Fresenius Medical Care AG(FMS) - 2023 Q2 - Quarterly Report

Introduction The report details the proposed conversion of Fresenius Medical Care KGaA to an AG, aiming for FME Group's deconsolidation from FSE KGaA to enhance flexibility Introduction The report details the proposed conversion of Fresenius Medical Care KGaA to an AG, aiming for FME Group's deconsolidation from FSE KGaA to enhance flexibility - The company plans to change its legal form from a partnership limited by shares (KGaA) to a stock corporation (AG) under German law[26] - A key objective of the conversion is the deconsolidation of the FME Group from the consolidated financial statements of its parent company, FSE KGaA, due to a loss of control under IFRS 10[26] - The conversion will maintain the company's legal identity; it is not a liquidation or the formation of a new entity. Shareholders' stakes will not change, but the General Partner will exit the company[28] - The change is anticipated to increase FME Group's financial and operational flexibility, supporting its position as a leading provider of products and services for individuals with renal diseases[31] FME KGaA Overview Registered Office, Administration, Corporate Object, and Fiscal Year This section details Fresenius Medical Care KGaA's registered office, administrative headquarters, corporate objectives in medical care, and fiscal year alignment - The company's registered office is in Hof (Saale), Germany, with its administration located in Bad Homburg v. d. Höhe, Germany[37] - Corporate objectives are focused on medical and health care, including the development, production, and distribution of products and services for dialysis and associated treatments[40] Structure of FME Group FME KGaA's structure shows FSE KGaA as the sole General Partner shareholder and largest equity holder, leading to FME Group's full consolidation under IFRS 10 - FSE KGaA is the sole shareholder of the General Partner, Fresenius Medical Care Management AG, and also the company's largest shareholder with about a 32.2% stake[43] - Due to FSE KGaA's control via the General Partner, FME Group is fully consolidated in FSE KGaA's financial statements in accordance with IFRS 10[46] Business of FME Group FME Group is a leading provider of renal disease products and services, reorganized into Care Enablement and Care Delivery segments, with key financial figures presented - FME Group is the world's leading provider of products and services for individuals with renal diseases[49] - Effective January 1, 2023, the business was reorganized into two global operating segments: Care Enablement (healthcare products) and Care Delivery (healthcare services)[52] Selected Key Financial Figures (Audited) | Metric | FY 2022 (audited) | FY 2021 (audited) | | :--- | :--- | :--- | | Revenue | €19,398 million | €17,619 million | | Operating income | €1,512 million | €1,852 million | | Net income attributable to shareholders | €673 million | €969 million | | Basic earnings per share | €2.30 | €3.31 | Selected Key Financial Figures (Unaudited) | Metric | Q1 2023 (unaudited) | Q1 2022 (unaudited) | | :--- | :--- | :--- | | Revenue | €4,704 million | €4,548 million | | Operating income | €261 million | €348 million | | Net income attributable to shareholders | €86 million | €157 million | | Basic earnings per share | €0.29 | €0.54 | Corporate Governance FME KGaA's complex corporate governance involves the General Partner, KGaA Supervisory Board, general meeting, and Joint Committee, with the General Partner wholly owned by FSE KGaA and a Pooling Agreement ensuring independent board members - The company's corporate bodies include the General Partner, the KGaA Supervisory Board, the general meeting, and the Joint Committee[63] - The General Partner, Fresenius Medical Care Management AG, is a wholly-owned subsidiary of FSE KGaA and is responsible for managing FME KGaA[64][66] - A "Pooling Agreement" ensures that at least one-third (and at least two) of the members of the General Partner's Supervisory Board are independent[71] Share Capital, Shares, and Shareholder Structure The company's share capital is €293,413,449.00 across ordinary bearer shares, listed on FWB and NYSE as ADSs, with FSE KGaA as the largest shareholder at 32.17% - The registered share capital is €293,413,449.00, divided into 293,413,449 ordinary bearer shares with no par value[82] - The company's shares are listed on the Frankfurt Stock Exchange (FWB) and as ADSs on the New York Stock Exchange (NYSE)[86][87] Shareholder Structure | Notifying person | Share of voting rights (in %) | | :--- | :--- | | FSE KGaA | 32.17 | | Richard Pzena | 5.20 | | Dodge & Cox | 5.03 | | BlackRock, Inc. | 3.19 | | Harris Associates Investment Trust | 3.01 | | Harris Associates L.P. | 3.00 | | Dodge & Cox International Stock Fund | 3.00 | | Free float | 45.40 | Employees and Co-determination As of March 31, 2023, FME Group employed 125,231 people and is not subject to German co-determination laws, with employees represented on FSE KGaA's supervisory board - As of March 31, 2023, FME Group employed 125,231 people (headcount)[112] - The company is not currently subject to corporate co-determination. Its German employees are attributed to FSE KGaA for co-determination purposes and are represented on FSE KGaA's supervisory board[113] Overview of the Conversion and its Economic and Legal Reasons Overview and Background of the Conversion The conversion from KGaA to AG addresses complex governance and financial reporting, aiming for FME Group's deconsolidation from FSE KGaA and equity method accounting - The current corporate governance structure is highly complex due to the dual KGaA structure of FME and its parent FSE, involving multiple supervisory boards and legal dependencies[118] - The full consolidation of FME Group has a disproportionate impact on FSE KGaA's financial statements, as FSE KGaA only holds a ~32.2% equity stake[122] - The conversion to an AG is considered the best option to achieve deconsolidation and allow FME Group to focus on its own strategic objectives[124] Reasons for the Conversion Key reasons for conversion include simplifying corporate governance, improving decision-making, increasing outside shareholder influence, and gaining independent financing strategy - Simplification of Corporate Governance: The complex KGaA structure will be replaced by a simpler, more agile two-tier AG system (Management Board, Supervisory Board, General Meeting)[127][128] - Improved Decision-Making: The conversion will free up significant management resources currently spent on aligning with FSE Group, allowing for faster and more efficient strategic decisions focused on FME's business[131][132] - Increased Shareholder Influence: Outside Shareholders will gain more influence by electing at least four of the six shareholder representatives to the more powerful AG Supervisory Board, which appoints the management[135][141] - Independent Financing Strategy: The company will have more flexibility to establish and execute its own financing strategy with less consideration of FSE KGaA's interests[142][143] Impact of the Conversion on the Company's Share Price The capital market reacted positively to the conversion announcement, with the share price increasing by approximately 7.3% to a six-month high, a trend expected to continue due to simplified governance - After the company announced concrete plans for the conversion on February 21, 2023, the share price increased by approximately 7.3% to a six-month high of €39.88 on February 22, 2023[147] - The General Partner believes the capital market has reacted positively to the announcement and expects the conversion to have a positive future impact on the share price[148] Appropriateness of the Participation Ratio The conversion maintains the existing shareholder participation ratio, with each KGaA share converting to one AG share on a 1:1 basis, ensuring unchanged proportional ownership - Shareholders will receive one AG Share for each KGaA Share they hold, a 1:1 conversion ratio[149] - The conversion ratio is considered appropriate as the proportional participation of each shareholder in the company's share capital remains unchanged[149] Alternatives to the Conversion Alternatives like SE conversion or General Partner acquisition were rejected due to legal complexity and change-of-control risks, making the AG conversion the most favorable option with lowest execution risk - Alternatives considered included changing the legal form to an SE, the company purchasing the General Partner, causing the General Partner to exit, or an agreement to suspend control[156][157][158][161] - These alternatives were rejected due to factors like legal complexity, execution risks, and the high risk of triggering change-of-control clauses in material financing agreements[157][161][164] - The conversion to an AG is considered the most favorable option as it has the lowest execution risk and does not have a significant impact on current financing agreements[164] Assessment of the Conversion by the General Partner The General Partner assesses the conversion as being in the best interests of the company and stakeholders, citing simplified governance, strategic freedom, and strengthened shareholder rights outweighing costs - The General Partner assesses the conversion as being in the best interests of the company and its stakeholders[167] - Key factors in this assessment include the simplification of corporate governance, increased strategic opportunities, and the strengthening of outside shareholder rights[168] - The future advantages of the conversion are considered to significantly outweigh its potential disadvantages and costs[172] Assessment of the Conversion by the Independent Members of the Supervisory Boards Independent Supervisory Board members approved the conversion, concluding its advantages, including simplified governance and enhanced shareholder influence, significantly outweigh disadvantages, and deemed FSE KGaA's appointment right appropriate - Independent members of the Supervisory Boards approved the conversion plans, with members holding mandates at FSE KGaA abstaining from the vote[172] - The independent members concluded that the conversion is in the best interests of the company and its outside shareholders, as the advantages significantly outweigh any potential disadvantages[179] - The Appointment Right for FSE KGaA was deemed appropriate in light of its ~32.2% stake and its continued commitment as the largest shareholder[178] Explanation of the Conversion and the Conversion Resolution Procedure of the Conversion The conversion, a change of legal form under German Transformation Act (UmwG), becomes effective upon Commercial Register registration, requires no shareholder compensation, and preserves the company's legal identity as an AG - The conversion is implemented as a change of legal form according to the German Transformation Act (UmwG) and becomes effective upon registration with the Commercial Register[181] - Under German law (section 250 UmwG), a compensation offer to shareholders is not required for a change of legal form from a KGaA to an AG[181] Key Legal Steps of the Conversion Key legal steps include a notarized Conversion Resolution requiring 75% EGM approval, formal General Partner approval, and subsequent registration with the Commercial Register for effectiveness - The Conversion Resolution requires a majority of at least 75% of the share capital represented at the EGM[183] - The General Partner must also provide a notarized approval for the conversion, as it will exit the company upon completion[185] - FSE KGaA, holding approximately 32.2% of the share capital, intends to vote in favor of the Conversion Resolution[184] Explanation of the Conversion Resolution The Conversion Resolution details the legal form change to "Fresenius Medical Care AG," new Articles of Association, unchanged share capital, General Partner exit, a new co-determined Supervisory Board, and the introduction of co-determination for employees - The new legal name will be "Fresenius Medical Care AG", with the registered office remaining in Hof (Saale), Germany[196][197] - The General Partner will exit the company without compensation upon the conversion's registration. Consequently, FSE KGaA will no longer control the company under IFRS 10[238][240] - A new, 12-member Supervisory Board will be formed under German co-determination law (MitbestG), composed of six shareholder representatives and six employee representatives[245] - FSE KGaA will be granted a special right to appoint up to two of the six shareholder representatives to the new Supervisory Board, contingent on its shareholding level (at least 15% for one seat, at least 30% for two seats)[278] Operational, Financial, and Tax Effects and Costs of the Conversion Operational Effects Operational impacts include relabeling approximately 1,000 products, separating shared corporate functions from FSE Group, and the termination of the Pooling Agreement protecting outside shareholders - Product relabeling is required for approximately 1,000 products to change the company name from "Fresenius Medical Care AG & Co. KGaA" to "Fresenius Medical Care AG"[342][343] - Essential services currently provided by FSE Group, including IT, treasury, and insurance, must be separated. FME Group will need to establish these functions independently, with transitional service agreements planned for the interim period[347][348] - The Pooling Agreement, which grants certain rights to outside shareholders (e.g., independent members on the GP Supervisory Board), will terminate upon completion of the conversion[356] Costs of the Conversion One-time conversion costs are estimated at €50 million to €100 million, mainly for product relabeling, while recurring administrative costs are expected to be significantly below €50 million annually - One-time costs associated with the conversion are estimated to range from €50 million to €100 million, with product relabeling being the main driver[358] - Recurring costs for new administrative functions are expected to be significantly below €50 million per annum and have an immaterial impact on EBIT[359] Financial Effects Financial effects include maintaining investment-grade ratings from S&P and Moody's (Fitch potential downgrade), termination of a €600 million FSE KGaA credit facility, and no trigger of change-of-control provisions in major financing agreements - The company expects to maintain its investment-grade ratings from S&P (BBB-) and Moody's (Baa3), but Fitch has placed the rating on "negative rating watch" with a potential one-notch downgrade[362] - The conversion is not expected to trigger change-of-control provisions under the company's bonds or most of its other material financing agreements[362] - An existing €600 million uncommitted revolving credit facility from FSE KGaA will be terminated upon the conversion[362] Tax Effects The conversion is expected to be tax-neutral for both the company and shareholders, qualifying as a tax-free "F-Reorganization" for U.S. tax purposes, with no German RETT or VAT implications - The conversion is expected to be tax-neutral for the company in Germany, with no gain or loss recognized and no impact on tax attributes like loss carryforwards[369][370] - For U.S. federal income tax purposes, the conversion is expected to qualify as a tax-free "F-Reorganization," meaning no gain or loss should be recognized by the company or its shareholders[372][378] - The transaction is not expected to trigger German Real Estate Transfer Tax (RETT) or Value Added Tax (VAT)[373][374] Future Shareholding in FME AG General Comparison of KGaA and AG This section compares KGaA and AG legal forms, highlighting the KGaA's General Partner management versus the AG's two-tier board structure, which grants shareholders more indirect influence over management - A KGaA is a hybrid legal form managed by a General Partner, whereas an AG is a standard stock corporation managed by a Management Board[383][402] - In an AG, the Supervisory Board appoints and dismisses the Management Board members. In a KGaA, the Supervisory Board has no such power over the General Partner's management[412][455] - The AG Supervisory Board has greater authority than its KGaA counterpart, including the ability to make certain management transactions subject to its approval[452] - In a KGaA, certain general meeting resolutions require the consent of the General Partner, a requirement that does not exist in an AG[476] Legal Structure of FME AG FME AG's future legal structure will include an AG Management Board, a 12-member co-determined AG Supervisory Board (six shareholder, six employee representatives), and a general meeting, with FSE KGaA retaining appointment rights based on its stake - FME AG will have three corporate bodies: the AG Management Board (managing the company), the AG Supervisory Board (supervising management), and the general meeting[493] - The AG Supervisory Board will consist of 12 members: six elected by shareholders and six elected by employees, in accordance with German co-determination law[502][555] - The new AG Articles of Association grant FSE KGaA the right to appoint one or two members to the Supervisory Board, depending on whether its shareholding is above 15% or 30%, respectively[558] Effects of the Conversion on Shareholder Rights The conversion significantly enhances shareholder rights, particularly for Outside Shareholders, by granting indirect influence over management through electing at least four of six shareholder representatives to the AG Supervisory Board - The most significant change for shareholders is the shift from a General Partner-led structure to a Management Board appointed by a Supervisory Board that is partially elected by shareholders[596] - Post-conversion, Outside Shareholders will be able to elect at least four of the six shareholder representatives to the AG Supervisory Board, thereby gaining indirect influence over the appointment of the company's management[601] Comparison of Shareholder Rights | Right | FME KGaA (Current) | FME AG (Future) | | :--- | :--- | :--- | | Appoint Management | No influence. GP Management Board is appointed by GP Supervisory Board, which is elected by FSE KGaA. | Indirect influence. Shareholders elect a majority of shareholder reps to the AG Supervisory Board, which appoints the AG Management Board. | | Elect Supervisory Board | Outside Shareholders elect all members of the (less powerful) KGaA Supervisory Board. | Outside Shareholders can elect at least 4 of 6 shareholder reps to the (more powerful) AG Supervisory Board. | | Amend Articles | Can be blocked by FSE KGaA (via General Partner consent). | Can be blocked by FSE KGaA (if it holds >25% of votes). No General Partner consent needed. | Listing and Certification of the AG Shares Listing and Certification of the AG Shares The conversion will not affect the FWB listing, ISIN, or ticker symbol, but new ADSs representing AG shares will be listed on the NYSE, and new global share certificates will be issued - The listing on the Frankfurt Stock Exchange (Prime Standard) will not be affected by the conversion. The ISIN (DE0005785802) and ticker symbol (FME) will remain the same[614] - The company will apply to list the ADSs representing the new AG Shares on the New York Stock Exchange (NYSE)[618] - New global share certificates representing the AG Shares will be issued to replace the existing certificates for the KGaA Shares[619]