healthcare Services amounted to approximately 390 basis points for the third quarter. Nevertheless, organic growth increased despite these negative impacts from the pandemic in all regions. It was also negatively impacted by customer metrics in North America. Asia Pacific stood as a strong regional contributor in the third quarter, supported by a rebound in elective procedures and solid dialysis services. With the spread of the Delta variant and increased level of excess mortality, same-market treatment growth decreased by 2% in the third quarter, while new patient starts were on a solid level. I'll now move to the Products business on Slide 13. Revenue for our Products business was stable in the third quarter, and organic growth was flat overall. On a regional basis, North America delivered growth despite continued pressure from the pandemic. Lower sales of in-center disposables, particularly in EMEA and Asia Pacific, as well as lower overall sales of peritoneal dialysis products were offset by a positive impact from foreign currency translation and higher sales of machines chronic treatment. Turning to Slide 14. Here, we show the margin development for the first 9 months of the year. As we have discussed, the biggest impact on margins year-to-date relates to COVID. The effects of excess mortality on both our core dialysis and downstream businesses are a large component of the COVID impact. Higher cost for labor, raw materials and health care supplies, mainly due to macroeconomic inflationary effects, have been the next biggest negative drivers of our margin in the first 9 months of the year. Wage inflation is not a new challenge for us, and our outlook for 2021 factored in the usual 3% wage increase. This is one of the reasons that growth in home dialysis has been and continues to be an important strategic priority for us. Like many companies operating in the U.S., we have a very high number of open positions that are taking time to fill. The level of open positions has stabilized since July, but it is something that we are continuing to monitor and need to take into account for 2022. We also see inflationary pressure as it relates to raw materials. These are mostly related to higher prices for plastic used for the production of disposables, which in our case, are often indexed with oil prices. On the positive side, we saw an improved payer mix due to growth in Medicare Advantage. Medicare Advantage continues its growth at the usual intra-year pace in the third quarter and remains, like in the last years, our fastest-growing book of business. Our Medicare Advantage mix right now represents roughly 30% relative to our entire U.S. patient population. Our 9-month development also benefits from overall reimbursement rate increases and an impairment for a license held by our joint venture with Vifor Pharma last year, which lowered the 2020 days. Some of the headwinds that I've just outlined will continue to impact us in 2022. With excess mortality continuing to accumulate, the annualization effect is lasting longer. We face a very tight labor market that triggered higher than normal wage inflation, a general macroeconomic inflationary environment, sequestration release expiring and some of the PPE costs potentially continuing depending on CDC protocols. However, the solid underlying patient new starts, the growth in Medicare Advantage, the start of CKCC models and our FME25 savings should be on the positive side. Next on Slide 15, during the third quarter, we generated operating cash flows of EUR 692 million and a resulting margin of 15.6%. The decline was mainly due to the U.S. federal government's payments in the second quarter of 2020 under the CARES Act and the continued recoupment of these advanced payments. EUR 195 million were recouped during the quarter and EUR 354 million year-to-date. With the recoupment of funds and driven by our lower EBITDA, we have seen our net leverage ratio of 3.1 move back into our target range of 3 to 3.5x. The ratings presented at the bottom right were all reconfirmed earlier in 2021 and support our solid financial position. Turning to Slide 16. We are confirming our 2021 guidance range of low- to mid-single-digit revenue growth and net income to decline at a high-teens to mid-20s percentage rate against the 2020 base. However, we are now expecting to be at the lower end of both of these ranges. When we provided guidance back in February, we had assumed an accumulation of COVID-related excess mortality in the first half and a return to normal mortality patterns in the second half of the year. We know that predicting the full development of the pandemic would be hard, which is why we provided the ranges that we did. As we have discussed already, the continued presence of COVID, along with the development of the Delta variants, has led to a significant increase in excess mortality that has not been included in our outlook assumptions. Rice has mentioned earlier that since the beginning of the quarter, we have seen declining infection rates. Therefore, we are now projecting excess mortality to decline again from the elevated level of the third quarter. As a reminder, we have not yet completed the budgeting process for 2022, and we will provide our outlook for 2022 at the time of our full year results in February, and we have already provided a midterm outlook. That concludes my prepared remarks relating to the third quarter. And I will now hand it back over to Dominik to begin the Q&A.
Thank you, Helen. Thank you, Rice, for the presentation on Q3. I'm happy to turn it over to Natalie to open the lines for the Q&A, please.
Ladies and gentlemen, thank you for standing by. Welcome back to the second part of the event, which is the update on Fresenius Medical Care FME25 program. [Operator Instructions] I would now like to turn the conference back over to Dominik. Please go ahead.
Thank you, Natalie. Welcome back, everyone, to the second part, and thank you for joining this part as well after what is a tough reporting day for all of you, we know. Rice and Helen will now guide you through our FME25 transformation program. The presentation will now become available on our website. With this, I hand it back over to Rice. The floor is yours.
Thanks, Dominik, and thank you all for giving us some additional time with Helen and myself today. Next to managing the pandemic situation, FME25 has been one of the key focus areas for the management board over these last 9 months, but we really appreciate the opportunity to share further details on the transformation program and address your questions. Please do keep in mind that we might be limited in some of the answers we can give on certain topics as we are subject to consultation with the workers council, and we hope you understand that we fully intend to comply with that relationship and the way that we're going to be able to comment on some things or not.So let's start with our strategy on Slide 4, please. With FME25, we will transform our operating model to better execute on our strategic priorities. This means we continue to execute on strategy 2025 as presented at our Capital Markets Day last year. We are positioning our business to deliver sustainable, profitable growth over the medium term and beyond.At the heart of our strategy is our core dialysis business where we are able to leverage our expertise in services, med tech and pharma to maximize the impact of vertical integration. Within the renal care continuum, we are extending our patient reach, as we strive to treat patients with chronic kidney disease holistically as they move through different stages of kidney disease and the different treatment modalities. From CKD to transplant and from acute to home and in center is where we will support our patients throughout their journey.The Renal Care Continuum represents the next level of our strategy with respect to value-based care. Data analytics and assets can help improve the quality of care for our patients and also help us reduce the financial burden for the health care systems. We are the world leader in value-based care and are on track to further expand value-based care arrangements in the U.S. and leverage these capabilities to other markets around the world as appropriate. Critical care and complementary assets further enhance our ability to treat patients holistically, provide new patient-focused therapy offerings and coordinate patients efficiently, which further ties in to our value-based care capabilities.Sustainability is an integral part of our strategy. We are driven by our patient-centered mission to provide holistic care for patients with kidney disease around the globe.To us, managing sustainability successfully means creating lasting value economically, ecologically and socially. And with the launch of our global sustainability program last year, we strive to continuously improve in these areas.Moving to Slide 5. Our history and experience run deep when it comes to treating patients with kidney disease. Through this, we have gained tremendous experience and developed unique core competencies that provide us with the knowledge and skill to change the way chronically ill patients are treated.With our strategy 2025 and looking out to the future, we have the opportunity to leverage these competencies even further. We have been market movers when it comes to value-based care in order to create better value for patients, payers and ourselves while also expanding into new patient groups along the renal care continuum. We also plan to continue our long history of transforming renal care through innovation, most notably as it relates to new digital tools and medical science enabling both therapeutic and product innovations.Critical care is another area that we are expanding our MedTech portfolio with innovative products, and we see the opportunity to enhance value creation by investing in a new operating model that is oriented towards our key value drivers.If you would, please move to Slide 6. Vertical Integration is a hallmark of FMC's business model. We believe that pairing vertical integration with a fully globalized operating model will allow us to further leverage the advantages of vertical integration. In bringing together our proven capabilities in engineering, patient care and medical science, we believe we can better capture identified growth opportunities, leverage expertise to accelerate value creation, enhance capital allocation, increase transparency both internally and externally, and reduce administrative burden as it relates to cost and speed. And this allows us to advance a culture of clarity, agility and innovation. We have the building blocks in place already, and FME25 will help take our execution and delivery to the next level.Turning to Slide 7. We have been on a journey since the formation of our company. And here, let's take a look at key milestones in the evolution of our operating model. 25 years ago, our business was created with the intent to realize the advantages of vertical integration. The founding of Fresenius Medical Care joined the preeminent dialysis products business with National Medical Care, the largest dialysis service business at the time. This resulted in a global and vertically integrated company addressing patients with kidney disease.Our first quarter century was marked by geographical expansion and market consolidation. When I took over as Global CEO in 2013, the entire business had been run in distinct regional silos. An early initiative of my tenure was to start globalizing our manufacturing processes and our R&D capabilities. In 2019, we established the Global Medical Office to enhance our patient-focused care business model and ensure that we harness the full potential of our global, vertically integrated approach to achieve the best clinical outcomes for our patients, their families and the payer community. Last year as Helen started with her organization in a transformation to a new centralized and leaner DNA model through the creation of global finance, IT and procurement organizations, this brings us to today and now the next step in our journey.We see the opportunity to achieve a different level of value creation. And through the FME25 program, we will reorient the business around key strategic value drivers in a global operating model. This will be fully implemented around 2023 along with enhanced transparency and reporting. The new operating model will not only support our mid-term strategy but also create room to further unlock value and drive greater growth and profitability beyond 2025.Moving to Slide 9. This past February, we announced our plan to launch FME25. The intent behind FME25 is to transform our operating model and position our company for the next 25 years, while, at the same time, supporting the execution of our mid-term strategy. To further strengthen profitability, we committed to invest up to EUR 500 million by 2025 in order to sustainably reduce our cost base and improve operating income by at least the same amount. As part of FME25 we said that we would review all facets of our current operating model with the intent to simplify, streamline, apply what we have learned from the COVID pandemic and the resulting new normals that affect us all as well as further accelerate our digitalization agenda.Turning to Slide 8 -- Slide 10, sorry. In the past 25 years, we have grown by consolidating the market and expanding geographically. In that phase, the decentralized regional model allowed us to utilize local expertise and best practice sharing while optimizing the P&L for those particular regions. Now that our business has gained scale and experience and has matured in many markets, the decentralized approach creates limitations in unlocking further value creation and driving future growth in line with our ambitions.Vertical integration on a regional basis limits our ability to further leverage the benefits that we believe it offers. You can clearly see on the left the redundancy of separate G&A organizations across our 4 regional operating segments and the other global functions. An example for you. Today, we have split responsibility between R&D, product manufacturing and sales. The responsibility for each of those areas is in different parts of the current organization. What is missing is the direct feedback and responsibility for how to develop products, sell into different markets or what are the implications of new product features on manufacturability and distribution. Continuing this way with an ever faster changing innovation cycle from the competition will not allow us to create the value we envision. Integrating all of this in one segment under one responsibility will not only drive efficiency by faster and more effective feedback loops, but it will drive the focus on those innovations that meet market needs or unmet needs in the most profitable way.Understanding these current limitations while recognizing the evolving and changing payer environment and effects from the COVID pandemic have been important factors in the design of our future operating model. In order to drive up value generation and reflect on evolving and changing payer environment with increasing headwinds from macroeconomic inflationary environments, we need to transform our operating model, simply put. We want to reorient our business around strategic value drivers rather than regions, unlock value by increasing reporting transparency and continue our transformation to a leaner G&A model while leveraging new opportunities for digitalization.Join me on Slide 11, please, or Slide 12. This is the planned structure of our future globalized operating model. As just mentioned, by organizing the company around strategic value drivers rather than geographies and streamlining the structure with end-to-end accountability, we can drive transparency, enhance capital allocation, increase operational agility, and enable enhanced growth and returns.Our business will be realigned in 2 global operating segments, which are called Care Delivery and Care Enablement. Each segment will have full profit and loss accountability that we plan to increase our reporting transparency. In Care Delivery, health care services will be designed to strategically optimize our global service offerings in a value-based care future while driving growth in home dialysis and improving our operating leverage.Care Enablement comprises our healthcare products business. This segment enables an end-to-end focus on the highest market growth potential and global return opportunities within our MedTech portfolio. Through the Global Medical Office, we will continue to implement the latest medical, scientific and digital developments across the Care Delivery and Care Enablement segments in a consistent way.The new operating model as well as further developments in digitalization will enable us to sustainably lean cost base, in particular, for G&A functions through simplification, standardization, eliminating all duplication and automating wherever we can in enhancing our shared service solutions.I'll now hand this over to Helen, and she'll take you a bit deeper into the operating model and our planning.
Thank you, Rice. And I'm happy to share with you more details on our planned transformation journey that lies ahead of us. I'm really excited about how we will transform our company to be best positioned for the future and about the value we will generate not only with FME25 but what we can do beyond this based on the new foundation we are laying. I'm honored about taking on the additional role of Chief Transformation Officer and ensure that the plan becomes reality.I will start with Slide 12. Rice has already laid out the overarching model. Now to the question on how will we transform our health care services business. Consolidating health care services into one global operating segment will not only allow the implementation of the latest medical and scientific development at a global scale. It will help us enhance profitable growth. At the same time, and this is really key to us, it will be improving quality and affordability of care. By consolidating the operations in one unit, we will be able to better leverage our global scale, expertise and standards as well as digitalization to improve profitability.Important to me is that the vertical financial accountability within Care Delivery will enhance transparency, profitability and drive a more focused capital allocation within health care services. We will be able to apply our world-leading value-based care know-how originating from the U.S. across other mature markets to address new patient groups across the renal care continuum and to inspire other health care systems. The new setup will enable us to adjust fast to new payer approaches or models like the CKCC model in the U.S.Those of you who know me by now are well aware I'm always looking for opportunities to simplify for the better. Also in Care Delivery, it is key to simplify and reduce organizational complexity. The commercial operations will have just 2 subsegments: the United States; and international. In those subsegments, we will have Renal Care Continuum services and complementary services.The commercial operations will be supported by the shared platforms outlined in the other boxes that you see on the slide. For example, rev cycle management, clinical services and operational excellence. In a nutshell, this will be a fully integrated, efficient and agile health care service business with clear return-focused capital allocation priorities that delivers high quality of care to patients.Let's move on to the question of how our healthcare products business will look in the future, on Slide 13. After the transformation, we will call this operating segment Care Enablement. Care Enablement will become a fully integrated MedTech operating segment designed to focus on accelerating innovation, drive cost leadership and commercial excellence.With an enhanced level of transparency, we will be able to further eliminate inefficiencies. We will be able to allocate capital more strategically balancing short- and long-term return enhancements in a more sophisticated way. In center, home and critical care will become fully integrated product verticals, each with full P&L accountability and encompassing strategy, R&D and product management. The 3 verticals will be supported by shared platforms of supply chain, quality management, manufacturing and regulatory affairs. Our go-to-market strategy will be better enabled by shared business services such as marketing communications and executed by commercial operations in the U.S. and international businesses. To sum it up, this will be a fully integrated global, cost competitive and innovation-leading MedTech business, also with clear returns-focused capital allocation priorities.As to how we will transform our G&A functions, let's move to Slide 14. In the finance organization, which includes IT and procurement, we have started the journey already to globalize G&A functions. Going through this with my team for more than a year, I know it's hard work, but I also know how much value we can generate by doing this. The new operating model will allow us to expand this more efficient approach of globalized or centralized G&A to other functions as well.Moving from regions to segments and leveraging current best practices of utilizing end-to-end process design, digitalization and capitalizing on our scale while optimizing with low-cost locations, that will allow us to truly globalize our main G&A functions, all while adding value to the businesses we support. This will allow us to reduce organizational complexity, drive consistency via our standards and streamline processes, increase functional performance, and establish clear cost accountability and increase efficiency via automations.In G&A, we will adapt a 3-pillar concept. Starting with the business partner concept to deliver high value add by reducing the operational burden and being a strategic partner to the business segments we serve. We'll also create functional centers of excellence focusing on specific expertise and know-how and then global shared services to leverage resources and drive efficiency at scale. Transforming our G&A functions will be an important driver for reducing our annual cost base while improving the quality of internal services.I will now move on to the timing of the journey on Slide 15. Here, I've outlined the next steps and approximate time line for transitioning into the new operating model. We have a clear plan for the complex journey, which we will execute step by step.In this current quarter, we will define and finalize the governance structure and management reporting model as well as the road map to transition to the new operating model. And we will further detail the planned cost savings initiative.In 2022, we will begin the transition to the new operating model. For our new care delivery and care enablement segment, we will design in detail how the new organization model will look on all levels. And then we begin to map the old structure to the new model layer by layer.Within G&A, we will initiate the transition to a globally centralized model and begin infrastructure modifications so that they can support the new operating model as soon as possible. When the operating model is fully in place around 2023, we will be able to introduce our new external reporting with Care Delivery and Care Enablement as the 2 new operating segments.The new external reporting will provide a higher degree of transparency into our healthcare services and our MedTech business, while being simpler to understand, this should help the capital markets to better understand the strategic priorities, growth opportunities and potential future value contribution of the different operating segments. We do not see this journey stopping in 2023 either. Once the new operating model is in place, we will be able to look beyond 2025 to further growth opportunities and potential efficiency measures.Throughout this entire transition to a new operating model, we will strive to advance a corporate culture of agility, innovation and accountability. We recognize this is a time of change for our organization, and we are committed to making decisions in a timely, consistent and responsible manner as we align to the new model.Important to me is that you not only take away what we have identified already but that we will focus on identifying further growth opportunities and efficiency measures that the new operating model enables once implemented. Of course, we work on this in parallel to executing on the identified efficiency initiatives.We also need to be conscious about how much change an organization can manage while operating at full steam still in a pandemic. And it is key to minimize disruptions to our operational businesses.So let's take a look at how this translates to numbers on Slide 16. At the start of the program, we initially estimated onetime spend of [ up to ] EUR 500 million for a minimally matched amount of annual savings. Following our intensive review of the operating model over these past few months, we now confirm the expected sustainable reduction of our annual cost base by EUR 500 million by the end of 2025. This will include an FTE reduction of up to 5,000, which will be managed in a socially responsible way.In the past few months, the entire Management Board has worked intensively on taking the right course for our ambitious plan. Due to the extensive work and progress over these few months, we have already clear line of sight into around EUR 400 million to EUR 450 million of savings. Moreover, we have identified further initiatives that are under pressure testing at the moment, and we will continue to add further initiatives into the funnel.The positive effect of these savings in our operating income will continuously ramp up every year. We assume to have reached the 50% level of savings by the end of 2023. And to achieve these annual savings, we are anticipating an investment level of EUR 450 million to EUR 500 million, and this will be taken into special items. Of this EUR 450 million to EUR 500 million, we expect that we will have invested around 80% by 2023.So how do those numbers now square from a phasing perspective? As previously communicated, we expect that the onetime investment in the year 2023 will be lower than the achieved reduction of the annual cost base under the FME25 program by the end of 2023. This means we would turn net positive with the FME25 program around the end of 2023.As mentioned earlier, with FME25, we have started and implemented the process to continuously identify improvement opportunities, which we will not stop to continue to identify those areas for further savings as well. In terms of where the savings will come from, please understand that we're in final planning stages and changes that we need to discuss with the workers council before we would be able to share more detail.To the extent that we can, we did want to provide you with some idea for what we anticipate to be the major savings categories and how they are contributing. We expect around 20% of savings to come from within Care Delivery. Here, we see, for example, potential to drive clinic operations efficiencies, standardize delivery models and leverage best-in-class products and optimize our real estate. Care Enablement should contribute around 30% of savings with the opportunity to standardize product offerings globally, footprint optimization, productivity improvements and cost of product improvement, to name just some examples.The remaining 50% of savings will come from G&A functions as the global operating model will allow us to eliminate duplication, leverage global shared services, and roll out global standards and end-to-end process. It will also enable us to harmonize and standardize our IT infrastructure as well as leverage benefits of further digitalization.I hope this helps to understand how deep the analysis and detailed the planning is and how significant our transformation will be. This will not only make us more efficient but truly enable new growth opportunities.I will now move to my last slide which is Slide 17. We see FME25 going hand in hand and complementing our strategy to create the future of health care for chronically ill patients across the Renal Care Continuum. We are very excited about the transformation of our operating model and how that will position us to execute on our mid-term strategy while creating shareholder value and establishing a base for sustainable profitable growth beyond 2025.As we continue to move the market with our leading value-based care capabilities and grow our MedTech business with focus on leading innovation, we believe the simplification and globalization of our future operating model will result in greater end-to-end accountability, more agile decision-making and focused capital allocation.With that, I will hand back to Dominik to open up to Q&A.
Thank you, Helen. Thank you, Rice, for the presentation. I would say I'm happy to turn it straight over to Q&A. Natalie, could you please open the line?
[Operator Instructions] And the first question is from the line of Oliver Metzger from ODDO BHF.
The first one is on excess mortality. Could you make a comment how many or which share of the incremental, the past away patients, were vaccinated? Number two is a financial one on inflationary and labor cost increases. So in the first month, you had reported an impact of 120 basis points of margins, which equates to around EUR 11 million compared to last year. Now after 9 months, it's already 170 basis points, which links to EUR 24 million or additional EUR 13 million for the quarter. So could you comment which components drives this position the most and whether we should assume the current momentum to continue even to accelerate for last quarter?
Oliver, it's Rice and Helen. I'll take number one, and Helen will take number 2. So in the quarter, the excess mortality that we saw, the vast, vast majority of that was unvaccinated patients. We know from our data that generally, our vaccinated patients are somewhere around 1/3 to almost -- 30% to 50% less likely to be infected with COVID as a result of having been vaccinated. Now having said that, we had some vaccinated patients that pass away, but it would not be due to COVID. It would be some of the other comorbid conditions, obviously, that you're well aware that they have to deal with through their chronic treatment. But I would say at this point, we believe the vast, vast majority of what we've seen in the excess mortality has been from nonvaccination of patients. And I'll turn it over to Helen for number 2.
Yes. Thanks, Rice. So Oliver, I would say we have 2 components of labor, and I'm going to separate them out because I think it's important to do so. Included in our COVID effect, we have some labor impact in that. As you can appreciate, with the number of excess mortality that we're dealing with, we're still operating some isolation clinics. We are having to adjust comp on adequate workforce and critical pay, float differentials as we keep the clinics operational and manage our way through this COVID situation. And then secondly, I would say, in the labor buckets that you're referring to on the bridge, that's where we have kind of probably a netting effect of the positive impact from the open positions but offset by what we're seeing on wage compression. And obviously, it's that wage compression that we are watching closely as well as the overall labor market as we move into Q4 and into 2022. As I mentioned, it's really important for us -- in my prepared remarks, important for us to see how that open position number develops as we're seeing the current trends. So yes, no, your math is right. But the compression and obviously, the wage inflation is something we're watching hopefully as we go into 2022.
The next question is from the line of Veronika Dubajova from Goldman Sachs.
I have 2. One, just following on, on the labor conversation, I guess. Helen, would love to understand at this point in time is sort of pressure you're seeing primarily driving pressure in the P&L on a cost perspective? Or are you seeing any detrimental impact on revenue growth as well? And I guess, as you think about 2022 and the wage compression that you're observing between the rates you're paying and some of the other health care providers, how much more room do you have before your salaries kind of get to parity and it becomes harder for you to recruit? So that's my first question. And then my second question is just very briefly on the weakness that you saw in the Products business in the third quarter. I would love to understand whether there is anything structural there or just some timing impact. And related to that, I'm going to sneak in a quick follow-on, which is any thoughts on the incremental reimbursement for the Tablo and whether that changes how you're thinking about home through 2022 and beyond in the next stage competitive positioning.
You want 1? And I'll do 2 and 3.
Sure. Yes, Veronika. So yes, on labor, look, I think a massive call out to the North America team. I think they -- obviously, the open positions mean that they are juggling those operations and making sure that no patient goes without dialysis and that we keep everything running as smooth as we can. I would say so far, the impact has been more on managing the cost as we obviously move our employees around to cover what we need to, to keep the clinics operational. Obviously, the situation in the labor market is quite unique and unprecedented for us. And we obviously keep an eye on that weight. Yes. I mean there's a shortage on health care workers in general. There's definitely a war on talent. We expect to have to put more into rate over the course of the next year. But I think it shouldn't be lost on us. In Rice's opening comments about #2 of employers, sorry, in health care services, we are seeing loyalty from our employees that is helping as we've gone through COVID, and it's helping keep that turnover lower. But without a doubt, it's a challenge out there, and we're doing everything we can to kind of keep the recruiting of the open positions. I would say back in the summer, the number was much more significant than we appreciated it could ever be. But the team has done a nice job of bringing that down over the past few months. So I think it's a trend that we're watching really closely, Veronika on how it unfolds over the coming months here, and obviously, a key part of our 2022 forecasting.
Veronika, it's Rice. As it relates to products, I would say I don't think we see something structural or something that's gone awry, if you will. I think it's just, again, the continuation of excess mortality and the knock-on effect that brings you because you don't have patients utilizing products as they're being treated.And then secondly, remember, our Acute business, our Critical Care business ran hot all of last year as a result of what was going on in the ICUs. And that has kind of trailed off in some of the regions. So that's, I'd say, the 2 primary impacts. And then we did have some timing of a couple of things in the export side of the house that we think will come back. We don't think they're -- that's missed forever. Tablo, as you guys may or may not know, so let me just kind of give you a little bit of a brief. The price differential on a Tablo machine versus the NxStage machine is almost double on the Tablo product. And so when you look at [ Tiffany's ] and what it's going to provide, it is not much of a gap closer, if you will. We don't really believe or see that, that's going to be something that's going to fundamentally change the trajectory of our business with NxStage product line versus what we're seeing there. It's just not going to come nearly as close to offsetting that big differential between where they're priced and where we are.
The next question is from the line of Lisa Clive from Bernstein.
Two questions on value-based care. First of all, David is doing a significant amount of investment into 2022 to be able to handle the increase of patients in value-based care, largely on the back of the CKCC program. Can you just confirm that given your history with the ESCO program that you already have the infrastructure in place? Or if that's not the case, could you just give us an indication of what sort of investments we should be thinking about into next year? And then second, just on the trajectory of CKCC you are -- obviously, ESCO program was a significant scale at almost 50,000 patients when you shut it down. How quickly could you get to that kind of figure with CKCC?
Lisa, it's Rice. I'll take those. So we will need to invest in value-based care to the degree we need to ramp up with some extra resources. If the program begins to grow like we hope it will, I'll be happy to spend some money there. But generally, the level of investment that David is talking about, we've been there a long time ago. So your assumption is correct. We're simply going to need to flex labor, depending on how the program is going up or down. Up, we hope. But no, we don't see a lot of brick-and-mortar as we would call it, not in the traditional sense, but a lot of heavy investment. We think we have the systems and the capability to do what we need to do. So we're very comfortable there. And then looking at what happens with CKCC and how quick it ramps up and can we get to an ESCO volume, we've got some assumptions. I think we're probably trying to be conservative and wait and see how this plays out. I think what my guess would be, ramp-up will start slow and then it may pick up later on. We'll have to see how that plays out. But I think we are feeling that we are going to see ramp up immediately. It's going to come. And then we'll see is it really going to exceed where we were exactly where will the place be. But we're prepared, and we're ready for it to kind of rock and roll when we go into the new year.
Okay. And then just a follow-up. Just on the revenue recognition, given the significant delays that you saw in ESCO, as you do ramp up CKCC and get several thousand patients enrolled in that program, will you recognize the revenue -- at what point will you recognize the revenue? Will it be like an 18 to 24 months delay? How should we just think about the modeling of that?
Well, they don't let me talk about revenue recognition, so let me turn it over to Helen. Go ahead, Helen.
Well, I think like with the ESCO program, we had to obviously put our best estimate of what the savings would be and then it was trued up once we got the report. So I'm anticipating it will be a similar situation, Lisa, that we will always be accruing to the latest reports that we get from them with an estimate of what we think those savings will be. And obviously, the experience as we go through the quarters and so on will get refined.
So at some point, the revenue recognition should roughly match up with the quarter that it's in?
Yes. Exactly. Exactly. Yes. And we learned a lot from ESCO, too. So...
The next question is from the line of Tom Jones from Berenberg.
Two questions. The first was just on hospitalization in COVID patients. We talk a lot about mortality. But I guess the other side of the volume coin is the issue of hospitalization. Because I know you picked some of that up through your Acute Care business, but perhaps not all. So I guess I wondered if you could make some comments around kind of hospitalization rates amongst your COVID-positive patients and whether the same-store volume growth perhaps isn't as bad as it looks because as well as losing patients to mortality, you're perhaps losing more than usual to treatments in alternative sites. So just wondered if you could put some color around that? And then the second question was just on the final rule as it pertains to the ETC model. They seem to make some vaguely sensible adjustments to it, but I'm just wondering what your perspective on the final rule for the ESRD treatment choices model would be?
Tom, it's Rice. Thanks. I'll take those of those, and Helen will jump in when I go astray. So when we look at hospitalization of COVID, cohort of patients, our acute care is down somewhere around 2.5%, 3%. So we've seen some decrement there. And then when we look at the -- or looking at the ETC, we got that as you did on Friday. So we're trying to unpack how we see some of that. I do think we were happy to see that what we had believed was a little bit of discrimination about large LDOs versus smalls and some of the things that were going on there that seemed to kind of gotten rationalized, if you will. But we're going to need to do some more work on that and unpack it. As you well know, it's not the most straightforward model that we're dealing with. But we're going to see each other here pretty soon again, and I'll come back around. And hopefully, we'll get it unpacked by the end and we can chat about that. Did I leave anything out, Helen?
No. No.
Sorry, just to clarify on the hospitalization thing. I was talking a bit more about the impact of COVID-related hospitalizations from your incentive patients going into hospital and therefore missing treatments. So I just wondered how much of a factor that was in the dip in same-store volume growth that we saw in Q3.
I'm going to be probably making a guess on that. Can I come back to you on that time? Because as I said to Oliver earlier, our situation on hospitalization and ultimately, the excess mortality was on the nonvaccinated. But let me come back to you on that. Maybe we can even get back to you before we get off the call, okay?
Sure. No, that would be helpful. I'm happy to hang on.
The next question is from the line of Patrick Wood from Bank of America.
Perfect. I'll keep it to one, and I'll try and make it one that's impossible to answer, if I can. I appreciate you guys -- you didn't want to talk about '22, but if I think of it as just the basic bridge, right, you've got little bits and pieces like California. You've got mortality as you flagged across sequestration, cost inflation. But then on the flip side, you've obviously got good patient starts and some of the cost savings. So I guess, if I ask it in as open-ended way as possible to try and fish for an answer, at this stage, when you're just conceptually looking at it from a top-down perspective, is it possible to commit to any kind of EBIT growth next year? Or is flat EBIT year-on-year, or any other metric you like, still on the table as a possible outcome?
Well, Patrick, you know me well enough by now to know I'm not going to commit to 2020 guidance rates in November. But look, as you can all appreciate, there's a lot of moving parts for 2022. I think you've characterized a lot of the pluses and minuses appropriately. And Rice and I were chatting earlier, and we tend to talk about what we know and what we don't know. And a lot of those things that you've mentioned, I think we know. We can see the annualization of COVID, even though we don't know what Q4 truly looks like yet. We know where we are with sequestration, the ballots, we can make some assumptions on labor and inflation. And then I think on the positive side, we do expect volume to recover. And then for us, particularly, don't forget, when our volume recovers, all the downstream effects that have hurt us this year should also recover as well. And then, of course, we've got the kind of the continued growth in VBC and CKCC coming online, a little bit unknown on GPE on what the protocols will be. Obviously, as you've already noted, the Medicare reimbursement rate helps. And then I think we obviously have FME25 that we'll talk about in the next hour of the call. So a lot of moving parts, and we will triangulate all of that with you with new bridges as we get into February. But as you can appreciate, they're all on the table and all being reviewed as we are actively going through our 2022 budgeting process right now.
The next question is from the line of David Adlington from JPMorgan.
So firstly, just on the staff vacancies, I just wondered if you could sort of quantify how many there are currently versus you would normally have? And what sort of tailwind you've had from those open positions? And how you expect those to be filled going on from here? Or do you just not feel them as part of the FME25 program? And then secondly, on the Products business, you called out the cost inflation on the raw materials. So sort of roughly how much you spend on plastics in a given year what sort of inflation you're seeing?
Yes. I will have a go at the -- both of those, actually. The staff vacancy is, I don't have the latest number other than we were seeing higher-than-normal early part of the year, and that's coming back and being filled as we go. But definitely, we are not -- and I want to reinforce that significantly. We are not leaving staff vacancies in clinics. Our operations open as a result of FME25. FME25, we'll get into in a bit more detail, but that is not just leaving open positions as a path to get savings and not part of our strategy. But we can follow up on what the latest number was. I know back in the summer, we had about 6,000 open positions. I don't have the current number right now at hand. But we definitely are doing all we can with active campaigns to recruit and fill the positions. That's really important to us. And then on your question on the plastics. I would say I don't have the exact amount of the base of plastics, but we definitely are seeing a low double-digit million euro impact in 2021. So you can kind of -- maybe around the EUR 10 million impact in 2021 on those inflationary measures. But I don't have the base number to hand, David. Hopefully, those are both helpful.
And have you entered into sort of contracts on those plastic prices as you expect more inflation next year?
Yes. I mean they are standing contracts, but they are linked to the kind of the commodity indices. So you take the rise and the fall with those. And obviously, again, trying to predict what impact that could be next year as part of the '22 numbers.
The next question is from the line of Falko Friedrichs with Deutsche Bank.
Two questions as well, please. Firstly, on excess mortality. So when we checked your Q2 presentation from the end of July, the excess mortality figure you gave for Q2 at that time was 1,489. When we look at your presentation today, the number for Q2 was revised up to 1,903. So that's almost a 30% increase. So maybe you can let us know what the reason was for that very steep increase here.And then related to that is how big is the risk that your Q3 figure that you presented to us today will be revised up that significantly? Again, and all of the sudden, you might be looking at some risks surrounding your 2021 guidance. So any kind of comment here would be very helpful for us.And then secondly, on vaccinations. I think we've all been a little surprised that the number is only at 78%, given that your dialysis patients, obviously, in the super high risk group. Were there some logistical problems or other stuff that prevented some of the remaining 22% from getting a vaccination so far? Or can you already say that the 22% is unvaccinated, they are very unlikely going to go for it and they just feel like they're better off without it, that would be helpful, too.
Falko, it's Rice. So you're absolutely correct on the change in the mortality, and it really is in the case of simply, we had about 400 registered deaths come in after the quarter had actually closed. And that's really kind of just, how shall I say this, is not a good way to say it, but the actual passing of the patient happened within the second quarter, but we didn't get the material back from the hospital system, if you will, where the pass occurred. Now in the case of what we're looking at now, I think we believe that there's a little bit better system. It moves a little better than we had imagined. If you look at the end of Q1, we were only 60. So it's a little bit variable, so we'll have to see where that goes. But we will always catch up and report, where I'm glad you asked the question, so we'll let you know what it is. I don't think, at this point, we believe we have no way to judge does it mean we're going to be off in Q4 or what's going to happen, but we'll keep -- we'll give you those numbers so you can see that. Now on the case of vaccinations. We had no logistic issues. We had no problems there. This really comes down to, and this is predominantly a comment about the U.S. It's just simply that people have refused, many religious reasons, other, I might say, foolish political reasons, whatever you want to say. As you well know, we worked very hard. We've had campaigns. We're doing everything humanly possible to get as many people vaccinated, but we cannot make them get vaccinated. So we don't think 78% is a great number either. I'd love to see it be 90%, but they're not many 90% around. So it is just simply a matter, it is an individual decision. And before COVID ever came, Falko, we know patients that would refuse to stay on their treatment for the full 3 hours and 45 minutes. They would say, "I've got to go somewhere. I need to come off the machine quicker. I want to get out of my treatment earlier because I have to go here or there or some place else." So we do the best we can do to encourage, to help people understand the importance, but we don't have the ability just to force them for vaccination.
The next question is from the line of James Vane-Tempest from Jefferies.
Two, if I can, please. Firstly, you've highlighted an expected decline in mortality in Q4. I'm just wondering, because last year, there was a spike, I think after Thanksgiving, and there's a bunch of uncertainties here. So my question is, is lower mortality in Q4 required to meet your revised guidance at the low end? And to quantify guidance as well, if there's no further FX headwinds or changes in Q4, would that be around a 5% negative impact to reported net income? And then my second question is -- and I'll try my luck just like Patrick did. I guess, thinking about 2022, is Q4 a good quarter as a starting point to think about 2022? Or are there any seasonal one-offs we need to think about? And outside of the positives and negatives we've discussed in terms of the moving pieces, are there any catch-up effects we need to consider as well from trough levels this year?
All right. You want to take some of that?
Yes. So James, I'll take 1 and then Helen can pick up 2 and 3. So when we look at the expectation we have for getting a decline in excess mortality, we're really looking at that, thinking about the fact that with continuing, albeit slowly, but continuing higher vaccination occurring among our patient base with the boosters now being available and being out there, and we have a push, as I'd mentioned in the prepared remarks, of trying to get all of our patients in the U.S. boosted before November 11. And then just hoping that we continue to see kids getting vaccinated because we have pretty good data that says people haven't caught COVID in our clinics. They catch it at home, in the community, et cetera. We think that it's a fairly good expectation for us that we'll see some lessening of this. Yes, the one big risk point is what happens in the holiday season. I don't think we've blown out exactly at what percent do you think it gets in the way of guidance. As we've looked at this in the big picture, Helen, I think we believe it's manageable if we're close to the assumptions that we've made on, what I would say, would be the improvement in not seeing as much excess mortality. And you want 2 and 3?
Yes. Yes, yes. So James, your question on FX, not part of our guidance because we guide in constant currency. I think the -- when you think about Q4, Q4, obviously, being the guidance range of Q4 is looking like a big decline, and there's some things in that, obviously, COVID effects in Q4 of 2021 looks a lot different to Q4 of 2020, if you can kind of -- if we can all even think back that far of what COVID looked like in Q4 of 2020. And then we did have some onetime favorable year-over-year impact in 2020 as well from the equity investment, which was around EUR 25 million. So I think the phasing and that is probably not -- Q4 growth rate, probably not the best one to be taking. And of course, we'll lay that out in much more detail in February. But to Rice's point, we have an assumption of excess mortality for Q4. We will see how that translates and what the jumping off point is in excess mortality. And I think that's the key for going into 2022 on where we're starting from. But I think right now, we have a pretty -- as good an assumption as we can have with the infection rates and how that 4- to 6-week lag translates into excess mortality. And then as we get closer to the end of the year and early part of next year, we'll be able to finalize those assumptions on mortality going into '22.
Natalie, give me one moment, please. Tom, we did some look here and a little bit of quick math. I would tell you, in the quarter, we're thinking it's probably somewhere around 100,000 treatments or so that was the impact of the excess mortality.
So there are no more questions at this time, and I hand back to Dominik for closing comments.
Yes. It's not really closing comments. So thank you for the accident question you have handed in and asked. This is appreciated. I hope you still have enough energy for the next agenda point, which is FME25. So we want to give you a short break. Please stay on the line or in the webcast. Don't discontinue. We will be back here at 4:25 CET or 11:25 ET, and we'll mute until then.[Break]
[Operator Instructions] And the first question is from the line of Veronika Dubajova from Goldman Sachs.
One, just, Helen, would love to get a little bit more color from you, in particular, on the G&A piece. I mean, obviously, it's a fairly significant proportion of the savings that you're expecting. And maybe if you can give us a little bit of flavor for the structure of that function where it might be located and just give us a bit more detail on how that accounts for 50% of the savings since it's pretty substantial in the context of the plan.And then apologies, Rice, but my second question is also for Helen, which is Helen, you've obviously transformed other businesses in your prior roles and just looking at this transformation plan with your new CTO hat on kind of curious what you see as the biggest risks to the execution both from a time line and magnitude perspective. And I mean, of course, Rice, you're welcome to weigh in on that as well.
Yes. Thanks, Veronika. Yes. The G&A is significant, but I think very doable. When you look at the picture that we walked you through that shows kind of 4 regions, each with their own G&A structure, you see some of the global functions each with their G&A structure, that regional model works for us for a while. And the approach we've already taken with finance, IT and procurement, in particular, is to do a lot of benchmarking. We've done detailed analysis of what work gets done where and then taking a step back to say, how do we do it different.And I think that 3-pillar model is key here. And the business partnering, we obviously want the best business partners we can, supporting the business and supporting the strategy of the business. And then we want to build out true centers of excellence. Not everybody in the region -- and I don't mean to be disparaging at all when I say this, but not everybody in the region is a tax expert or a treasury expert. So how do we build those centers of excellence where we build these capabilities and consolidate that experience?And then shared services. We do have shared services around the globe. They're very regionalized, but again, they're not really focused on true end-to-end process and automation. In terms of where the work will be done in the future, I can't comment too much on that because of the workers council consultation. But we will, obviously, look to do it in a more streamlined, consolidated efficient way, taking into account the cost structure. But truly, the key here on G&A, Veronika, is really consolidating and reducing the duplication.Within G&A, there's obviously the functions themselves. There's also kind of a significant IT transformation that needs to happen in using technology. And also, as we continue to -- on the journey of procurement, really globalizing procurement and getting some significant savings there as well.In terms of your question kind of wearing a new CTO hat, have I done this before? Yes, and it's different. There's a lot of things are the same, which is about how do you go through such a change in the company that make sure you create the right priority, that it's tied to strategy and you create the right culture for the future.In a previous life, I was involved in taking 2 companies into 1. This is taking one company and transforming it and really aligning around the strategic drivers. So I think it's -- as we move from a regional view to a segment view, there's a lot that has to change internally, mapping our international regions to the new segment, kind of splitting some of the businesses into products and services where they've been probably integrated in the past and then transforming the overall back office support if you will.Obviously, our management reporting and systems need to come along on that journey as well. So I think the key is we kind of also focused on in terms of significant pandemic right now the -- trying to stay focused, making sure we're not disrupting everybody. That is really -- how do I say this? But we've got very detailed integrated project plans that we can move through at pace to get to where we need to by 2023.And I think the value unlock in people really being able to see our 2 segments and the profitability that goes with them, what we're truly excited about. But the fair amount of work ahead of us and we acknowledge that.
The next question is from the line of Oliver Metzger from ODDO BHF.
First one is I understand it's a trade-off between the low-cost strength and centralization. So for some areas, the reduction of cost and expenses. For some, it might be harder. To which extent have you evaluated to leave certain areas or regions of the new strategy?And the number two is you execute a massive transformation in your organization, so it appears that the product business with a more centralized characteristic might be also eligible to be separated at one part of time. So could you share with us some of your views why an integrated offering of dialysis service and products would make sense? And where do you see the synergies in future?
Yes. So Oliver, on your low-cost locations and centralization, I fully agree that there are trade-offs to be made. But I think particularly where -- you look at these areas of expertise in the shared service world. You obviously have to take a long hard look at where your -- what is a global hub or what is regional, so looking to see where capabilities exist and where the locations best set for our business is key. And I think there's different trade-offs for business partnering if there are centers of excellence to what there are shared services, and we have to make sure that we have all things in the right place. But ultimately, we're here to support the business. So if we can support the business better in a more efficient way, that's what we plan to do.Obviously -- and I think if I understood your second question correctly, it's about we have some countries where they already have products and services and they're sitting in a region and how do we think about the transformation of those countries where now they're sitting products and services. I think the first thing I would say is bringing all of the product pieces together under one MedTech umbrella is a big move for us and a critical one. The example that we gave shouldn't be lost on you so that when we're really trying to think about innovation, where we invest our product offering, our R&D pipeline, the cost structure for products, that all being under one umbrella is really key.And then the same on the services, right? We've got some businesses that are purely services and majority of services. Don't forget, on our journey, we have about 100 countries that are products only and about 50 countries that are products and services. And we have to be thoughtful about how we handle those countries that have both and aligning them to where the value unlocks, can be in the services vertical.And I think the disruption there is something that we're very mindful of and are trying to minimize so that we can get at the maximum opportunity to unlock value in those services businesses. But obviously, the split of international and North America -- or I should say, international and U.S., excuse, I have to get used to that, will be key as we stand up those verticals.
Yes. Oliver, your part 2 to that and maybe to your question 3, if you're thinking that would we ultimately end up at some point spinning off 1 or the other, that's not the intent. We still completely believe we are unique in vertical integration, and moving to value-based care makes the most sense. But we recognize we've gone about as far as we think we can effectively go being regionally focused and being able to go into these 2 reportable segments, shine lights on what we want to get done and how we want to do it makes the most sense.This is not, in my mind, in any stretch, a precursor that we would spin something off. In fact, we think we're going to be just as tight as we need to be, but we want to look at it and eat the elephant in a couple of smaller bites, if you will, in order to maximize the value that we believe sits within our capabilities.
The next question is from the line of Lisa Clive from Bernstein.
Just, clearly, there's a lot of mention of sort of shifting the services organization to be ready for more value-based care opportunities. Can you give us some comments on what your VBC platforms look like in markets outside of the U.S.? I remember a few years ago, you were doing a bunch of things in Portugal, maybe also in Spain. Just wondering whether you're starting largely at 0 in the international markets or whether there are some pilot programs going on.And then in Care Enablement as a sort of independent business unit, how should we think about -- and you mentioned sort of innovation potential in there. How should we think about the focus for R&D there? I mean is this something where you'd be interested in doing more work on wearable kidneys? There's been a lot of academic work here, but it always seems like an actual product is a decade away. But this is clearly something that you guys would be uniquely positioned to be good at. But at the same time, big companies are not necessarily known for innovation. So is this an area where actually you'd be looking at more sort of small M&A tuck-in targets?
Yes. Thanks, Lisa. Look, I think the idea about the -- you're absolutely right, value-based care, key part of our strategy, and we, obviously, have some significant success here in North America and really excited about the shape of these models in the future. I think the benefit of putting the international service market under that umbrella is that we can apply those learnings and look out for opportunities elsewhere in international where they make sense.I mean there's no doubt, right, the entire health care system is looking for better outcomes at a lower cost. So we want to be prepared for those developments in the international markets.I don't have -- Lisa, I don't know if you do. I don't have the history of Portugal, what we may have done there, where we are with that honestly. But I think it's just trying to get us prepared for those markets that may evolve in the future, and we've seen some of that in Asia Pacific.
Yes. I would say, Lisa, given your history and my history together, Portugal is not as far as long as we had thought. They were really looking at some pretty creative things a while ago, and I think the economy and things kind of got in the way of that. Spain is actually doing some pretty interesting things. Nobody does value-based care exactly like we do in the U.S. since the payment systems are different. But what we find is health economics and being able to go in and give governments and payers a sense of here's what value-based care does; here is what better outcomes, et cetera, will lead you to; and would you guys ever think about working in more of a concept of us being able to think about how would we look at reimbursement versus the things that we're doing with the outcomes and the interplay between there.Those are things, I think, will develop over time. My crystal ball didn't tell me that 2 or 3 years from now. But I think everything we've learned about predictive analytics and the way we take risk just is now going to be more shareable. It's going to be more transportable as we look at the opportunities that present themselves in that regard.And on your second question, it's a good question. What I would say is I'm excited about the fact that by putting people in these verticals, now we have a set of people that get up every day and I'll just focus on home at a moment, and they live and die by home. And then there's a group for critical care and a group for in center. And we will put the R&D functions in those appropriate verticals.I think when we had more of a massive people trying to do a little bit of everything, it wasn't nearly as effective as it can be. When you get people in a much simpler environment, you make them accountable, and you sort of turn them loose to go do things.When you think about innovation, remember, we still have our venture fund, and we are invested in a number of places. I think if you remember, our investment in Humacyte and the relationship we'll have with them for acellular vessels and being able to solve a huge unmet need, that PTFE grants -- grafts don't really last forever. They tend to be pincushions. They leak. A natural living vessel is going to make this a lot easier for people.I think the wearable kidney may not actually be a mechanical wearable kidney. I think what we're really thinking about is eGenesis and xenotransplantation. I know you're aware they just had that done successfully in New York City. We have an investment there as well. I think the ultimate wearable kidney is more transplantable kidneys, whether they be human or be porcine. So I think those are the things that we believe by standing up these verticals and getting people focused within their area, it's going to allow us to be faster, be quicker if you will.
Okay. And then, Helen, can I just follow up? In terms of the new reporting structure, are we actually going to get margins for the products business separately for the first time? And will we lose the granularity on the regional split?
That is my intent, Lisa, that we would have margins for the products vertical, the services vertical, and we will report revenue on the geographical split. But we'll be able to -- it's going to take some time for us to get through this in 2022, but we're going to tease out the full P&L for Care Delivery and Care Enablement. And that, quite frankly, is why the G&A transformation is so important. We need to kind of be able to get -- right now, we have margins on regions and then we have corporate costs, and then we have G&A. Our goal is to kind of streamline the G&A and then have some, how do we call it, pragmatic allocation methodologies back to the operating segment so that we'll be able to show a full product P&L for both Care Delivery and Care Enablement. And yes, I think that's really more meaningful for us as we move forward, particularly on how both segments will evolve over the coming years.
And we'll figure out the KPIs that go with those. All of that's kind of what we're going to be busy doing next year as well as the remaining part of this year.
The next question is from the line of Tom Jones from Berenberg.
I just had one kind of big picture question really. There's been a lot of focus on the EUR 500 million reduction in your cost base. But actually probably what's more important is the kind of EUR 15 billion of cost that you still have once you're done with all this because if that EUR 15 billion grows at 1% quicker than you expected for the next 3 years, then the EUR 500 million is kind of gone and that you end up at 0.So I guess the question is maybe you could pull out from all the slides and all the information you've given us. What are the 3 or 4 key things within this transformation that you think will sustainably reduce the rate of cost growth within the business rather than just eliminate cost on a kind of one-and-done basis? What are the key things that will stop that EUR 15 billion from growing faster than expected and effectively negate all the efforts you've made to save costs on an absolute basis in other parts of the business?
Great question, Tom. And for me, it's FME25 is not just another cost efficiency program, and I think we feel very strongly about that. This is about organizing our company along with strategic drivers, getting a lean cost structure. But I think more importantly, it's setting us up for future growth that we can lever that infrastructure, that will be leaner for sure, that we can drive the top line and make investments in capital allocation that will be more accretive than maybe what we could do in the current structure. So I think that's the important piece. It's the value unlock. With that dedicated focus on services and products and the investment in the kind of the innovation and the new models that we think we'll see in services, that for us is the exciting thing. I think that's what -- that's why could we have kind of come at this program with just a hatchet and cut costs? Of course, we could, but that wasn't what this initiative was about.This truly was a blank sheet of paper strategic exercise aligned with our objectives of CMD and then saying, how do we prepare ourselves for future success and head off challenges that we know we're going to have that we probably don't even see today. So I think you see the underlying kind of realistic cost base, Tom, that we can use to grow. But the focus and the strategy is coming from Care Delivery and Care Enablement leaders, I think, will be a big enablement there.
Yes. Tom, if this were just a little bit cost cutting, we wouldn't necessarily have to go through the operating model change and what we're doing. I can tell you the best experience I've ever had in my career short of my 25 years at FMC was being in a business model structure where we took a big animal and we carved it up in some verticals, and I got put in a vertical that they just said go make it happen legally, compliantly, et cetera. But it's probably the most fun I ever had selling when I did that because we really woke up every day focused on that one thing and not worry about the overall big business and all pieces of the business.But there's no question that the operating model and the creation of value here really comes from focusing people in a different way. Doing our business differently, I mean we're probably never going to go back to the kind of travel expense we used to have, but we figured out virtually how we can do some things quite well. It is really kind of the summation of everything we've learned going through COVID. What Helen's learned in her lifetime and what I have seen as an old products guy when you break down that big products business into verticals and you get people focused on it.It's going to take some of all of that, but there is absolutely no intent that we're going to run through this EUR 500 million and the EUR 15 billion is going to become an albatross around our neck. You deal with that and you manage that because you've got growth in new markets. You've got new products, and you're back into kind of a growth mode that everybody wants to see us back into.
And then just one technical question on the implementation. Where are we with the federal monitor because I'm actually trying to do something like this for the federal monitor snooping about the places, kind of an extra layer of annoyance you don't there. Are we done with that? Or is that still running for a little bit?
Yes. So we are still in the monitorship, and we are hoping that, that will relieve itself of us next year towards end of the year. But we sat down with the monitor and we've had very open discussions about what we think we can do within the work that's going on and that it shouldn't upset or interfere with where we're trying to get to with the monitor. And then there are some places that we don't think it's prudent that we would be make any change at this point in time.So I think we've reached an agreement as to how we'll do it. And I would say to you, yes, we won't go as far as we might want to because we need to make sure this monitorship is closed out in the effective and appropriate way. But we thought through that. We've had discussions on it. A federal monitor sounds ominous, but I -- and it can be. But I would say we've got a good relationship with our monitor, and they want to see us succeed. So I think we've made some provision for how we're going to work our way through that, Tom.
The next question is from the line of James Vane-Tempest from Jefferies.
I've got 2 if I can. Just kind of curious, how much of this is inwardly looking within FME's business versus any changes to the patient experience? And how do you think about patient continuity in managing execution risks when there are so many changes to the delivery model? I also -- as I remembered a few years ago, I think there was a change in the patient onboarding process in the U.S., which resulted in fewer corporate patients and a material impact to the business. So I'm just kind of curious how you're sort of managing and thinking about sort of inward versus outward.The second question I've got is just regarding sort of structuring towards vertical financial accountability and full P&Ls. I'm just kind of wondering, does this extend to looking at allocating existing financial leverage between the different businesses? And is that part of the strategic review? Because if the company is being run by operating segment rather than by geography, are all the individual businesses within each of the operating segments core? Or does this present some other streamlining opportunities? And does the structure also give more options potentially to the broader review being carried out by Fresenius SE?
James, it's Rice. I'll take one and then Helen will take number two. So when we started debating, looking at how we were going to go forward, what's the plan, where do we go, there were a couple of things that were absolutely foundational. One is that this -- yes, it's inwardly looking, but at the end of that view, it's got to be patient and the patient experience can only be equal to or better as we go through this process. So we have been hourly focused on how do we make these things work and the patients never miss a beat. The only thing they will feel is even more individualized treatment and better outcomes.And we've tried to think our way through that as it relates to payers as well as regulators, back to Tom's question about the monitor in the U.S. government if you will. So we've tried very hard to make sure that we're going to do this in exactly the right way and that we won't wake up one day and feel like we did a great job and find out the patient experience hasn't been what we wanted it to be.In fact, I think this helps us continue to do what our patients are telling us. More of them want to be at home. We're going to continue to find ways to make that happen for them, et cetera. So it really is not meant to be so inwardly looking that we forget the fundamental purpose of what it is we get up and do every day, whether that's in enablement, in its innovation, in production, in distribution of goods or if it's in delivery where we are truly touching patients.
Yes. And I'll take the second one. Thanks, James. This is a big question. And I think how I would answer it is, of course, as we structure around the verticals, capital allocation and how we think about as you kind of used the word allocating leverage is key. My anticipation is the leaders of those segments will be taking a strategic review at all components of that. And as we move from geographies to having kind of quite clear visibility on the profitability that we don't necessarily have today on an operating segment deal, we will really take a hard look at that to see where we can unlock value.And I think that's the key driver here, is how do we kind of continue to unlock value as we think about being a services company and a med tech company and a blend of the 2 where the transparency and visibility is hard to tease out. I'm not going to comment on what the broader review of FSE is. I think our intent has always been to maximize the shareholder returns for FMC, and we do believe that organizing around these segments will do that for us. And as I mentioned to Tom, it's more than just the efficiency program. It's really the focused review of these segments by these leaders in the future on where we can invest or divest if the kind of the -- the performance isn't where we needed to be to unlock value to ultimately deliver even more on the top line and bottom line.
And just to clarify that, sorry, so will we get full P&L down to net income with sort of debt allocated between the different businesses? Or is it just going to be down to the EBIT level, just to understand?
Yes, yes. No, I think that's something we have to work through. It's probably more likely to be down to the EBIT level but with G&A allocated getting all the way down to the -- maybe I misunderstood your question. Allocation leverage, yes, I think that's going to be quite challenging to do. But getting it down to as much detail as we can in a way that makes sense and it's pragmatic for us, James.
The next question is from the line of David Adlington from JPMorgan.
So I might be being a bit slow. It's certainly been said before, but I'm not sure I get the cadence of the EUR 500 million, so year 1, year 2, year 3, how should we be thinking about how you get towards that EUR 500 million, particularly for next year. It will be useful just to have an idea of what you're thinking about in terms of savings.And then just on the Care Delivery segment, just sort of talk about clinical operations efficiency and standardized delivery models. I would have thought that's something you've been sort of doing already. So I'm just wondering what's actually kind of new here. Just a bit further color would useful.
Yes. As far as the EUR 500 million phasing is concerned, David, we'll give the details for 2022 that we've assumed when we do our guidance in 2022. What we have put out there today is that we expect about half of those savings to be delivered by 2023. So in broad brush, you should expect to see a full EUR 250 million of saving improvement in our P&L by the end of 2023. And then on the onetime cost, we said that those costs will be more front-end loaded. We should be about 80% of that through 2023. And as we're finalizing these plans and how we can get to work, particularly as we're navigating some of the workers council consultation, of course, we'll be able to refine those numbers in a little bit more detail for 2022. In terms of Care Delivery, as you think about the clinic operations, of course, that's what we do day in, day out. But what we're looking at now is to say is there any further opportunities with -- as we think about all of our clinical infrastructure to make improvement in that overall overhead and how it's run, are there any benefits that we can apply from how we run the North America clinics, for example, to the international operations? Are there things within the clinic operation even within the globe that are duplicated today? So can we streamline those structures and overhead structures that do we need different systems, different platforms, different ways of doing things? So that's how we're thinking about Care Delivery.But of course, we're always trying to run those operations as efficiently as we can. Now it's [ leveraging ] that scale on a global or centralized view rather than 4 individual regions.
Yes. I mean if you think about it, David, it's 20% of the 30 enable and 50 G&A and part of the 20% is because they are pretty darn efficient. But look, nothing stands still. So we grew up with one employee health record, one clinical data management system for international and one for the U.S. And guess what? Those are getting old, and so what we'd really like to do is have one system that's extremely efficient across the world. So those are the kinds of things that we're looking at from an efficiency standpoint, where out of necessity years ago, digitalization wasn't in a place that allowed us to have one answer for a global question. We think this is going to give us the opportunity to be able to do that from the transformation.
The next question is from the line of Christoph Gretler from CS.
Just one question with respect to this cost saving program. Is there any kind of intention to reinvest some of these kind of savings to drive growth? So is this basically purely kind of net saving, the EUR 500 million net saving kind of that we basically after tax could kind of mechanically add to kind of in our models?And the other question is just I don't want to spoil kind of your day. But just wanted to come back to these mid-term targets you set out back in 2020 at the Capital Market Day of high single digits kind of net income growth of this kind of huge 20 base, kind of. How should we kind of see that kind of in the context of this FME25 program?
Yes. Thanks, Chris. I think I'll take the first question. So right now, the way we're thinking about the EUR 500 million savings from FME25 is that, that will help offset the impact from the decline in net income from COVID that we've experienced. At our Capital Markets Day back last fall, if you recall, we said that with the outlook that we had that we would create additional firepower. And we had said around EUR 5 billion at that time, and that was pre COVID but that we would invest -- we would look at opportunities to invest in ourselves. And that's how I think about this EUR 500 million of FME25 investment that this is an investment in ourselves to drive a sustainable lower cost base.Now does that mean that we're not going to do any other investments? Of course, not. I think the phasing due to COVID probably looks a little different than what we did when we were at Capital Markets Day, but we will -- and I think this is the beauty of the operating segment now is that we will continue to look for opportunities to invest to fuel growth, whether that be acquisitions or partnerships. But those -- now that fueling of growth will now be very, very closely aligned to the strategy in the Care Delivery and Care Enablement. So we see this as helping offset the COVID effect, but obviously, that sustainable cost base, helping to continue to create that firepower so we can invest in even more growth opportunities in the future.And Rice, you'll take the second question?
Yes. Chris, hey, you're not going to ruin our day. Don't worry about that. Ask your question. Yes. No. Our mid-term targets are still alive. Now the phasing may be a little different throughout the planning period, if you will, but no, they are still alive, living, breathing things that we're working to make sure we bring those home. But I would say the phasing may adjust a little bit as we get further into this.
We have a follow-up question from Lisa Clive from Bernstein.
Just a question on the international services business, and I guess we'll have a bit more visibility now that products will be reported separately. But it does look like that business just gets a bit less profitable as the year has gone. I guess it's probably because you're expanding into lower-margin regions. So how should we think about the footprint of the international services business? Is a potential rationalization of that footprint in the cards? Or is that something that you would get to once this corporate reorganization is sort of more firmly bedded in?
Yes. It's a fair question, Lisa. And I would say, look, is there going to be a rationalization? Sure, we're going to turn over every stone. We're going to look at it. We've got emerging markets that actually do very well. I mean along comes some trouble like COVID and reimbursement is not great. So we have to go through and think our way through that and evaluate those kind of situations.But part of the discipline, I think, that we'll bring into this process is if we're in a place where it's marginal profitability, how do you fix it and if you have a plan to fix it, you go fix it. You mitigate whatever the issue is. If you give it that try and it still just doesn't seem like it's going to work, then obviously that's a different decision that we have to make.But we've got great operators. Everybody is pretty realistic and upfront about what they need to do. So we're going to do the work. We'll do the evaluation. We'll figure out how to fix it. And if there's something that just makes this unfixable, then we'll have to deal with that as well. But I'll put my money on our operators. I think we'll figure it out. But we want to be ruthless about our efficiencies and the things we need to do to make sure we can fix something and how is the best way to turn something or as we go through the process.
There are no further questions at this time. I hand back to Dominik.
Thank you, Natalie. Okay. We have no further questions, then I would say, ladies and gentlemen, thank you very much for hanging in for such a long time with that call. And this is highly appreciated. And see you soon, hopefully. Take care. Bye.
Stay well, everyone.
Thanks, everyone. Bye-bye.
Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.