Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the Fresenius Medical Care earnings call on the third quarter 2018. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead.
Thank you, Haley. We would like to welcome all of you to the Fresenius Medical Care earnings call for the third quarter 2018. We appreciate you joining today. I know you had a long call already. As always, I'm happy to start out the call by mentioning our cautionary language that is in our safe harbor statement, as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as our SEC filings. I'm outstandingly aware that everyone was waiting for this call for quite a while, and therefore, we do not limit it to 60 minutes. Nevertheless, I would like to limit the number of questions to two in order to give everyone the chance to ask questions.
If there are further questions, we are happy to go a second round. I hope this works for everyone. With us today is, of course, Rice Powell, our CEO and Chairman of the Management Board. Rice will give you some more color around the business development, go through some of the major topics of the quarter. Of course, also with us is Mike Brosnan, our Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours.
Thank you, Dominik. Welcome to the FMC third quarter earnings call. I do appreciate your interest in our business and the company. Before I begin my formal presentation, I would like just to make a comment that I understand that some of you were disappointed that we did not have a conference call immediately after the October 16th, 17th ad hoc. We made the decision, Mike and I, to stay within our process and take the two weeks to get clarity and as much detail as we possibly could in order to answer your questions today and give you our commentary. I also imagine that there will be questions regarding guidance for 2019 today.
Please understand we are just beginning the budget process for 2019, we are not in a position today to discuss 2019 and to try to give you guidance several months ahead of the normal process that we go through. I do ask for your understanding and forbearance on this, but that's where we sit at the moment. Moving to slide four to begin my prepared remarks. This is a new chart for you. We wanted to do the very best that we could to give you a sense of the growth trend, particularly looking at North America on the parameters of organic growth and volume growth on the services business, also to give you a view of the dialysis products organic growth for the larger regions in the product business, which are EMEA and Asia Pacific.
We did this in an attempt to make sure people did not think that the basic fundamentals of the service business in North America were fractured or broken, something to that nature. Did we meet the expectations that we had for ourselves? No. We'll take you through that. The underlying fundamentals in that business in that region of the world are still there. We have issues to deal with as any business does, but not to the degree I was concerned. Mike and I felt some of you thought the world was ending, and it's not. Looking at this slide, if you look at the dialysis services organic growth, what we've done is given you the group view at the broken line with the broken line.
We gave you North America, we backed calcimimetics out of that to give you a picture of the organic growth across three quarters of the year. Looking at dialysis services and the volume growth, we've done a similar thing and to give you the full group view for FMC and to highlight specifically North America at 2.5% volume growth. Lastly, when you look at the products growth on an organic basis, you see the reddish or brown line for EMEA. They're down 2.1%. You see the broken line for the group, and you see better performance coming from Asia Pacific. We will address a number of the questions I know that you have about the product business, in particular EMEA, in a couple of slides as I traditionally do on my product slide.
Moving to slide five. The growth continues. As we always have done, we show for you the progression in our clinic growth, our patient growth, and our treatment growth. I won't belabor those. They're there for you to see as we typically do. Looking at slide six, our quality outcomes in the quarter remain at a very high level. We continue to operate in a very tight clinical band. Any of these parameters you'd like to look at for any region, you can see that we're very close and we're in a very tight band here. Happy to address any of this in Q&A if you like, but I'm going to move on to get to more substantive discussion topics. Looking at slide seven, our update within the quarter. Key for you to know, we've seen improved sequential quarterly growth in the dialysis business in North America.
We'll talk more about that in Mike's presentation and on the Q&A. The business acceleration has been muted due to a couple of factors. Lower revenue from commercial payers as a result of seeing some drop out of the ordinary range in our commercial mix, and Mike and I will take you through that. Also, delayed de novos have created an issue for us. Remember this number, 79 delayed de novos. It's a significant number. We'll come back to that. I will go ahead and say now that we do not expect in the fourth quarter to get 79 de novo clinics certified. Roughly, there are 41 working days left in the quarter, so this is going to be a knock-on effect in Q4, and it's obviously colored our view of what we can do in the quarter.
Please remember that the Bipartisan Budget Act of 2018 allows us, January 1 of next year, to use third-party surveyors to get our clinics certified. We've already contracted with someone to do that, so this will help us get out of this situation that we're in with the U.S. government, where they cannot get us certified in any sort of timely manner. We have seen a lower than expected contribution from the vascular access business in our care coordination book. If you recall, we told you we had planned to try to convert 40 Site 11 facilities to ambulatory surgical centers in this calendar year.
Today, it appears to us that 29, perhaps 30, will be all that we get done in this timeframe, and much of that issue sits in the state-to-state requirements for certification that we must get done in order for us to bring those facilities up into the new classification. That is not going according to our expectations. We've talked every quarter about the difficult environment in the emerging economies. Obviously, things have gotten worse. Hyperinflation in Argentina, a couple of other countries where we've seen issues, and we'll talk about that, but this continues to be a drag and interrupt the expectations that we've had for the business. We do have some good news. Our care coordination margin has improved. Looking at our tables in the back, you'll see that it was 12.1% in the quarter.
Keeping in mind, we want you to know that there's a transaction effect on the Sound gain that makes that 12.1%, looking at the real margin, the way we look at it, we're standing right around 9%, a little bit more on a constant currency basis, I think 9.4%. We're within the range and the guidance that Mike had given you earlier in the year, and we're happy with that. We have and continue to have, and it will get bigger, our commitment to home. We're at 12.4% in terms of home penetration at the end of September. That is up from 11.8% at the end of Q2. Very good progress there. NxStage will close. We are later in the year than any of us imagined we would be, we still believe that it will close.
You'll notice probably sometime in the next day or two that we've extended the agreement with NxStage to February 5th in order to allow ourselves ample time to get this done with the Federal Trade Commission, then finally get on with the integration of NxStage into Fresenius Medical Care. Moving to slide eight, we are trying to give you as simple a look as we can on a comparable basis. If you'll note at the bottom right of the page, we have slide 25 and 26 giving you the same fulsome accounting of everything we've done in the reconciliation process, Mike and I feel like we've done enough of that we wanted to give you a simple slide to look at.
As you can see on this comparable basis, we are at 3% constant currency growth on revenue, EBIT at 4%, then you see the net income on comparable at 19%, then the adjustment. Okay. Hopefully that's easier for you to see, we do have the detail should you require it. Moving to slide nine and looking at our organic growth in the services side of the business. Just in the organic growth, I'm sorry. I'm one chart ahead of myself. Asia-Pacific at 4% constant currency revenue growth and organic growth of 5%. Latin America, those are pretty large numbers you see there. That's driven from the hyperinflation. We're going to want to talk some about EMEA at a 1% constant currency revenue growth and no organic growth. You're going to have questions on that, we understand it.
North America, I think we've talked about extensively as to what's driving the organic growth then the constant currency drop in the revenue growth. We're happy to go through that in the Q&A. Turning to slide 10 and looking at the services side of the business on the organic growth. I tend to focus my commentary on the two right columns, organic growth for the total group at 4%, same market treatment at 3%, I won't read those to you detail to detail. We will get into more color on this as we look at your questions, I think Mike's going to cover some of that in his slides as well. Moving to products on slide 11. Let's go directly to EMEA. As you can see, 2% constant currency growth down in the quarter. Couple of things are driving this.
We saw a high single-digit million EUR impact with a lack of sales in Egypt. We addressed the Egyptian market through the United Arab Emirates. That's our hub. We saw a significant drop-off in sales in that particular country. We also had good growth in Libya in the second quarter. It did not materialize as to our expectations in the third quarter. In the case of Saudi Arabia, we have slowed down the sales because they simply are not addressing the day sales outstanding as quickly or significantly as we think they should. We've slowed that down ourselves. If you look at Asia-Pacific, good growth there at 6% constant currency growth, predominantly driven from their chronic and their acute product lines. Looking at North America, 1% constant currency growth. Quickly, good job in renal drugs, up 24%, PDs up 8%.
Let me just remind you that with IFRS 15, we had a high single-digit million-dollar impact on our HD machine business. If we had done that on a like-for-like basis, we would've seen about 5% growth, just, I think, 4.9% in our hemodialysis equipment. I point that out just to give you some better clarity on what's going on the product book of business. Lastly, slide 12, in conclusion, again, I don't think I have anything more to add to what's on the slide other than to say to you, we have adjusted Q3 based on not getting to the expectations that we wanted, and we see the knock-on effect in the fourth quarter. There truly are, if you count them, 40 to 41 working days left in the quarter.
We have to be pragmatic and realistic about how quickly and deeply our countermeasures are going to turn some of these issues around. We'll talk more about that. The patient growth and the market dynamics, we do not think the fundamentals are disruptive or destroyed, particularly in North America. Yes, where we've been able to get at what has gone wrong, we have got countermeasures in place. We're working on those, but again, 40 to 41 days, and that assumes I don't take Thanksgiving off in the U.S. We will still be working to get that done, but it's not quite enough time in our estimation. With that, I'll turn it over to Mike.
Thank you, Rice, and hi, everybody. I'll continue on chart 14, the usual comparison with regard to our revenue growth that walks you from reported numbers to the basis we use for guidance. You can see the high-level reference to the revised guidance at the top of the chart, 2%-3% constant currency revenue growth. As you work through the chart, we've got the blue box in the middle, which is what we believe is the comparable measure for the quarter. We are at the 3%, and you see the items that we've considered outside of that to the left and the right. Turning to chart 15, we do continue to show you two views with regard to our earnings. Initially, we had guided only to the top view at the beginning of the year.
Having listened to the feedback from some of you on the call, we then supplemented that with the second view, which became the more operational view. That's why we've continued to show both sets of earnings and performance metrics as the year has progressed. You can see on the top of the chart, the details about what's in and what's out, and as Reece indicated, the detailed reconciliation for that, both for the three months and the nine months, is in the backup material that was distributed with the slides today. Business growth at EUR 57 million produces about 19% on a constant currency basis for after-tax earnings. That 19% obviously influenced by a benefit that we took in the third quarter related to some true-ups on the opening balance sheet associated with the tax reform in the U.S. end of 2017.
There were certain aspects of that that needed further research and study, which is very common. We see a number of U.S. companies taking adjustments to the opening balance as 2018 has progressed. That's in the comparable of reported earnings at 19%. When you look at the bottom of the page, you see again in the blue box, a decline in earnings, -2% constant currency. That is in part for some of the things that we are talking about today overall, but I would say more specifically, what drove that against the revised targeted growth for the year was the fact that we took an adjustment for the hyperinflationary accounting in Argentina. As a reminder, that is not tax effective. That's in the operational numbers that you see there on the page.
Turning to the following chart 16, and starting to talk about the margin performance in the regions around the world. I would say that if you looked at margin on an adjusted basis for all of the elements that we detail out routinely, you would see for total company globally, our margins would be flat year-over-year at about 15.1% compared to 15.2% in the prior quarter. But these charts are shown and explained on an as reported basis, with nothing taken out beyond what you see on the page. For North America, the reported operating income was up EUR 42 million to EUR 525 million, 9% in current or 2% in constant currency.
The EBIT margin, as you can see, was 18.5%, and the operating income includes EUR 17 million currency translation gains from the divestiture of the care coordination activities, and also a cost of EUR 23 million associated with spending we had on the ballot initiative in California in the third quarter. We did see, in total, personnel costs growing at a slower rate than revenues, which obviously has a beneficial effect on the margins. That includes some true-ups of accruals with regard to our healthcare costs and our other employee-related insurance matters in the quarter. It also includes payment we received with regard to our consent, and that contributed to the margin improvement in the third quarter. I typically comment a little bit about the dialysis business margins, even though it doesn't appear on the page. Those margins increased from 18.1%-19.2%.
That was largely driven by the consent agreement and by the effect of personnel costs growing at a lower rate than revenues. These figures were impacted by the natural disasters in the base last year, the implementation of IFRS 15, and the state ballot initiative. Calcimimetics also plays a role in the margin performance in the dialysis service business in North America. In terms of revenue per treatment, what you see here on the page is the sequential revenue and cost per treatment. If you think in terms of year-over-year, and you adjust for the VA agreement and the implementation of IFRS in the base period, you would see an increase of EUR 15 per treatment from EUR 341 in 2017 to EUR 356 in 2018. The cost per treatment would increase by EUR 19 from EUR 271 to EUR 290.
On the revenue side, the drivers for the increase in revenue are roughly EUR 17 million for the calcimimetics, a Medicare rate increase, an increase in Medicare Advantage treatments, and this was partly offset by lower commercial revenues, which we had in our guidance for the year, and a relatively small effect with regard to other items. On the cost per treatment side, the increase was driven largely again by the calcimimetic drugs at EUR 16 a treatment. I will remind you that I had indicated that we would probably have a relatively minimal margin effect associated with calcimimetics this year as we sort out both the billing side and the operational side in terms of utilization of the various drugs and patient dosing. That has continued to be the case as the year has progressed. We did see higher occupancy costs in the cost per treatment and higher costs associated with medical supplies and ancillaries.
In care coordination, the margins frankly do get a bit distorted as a consequence of the translation into euros, and also the fact that as you progress through the year, you have to revise your operating results to the year-to-date weighted average exchange rates. When you have an unusual gain, which we did in the second quarter, that tends to distort the impacts when you are converting dollars to euros. I think the important thing on a dollar basis, as Rice has already commented, we indicated that we would see an improvement in care coordination margins this year. We are seeing that frankly nine approaching the 10% range potentially for the year. That said, in care coordination, the drivers of the margin improvement were a favorable impact in the pharmacy because we continue to see good pricing on products that we are distributing to patients through the pharmacy.
The rebating of calcimimetics through services also helped the pharmacy margins. This was offset a bit in the quarter due to lower earnings related to the ESCOs. Just to remind folks, this is principally because we had the initial recognition of revenues in Q3 last year associated with the new ESCO locations that were approved in 2017. So the earnings recognition for the first nine months associated with those new locations was recognized in the third quarter. As Rice already mentioned with regard to the vascular access business, we are seeing a delay associated with our plan to convert Site 11s to ASCs, and we did have some pricing pressure with regards to reimbursement on the NCP side of the business, the cardiovascular, endovascular business.
In talking about care coordination and in particular the ESCOs, I would say in Q3 last year, we also had received the final reconciliations from the government on the first year, which was October 1, 2015 through December 2016. These reports were in line with our expectations for year one. We have not yet received those reports for year two, so that reconciliation will be forthcoming either in Q4 or possibly spilling over into 2019. You know we have grown the program. We continue to work closely with CMMI to ensure the program develops appropriately. We believe in the value-based care initiative for services in the U.S., and we have shown our commitment to this approach by significantly growing our ESCO site participation in 2017 and then our patient enrollments for all of our locations in 2018. Turning to the next chart and continuing the margin analysis.
For EMEA, operating income was down EUR 18 million, about 16% on a constant currency basis. The margin decrease was driven by a favorable impact that we had last year. We had a settlement in the third quarter of last year. That obviously impacted the decline this year. We did see higher personnel costs in some countries, particularly on the services side of the business, and we did have one less dialysis day as we aggregate the region. We had unfavorable foreign currency transaction effects, which have been a headwind for us this year. We did see higher bad debt expense. This is the case in a number of the regions, partly driven by our economic circumstances and the currency volatilities that drives credit default swap rates, which is what we base our bad debt provisions on in many countries around the world.
You see an uptick in bad debt expense because the swap rates have increased. In Asia Pacific, operating income decreased from EUR 77 million to EUR 66 million, about 14% both in current and constant currencies. The decrease in margin was principally attributable to a foreign currency transactions effect again, and also an unfavorable impact associated with our business growth in the region as we continue to invest for growth in the mid and the long term. This was partly offset by some favorable effects of translation in the quarter. In Asia, the care coordination operating margins declined a bit from 17.7 to 16.2, but still our investment in Cura in Australia is performing very nicely. Latin America operating income declined from EUR 18 million to about EUR 1 million. Margin decreased, as you can see on the page.
This was, as you can imagine, mainly due to the hyperinflation in Argentina, which was recorded for the first time in the third quarter. I'll come back and comment on that further later in my presentation. Corporate costs increased by EUR 76 million, from EUR 75 million in 2017 to EUR 151 million, obviously largely driven by the fact that we increased our reserves for our settlement discussions with the U.S. government by EUR 75 million in the third quarter. Turning to chart 18 and cash flows. In terms of absolute EUR, very little change over the period, EUR 609 million this year versus EUR 612 million. As a percentage of revenue, a little bit better at 15% compared to 14% last year. That's a combination of several effects.
We did have higher tax payments in the U.S. because we did make a tax payment associated with the gain we took on Sound in the second quarter. That was partly offset by lower tax payments in the current year, obviously driven by the new lower tax rate associated with tax reform. We took the opportunity and made an incremental contribution to our pension plan in the U.S. for $50 million or EUR 42 million. These effects were nearly fully offset by a decrease in accounts receivable due to our collection efforts in a number of countries around the world, but in particular in the U.S., seeing payments coming in on the calcimimetics which reduced our overall AR. The result, as I indicated, gives you a sense, strong cash flow, 15% of revenues in the quarter.
The DSO, days sales outstanding, does reflect an increase in receivables of a couple of days from year end. This is in part associated with calcimimetics, in part associated with just the normal practice on the ESCOs, and has been helped a bit by the divestiture of Sound because Sound overall had higher DSOs than the rest of North America, so there was a benefit in North America associated with that. CapEx for the third quarter is about 6% of revenue, seven one, and free cash flow just over EUR 350 million. As a result of the developments in our operating cash flows, our net debt has continued to decrease from December 2017, and our leverage ratio is slightly down from the end of 2017 at 2x. Turning to the next chart 19.
You see what we've tried to do here is give you an appreciation of the relative impact both in terms of revenues and in terms of net income on a comparable basis. The first line of net income, if you will, going back to the charts I showed at the beginning of our discussion. I'll walk through each of these and try to give you some additional perspective. Starting on the left and just working down the page. We have North American dialysis business, and what we had indicated in our earlier release and what Rice commented on is we did see lower growth in the commercial dialysis services revenues. We saw a drop in our commercial mix, which is influenced in part by higher growth in Medicare Advantage relative to commercial growth.
When you look at our commercial mix on a sequential quarter basis, Q2 to Q3, we did see a lower number of commercial treatments in the third quarter, and this was not our expectation with regard to the guidance that we confirmed in the second quarter. When you think in terms of commercial mix and the commercial book of business, obviously when we're reporting a year-over-year, you have one effect when you're looking at it against what our expectations were for the back half of this year, we were disappointed. Rice has commented a bit on countermeasures. I would add my voice in that we have had this experience in the past. We believe that we can refocus the business and regain some of the ground that we've lost.
Our de novo plan development also impacted our expectations, and that's represented in the chart that you see in terms of the relative size of the effects we've been discussing. The second one, mergers and acquisitions. We continue to actively evaluate opportunities, and we're always focused on doing what makes good business sense to us. We had started the year with guidance in the billion-euro range. We had anticipated we would tick up a bit our acquisition activities this year. We took that down to about EUR 600 to EUR 800 in the second quarter, and we've now dropped it further to EUR 400 to EUR 500 for the year. This still would allow us to achieve what you're used to seeing, roughly about 1% growth associated with acquisitions, but this was something that we had hoped to get a little bit more out of in fiscal 2018.
We have worked on deals this year, make no mistake. Some that we think would have been very attractive, and they just didn't proceed to close. Also, it's not a bubble on the page, but I'll just reiterate, because it's slightly different than what I had indicated at the beginning of the year. Rice mentioned the impact of IFRS 15 relative to the machine business in North America. When we adopted IFRS 15 at the beginning of the year, we anticipated the fact that that accounting pronouncement would require the installation and the training of people prior to the recognition of revenues to be a de minimis effect on 2018.
As we've gone through the year and as we've been monitoring this, we do see that it creates a bit more of a pipeline, so machines that have been sold and have been delivered, but have not yet been installed. That created a little bit of softness, particularly as you're getting into Q3 in the back half of the year. Rice referenced North America specifically. We see a similar effect, in particular in Asia, which, not surprising, also has much longer lead times in terms of getting the equipment on site. That machine influence does have an impact in terms of the emerging countries.
The other thing I would say with regards to the emerging countries, which I've commented on already, is with these currency volatilities, you saw in the first quarter, we indicated a relatively strong effect associated with collection losses given currency volatilities, particularly in emerging markets. You saw increases in bad debt, which I've explained. That moderated a bit in the second quarter, which gave us some optimism associated with what we might see in the back half. When we saw the preliminary figures for Q3, we saw an effect on earnings similar to what we saw in the first quarter, that also contributed to our decision to revise the guidance. The care coordination, lower revenues and earnings in our vascular access and cardiovascular business was considered.
In the vascular business, it does relate to the conversion from Site 11 to ASCs being a bit slower than we had anticipated, and lower revenue rates in the cardiovascular business. Hyperinflation you see is indicated as a positive effect in a different color on the left-hand side of the chart. That's because with the accounting associated with hyperinflation, you actually have an uplift in your revenues. I wish it were also the case on the earnings side of the business, but you get an uplift in revenues, and typically there is a cost associated with the earnings side. These are the factors and a little bit more of an explanation in terms of what led to the revision in our revenue guidance a couple of weeks ago.
Going on the right-hand side of the page and looking at net income reported on a comparable basis, you see that the emerging countries takes on a larger effect, and that is principally due to the fact that the hyperinflationary adjustment that we took in Argentina is not tax-deductible. That contributed to the quarter. In addition to that, I would tell you that our expectation coming into the third quarter was that under the accounting guidelines, we would be required to only address the hyperinflationary effect as it developed in the quarter. That was clarified as, and actually was definitively clarified just after the close of the quarter, that you have to book the full-year effect associated with conversion to a hyperinflationary accounting. We took a nine-month effect in the third quarter where we had anticipated a much smaller adjustment only relating to the three months.
That contributes to the size of that bubble. We do have, when we look at the inflationary expectations coming into the fourth quarter, we have considered that we expect we'll see a similar effect in the fourth quarter that we saw in Q3. I've already commented that we saw the currency volatilities and a resurgence of the transaction losses in the third quarter, and I've already commented on the influence of the credit default swaps with regard to our provisioning of bad debts. All of that contributes to why you see the emerging countries reflected proportionally higher than some of the other impacts. North American dialysis services business. You're seeing effectively the earnings effect associated where I've already discussed on the revenue side relative to commercial mix, some of the other effects in services.
I would take the opportunity here, talking on the earnings side, to say that at the beginning of the year, I had guided on revenue per treatment for the services business in the U.S. This was adjusted for the Veterans Administration, IFRS 15, and the calcimimetics to be flat to slightly down. I would expect that we'll be down around 1%-1.5% for the year. Within the range of guidance, but on the wrong end of that guidance, if you will. I would have preferred to be flat. On the cost per treatment, I guided to cost to be flat to slightly up. This was also adjusted for IFRS 15 and the 2017 natural disasters as well as Sensipar. I expect we'll be up around 1%-1.5%.
There is a little bit of pressure in the services business in the U.S. because you're dealing with the spread. Then last, again, a different color indicating a positive effect. Obviously, you get a beneficial effect on the minorities associated with the lower earnings. You also get a benefit in the comparable net income associated with the additional benefit we took for tax reform in the third quarter. Turning to my last chart. The top of the chart reflects the revised outlook that we previously published, and I think I've just described the drivers that contributed to our decision to do that. I will just take a moment to talk about the bottom part of the chart, for the most part highlighting some of the things that we've carried in the footnotes for some time.
I'm doing it in principle because Rice also indicated that we're just not going to comment on the 2019 now. We'll do that in accordance with our normal process. We are just beginning our budget cycle. We have obviously a number of items that are relevant to that process. On the footnotes, we do anticipate the closing of NxStage soon, albeit later than we had hoped. Frankly, NxStage has continued to develop very nicely since we announced the transaction last August of 2017. We will refresh our expectations once that deal closes, and that will take us some time as a part of our process to come out with guidance for these periods.
In addition, we'll update for the changes we've made in our care coordination portfolio with the sale of Sound Physicians, but also as well for the fact that we've expanded care coordination in Australia with Cura. We'll address the implementation of both IFRS 15 and also IFRS 16, the new leasing standard, which we're continuing to work on in order to meet the deadlines that we have related to announcing 2019 guidance. We'll also provide a more current view with regard to currencies. Couple things just to keep in mind, particularly as it relates to the fourth quarter coming back to 2018. We will have some additional spend on the ballot in the fourth quarter, and that will also not be tax affected. I've already commented that from a hyperinflationary perspective in Argentina, I expect a similar consequence in the fourth quarter that I've seen in Q3.
Last year, 2017, from time to time, I commented on Latin America and just with the volatility we have down there with some of the economies, we always have to be thinking about whether any of this contributes to the possibility of an impairment charge. We do not have an impairment at the end of Q3, but obviously this is something that we'll have to watch closely as we finish off the year and move into 2019. Thank you. Appreciate it. That's the end of my remarks. Back to you, Dominik.
Thank you, Rice. Thank you, Mike, for the presentation. I'm happy to open the Q&A for more insights now. Haley, can you open the Q&A, please?
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Veronika Dubajova of Goldman Sachs. Please go ahead.
Good afternoon, thank you for taking my questions. I will keep it to two, please. My first question is on the North America revenue per treatment and commercial mix. I appreciate there are a lot of moving parts, Rice and Mike, can you maybe comment on what exactly has gone wrong with the commercial business and why you are seeing a worsening of the mix above and beyond what you had anticipated this year? Is this in any way related to some of the escalators you had previously guided to for in the fourth quarter? That's my first question. My second question is actually on the EMEA margin. Also lots of moving parts, I'd like to understand what impact in the margin was underlying this quarter versus what was driven by currency.
Is this a new margin level that we should be assuming for your EMEA business going forward, are there things you can do to improve the profitability? Thank you.
Okay. Relative to revenue per treatment and commercial mix in North America, Rice may want to comment as well. I would say that there's always some volatility in commercial mix that we manage year in and year out, quarter to quarter. Our thinking, frankly, at the moment is the mid-year open enrollments are frankly becoming more popular. What drove the surprise to us was not something that we were seeing organically as every quarter moved. The surprise was we just saw a bigger reduction in our commercial book coming out of those July 1 open enrollments.
Yeah. Veronika, what I would tell you is, as well, we see a couple of things going on that I don't think we put the proper detail into. We did see some of our transient commercial patients, travelers, vacationers. We saw a drop-off in those volume of treatments that we would normally see in the third quarter. That concerned us trying to understand that, so we're ripping that apart. As I've always told you guys, your whole approach to the commercial book is a process. You figure out how best to take new patients on, do that effectively, quickly, and make it attractive for those patients to come into your clinic. We're going to go back and relook at that. We've already figured some things out that we want to do differently. I have to be honest and say, we've also made a management change.
We made a change in the senior executive that was running the kidney care business in North America in order to do some things, I think, in a more focused way around our commercial book, and perhaps not have too many initiatives that our people are focused on. We want to kind of skinny that down. I'm a big believer in three or four key things, not eight or nine or ten. We're kind of going back to basics on this, and we will get this sorted out. As Mike says, we have seen chatter every year, every quarter, up and down a little bit, but this was a move that was different than what we expected, and so we've done what we've done. Go ahead, Mike.
Okay. Thanks. We don't attribute it at all to any kind of pricing consideration, just more the open enrollment. On the EMEA margins, if I think in terms of what I just presented, last year was enhanced by the gain, which is non-recurring, so that would probably put you down in the range of 16% in terms of the base period. If I think of the currency influence this year I think 14% is a bit on the low side. Maybe a normalized expectation might be along maybe 100 basis points higher.
Okay, that's clear. Can I just confirm, I think there's been a little bit of speculation that part of the reason why the commercial business deteriorated is that one of your smaller competitors has renewed their relationship with one of the private insurers. Did that have any impact, in your opinion, on your commercial growth?
Veronika, we don't think so. I get asked that question a lot. We can't answer it with absolute clarity, as we rip apart what we're doing and we look at it from a geographic standpoint, obviously, we don't see that. I'm going to tell you, I don't think so, but I can't bet my two children on it explicitly. We do go at it from a market-to-market view, and given what we know about that competitor and where they were in that relationship, we don't think that's the case.
Very clear. Thank you.
The next question is from the line of Ian Douglas-Pennant of UBS. Please go ahead.
Yeah. Thanks very much. Just a quick question. The clinic counts that you give in the press release, is that before or after the certifications? Just before I start.
It's after they've been certified.
Okay. In that case, we saw that the total clinic actually up 5.2% year-over-year. That's over twice the long-term run rate of around 2%. I'm slightly surprised you calling out the lack of new centers or the lack of acquisitions as a headwind. It feels like certainly in terms of de novos, it could have been a tailwind and if you'd actually had those additional clinics certified, it would've been a huge tailwind. Maybe you could comment on that. I'm afraid I am going to ask about 2019 guidance, but I think a question you can answer. What format do you think you'll give that in? Might I suggest moving away from the current metrics with a large number of adjustments in favor of something simpler like organic growth and reported EBITDA margins?
Yep. Okay. Let me comment initially on your questions. Relative to the de novos being a headwind, it's a headwind against our expectations for the year. It's not a headwind against our historical trend. I think in our view, as we came into 2019, we felt that we should be doing a bit more in that regard. That's what led to the 79 that Rice was referring to. In terms of a measure, I would say if you go back to the beginning of the year, relative to treatment growth for fiscal 2018, I had indicated three plus percent. We're trending to a little bit under the 3%. Yeah. That's how you can kind of fit in Rice commenting about the approval of de novos being a bit of a headwind.
It's really against what our expectation and our guidance was when we started the year. In terms of format, I'm not going to prejudge 2019. I'm not going to be defensive about it. We made a change in Q1 because we tried to keep it simple in 2018 with one revenue guidance and one earnings guidance, and we got very, very strong feedback even before we had the call in February. Basically insisting that we had to provide something with more transparency about the underlying operations, taking out all of the knock-on effects from 2017. Frankly, you don't sell a business for a couple of billion EUR every day, so we felt it was appropriate to also take that effect out of the reported earnings for transparency.
There are people out there that like it, but it does make things more difficult for us, so it's not something that we're crazy about doing. When I think about 2019, and we've made no decision yet, I just need to think about the implementation of the leasing accounting standard, and folks might want some comfortability and some movement around associated with that potentially. We'll take a hard look at it, and we'll still have the legacy effects associated with the care coordination divestitures to deal with. We would like to find a better way where more people in the investment community are satisfied with the clarity we're giving, with the detail we're giving, with the transparency we're providing. The objective is not to confuse people.
The objective is to give people reported and one or two dimensions that we think they may be more interested in, which gets down to operational results.
Great. Thank you. Just one last, if I may, and I'm sorry if I missed it. Have you broken out the actual impact of calcimimetics in your North American dialysis care organic growth number?
On the-
Just a dollar number is fine.
Oh, no. Well, we give you the dollar number every quarter. I report it every quarter, but you're talking about the growth rate.
Right.
I believe We're just double-checking a couple things here.
That's all. I can follow up, Dominik. It's easy.
It's 2.3 without calcimimetics in the quarter.
It's with calcimimetics.
Thank you.
Yeah. Which is what I thought. I was hesitating, the rate is not adjusted, my revenue and cost per treatment is.
The next question is in the line of Tom Jones of Berenberg. Please go ahead.
Oh, good afternoon. I had two questions. I hate to harp on about it, I wanted to just ask another question on the commercial payer mix. I think what would be helpful is if you could just give us a bit of color on whether the challenges you're seeing or the reasons you think that your payer mix suffered a little bit in Q2 were 100% related to your own kind of operations, or there was any shift in the commercial insurance market external to FMC that you saw that you're now having to deal with. I think the reason I ask the question is the former, if it's just operational on your side, you've been there before. You had a similar position back in 2011, 2012, and a couple of quarters and you were back on track.
If the actual commercial market that you're operating in is becoming more difficult and more challenging, then that's maybe a bit of a bigger concern for investors. Maybe if you could just make some comment in that regard. The second question, I guess, is a bigger picture one probably for Rice. Emerging markets. How has the kind of last couple of quarters affected your thinking about your willingness to deploy capital in emerging markets? They by and large just generally seem to be a pain in the proverbial. When they grow, it's a relatively small number, and doesn't really move the needle given the size of the EMEA and the North American business. When they go wrong, they seem to go wrong in a big way and create a huge headache for everyone.
Are you as keen on the emerging market opportunity as you once were, or has your enthusiasm kind of softened somewhat?
Yeah, Tom. Two good questions. On the first question, it pains me greatly to say it's self-inflicted. I don't see something going on in the commercial book on a global or U.S. national basis, if you will. I'm not seeing something there. I simply think that we were not doing things that we should've been doing, lessons we learned a while ago, we seem to have forgotten. It is self-inflicted, which pains me to say it, but that is the case, and we will fix it. We'll sort through what needs to be done and get it fixed. On the emerging markets, today's not a good day to ask me that question, given what Mike's been talking about. Look, let's take a minute, and let me just run through this. We can't have it both ways.
We hear all the time from people, "My God, you're so consistently centered in the U.S., you should be doing something more international or you're going to grow your business." You got to kind of take the good with the bad. Having said that, just imagine though, you can't sit on the sidelines in China. China is a unique place that one person will make a decision that everybody's going to get healthcare, they're going to open up the markets, and you need to be there because the one thing we've learned in some of these countries, as those markets open up, if you don't have a presence, if you're not perhaps manufacturing, and they want to keep out foreigners, if you will, from coming into the country, they have ways to do that.
Being an early adopter and getting there tends to make sense, but you do have to take some of the good with the bad. Am I ready to change the strategy today? No. Remember, we try to go in as products first before we make a move to be a service provider, and there is a reason that we're in 150 countries with products, but only 50 with services. I have to say, as I sit here today and I read everything that's going on in the world, we have to be more diligent in looking at these opportunities. At the same time, I need some flexibility from you guys. I can't turn those opportunities down and stay anchored in the U.S. and Germany and no place else when everybody's telling me you need to diversify and you need to look to grow more.
We take a very long-term view, as you know, and we'll continue to do that, but it's a fair point that you raised today, and today I'm not big on emerging markets at this very moment, but I will calm down and think about this differently tomorrow.
That's understandable. Just one parting comment. We do appreciate the granularity on the various adjustments. It does help us to tease out the underlying trends in the business. Thanks for those.
Appreciate that.
Thanks, Tom.
Thank Mike, not me.
Yep. Thank you. I appreciate it.
The next question is from the line of Patrick Wood of BAML. Please go ahead.
Perfect. Thank you very much. Two from me, please. I'm sure it was clear to a lot of other people, but it would just be a little bit helpful if you could help me understand a little bit more the product side of things. Obviously the weakness in the 3Q, I understand some of the adjustments that have gone on there, really trying to get my head around how that looks going forward given the gross margin profile of that business, how we should expect growth. I guess on that same topic, I was a little surprised when we got the final numbers. Looking at the pre-release, why the product side wasn't called out as partly driving the weakness and the adjustment.
Did you not call products out as part of that weakness in the pre-release because of the expectation that it's going to improve materially going forward? It would just be helpful to understand why that wasn't sort of part of the commentary. Thanks.
I would say on the pre-release, then I'll let Mike jump into the margins here for products going forward, fourth quarter, what we think. Looking at the pre-release when we first looked at this, it's interesting, Patrick, lots of folks haven't really wanted to accept what I'm about to say to you, when we first looked at the signals that we were getting and got concerned that our expectations were not going to develop as we had wanted them to, it all kind of set right there in the emerging markets. The more we were able to dig into it and really talk to people with feet on the ground in some of these markets, it became clear to us it had to be a bigger situation than we were first looking at first blush.
Maybe people don't realize what two weeks of detailed study and being able to rip things apart and talk to people on the ground is worth quite a lot to Mike and I. Again, as I said earlier, to have done the pre-release and try to have a conference call the next day, we wouldn't have had the clarity to address some of this that we've gotten over the last two weeks. Mike, if you want to add anything.
I would just say, a lot of this is timing. Not that you need to, the expression, see how the sausage is made, literally, when we looked at this and what the obligations are under the ad hoc rules, we had operated only off our flash data. We did not get our closing information until literally the day that we had to release the ad hoc. That's why you're getting a lot more specificity today than you did two weeks ago, because we didn't have an opportunity to do a great deal of analysis of the details. We had to look at the big picture, then make some judgments.
Looking at products for fourth quarter, I'll make a comment, then I'll let Mike jump in. As we have traditionally seen in the fourth quarter, we can see better equipment sales as a result of people trying to spend their budget and get the equipment ordered on order and in by the beginning of the next year. When we look at what's happening in some of these emerging markets, I'm not as bullish that we're going to see a normal fourth quarter flood of equipment orders as we've seen. As Mike has pointed out, with IFRS 15, there's a lag time there, we're not going to see the same kind of contribution that we may have seen in prior years.
I do look at the disposable book of business, which I think is more repeatable and easier to measure, I think we'll see some of that come back. It's a matter of, is it going to meet the expectation that we had? We're just not sure it's going to develop that way. Mike, I don't know what you want to say on relative to the growth that we think we're still going to see, but that's kind of my commentary.
Yeah, I wouldn't add anything to what you said.
Hopefully that's helpful, Patrick.
Sure. Helpful. Thank you.
The next question is from the line of Lisa Clive of Bernstein. Please go ahead.
Good afternoon. Two questions. First, on home dialysis. You've had very impressive growth in your HHD population from, I believe, 2%-4% over the course of this year. I'm trying to get an idea of the margin impact of this. It really depends on how you're growing this business. Am I right in understanding that most of the new patients are PD patients who had rolled off that therapy? If that's the case, since they've been dialysis patients for a while, I assume all of them are Medicare. Meanwhile, it really seems the bigger opportunity in home is being able to attract those privately insured patients, as HHD can enable them to dialyze at night, stay employed, stay privately insured. How do we think about how you've been scaling up that business? I'll ask a follow-up question after that.
Yeah. Lisa, your instinct or your gut feeling is correct. The bigger growth that we're seeing in our home penetration, much of that is coming off of the PD sides of the business. If you go back and you were to look at our PD growth in the U.S. over the last couple of quarters, it has been high single digit to low double digit, they're coming in through the PD side of the house, if you will. Yes, your second point about privately insured patients that want to work and can work, bringing them in through home therapy is clearly a way to do that.
Because, as we've said, part of what led us down this path of acquisition with NxStage was seeing the trend that there are more people, as the younger people are coming onto dialysis, they have no desire to go into a clinic. They want to be at home, and many of them are employed and are working. All of those comments that we made a year ago August, when we were walking you guys through the deal rationale, that still is applicable today. You're correct.
Okay, just given the commentary, at least in the pre-release around the extra costs around HHD, most of those new patients are Medicare, right? I don't think that that's particularly profitable, is it?
Many of them are Medicare, and the increased cost wasn't directed just at HHD. Remember, part of what you see when you're growing your home book of business, either way, but particularly when it's PD, in the case of the U.S. and us, we run our own fleet of trucks. We do our own deliveries, and when the business grows, you got to have trucks, you got to deliver. There are things that go into that in addition to a tremendous amount of training that has to go on that sits in the clinic side of the house and not necessarily in the product side of the house. There's a little bit of division of labor, I guess I'll call it, for lack of a better word.
I don't know, Mike, if you want to jump in on that, I think that's the way I would say that.
Yeah. No, I agree with that. I'd just say bigger picture when we think about life after the closure of NxStage as we've talked about it, we think that gives us opportunities to approach home and in-center a bit differently and, in the midterm, generate some synergies.
Yeah.
Okay. Second question, just on care coordination. When you first launched this division in 2014, it was really segmented into the dialysis-related business lines like Fresenius RS, Rx, ESCO, vascular access, then non-dialysis expansion into other areas of healthcare services like Sound and NCP. Frankly, the latter really hasn't turned out how we initially expected. Sound has obviously been divested, albeit with a nice gain. NCP, if I've modeled it correctly, has seen something of a decline in its profitability since you bought it with, it sounds like, a further step down this quarter. Have you rethought your sort of non-dialysis aspirations? Given how big ESCO and other integrated care platforms are and your increased focus on home dialysis, where should you really be expending your energy and money in care coordination?
I think it's a fair question. I have not turned from facing north and gone south on NCP yet, Lisa. We are looking at that. It hasn't delivered to our expectations. At the same time, there is so much back and forth and in and out about where vascular access rates are going to be and where the procedures that offer the best opportunity for increased margin are going to go. We're not ready to cut that loose yet in any stretch of the imagination, we are looking at it and watching it. If there's any level of comfort people should have, I think we've shown you we will move when we think the time is right, i.e., Sound. We're not there yet. The other piece that you didn't mention in the urgent care. I'm more facing south than north on that one.
Okay.
We're going to do what we need to do. I would say, just keep in mind that we will act when we need to, the converse to that is when we see a good opportunity, like Cura in Australia, where it's really working, we're going to jump on that as well. It is still fluid. Let me say it that way without going much more into any specific organizational discussion.
Okay, thanks.
The next question is from the line of Ed Ridley-Day of Redburn. Please go ahead.
Hi. Thank you. My first question would be regarding the FCPA provision. Mike, can you just catch up on this? We had the big provision one year ago, then there was obviously you guided for lower costs related to that investigation. We have this additional charge and indeed in the pre-release commentary around non-financial matters that are still under discussion. Could you just clarify what those are and how we should think about this investigation and the cost relating to it going forward?
Ed, it's Rice. I'll turn Mike loose on you here in a minute, but I do want to make a comment. We're not going to get into a whole lot of detail about what the other non-financial discussions are. Let me say it this way, anytime you come to a settlement of this nature on the FCPA, you've got to agree on how it's going to be characterized and published when you've had that settlement. That means back-and-forth discussion about what's actually on the paper, where is it going. There's also how are you going to carry on your business post having reached a settlement that everybody is comfortable with, and that has to be discussed. We might want to do things differently than they do, and you have to go back and forth on that.
That's probably as much color as I think I can give you. Mike, I don't know if you want to walk him through a little bit of the charge componentry.
Beyond that, I would say that when we first took the charge, we had just indicated we'd started settlement discussions. We had a view of what we think the financial elements of We actually had several points that we looked at from a probability perspective to arrive at an estimate. As we indicated in the release, we've reached an understanding, and I use the word understanding because for us to reach a full agreement, we have to agree on all terms. We have reached an understanding with the SEC and the DOJ in terms of the financial piece, which was a little bit higher than what our probability estimate was at the time we established the reserve. In addition to that, frankly, it's taking us longer to get through the process, and when things take longer that involve lawyers, your legal costs go up.
We've kind of topped it off in that regard as well on the financial side in the EUR 75 million.
Fair enough. Thank you. The second question, I'm sorry if I missed it, but what was the materiality of the new consent agreement on pharmaceuticals on the dialysis margin in the quarter?
We haven't given an exact figure because we're limited in terms of what we can say under our confidentiality agreement. It's listed prominently, so I think it had a meaningful impact on the quarter. This is not a one-time thing, but I think probably the influence in the quarter is more significant than what you'll see going forward.
Think of it, we did this in the second quarter of last year, Ed. What happens is we are allowing, if you will, certain activities to be done by the partner that we're not undertaking, but they have to get our consent for that. I think that's kind of the way I would leave it, because Mike's right. We can't get into a whole lot of detail on that. Hopefully, that gives you a little color.
We should see some benefit going forward, but incremental relative to the effect in the third quarter.
You say incremental?
Well, I mean, a fraction of what we saw in the third quarter.
Yeah. A fraction, yeah.
That's fair. Thank you.
The next question is from the line of Michael Jüngling of Morgan Stanley. Please go ahead.
Thank you. Good afternoon. Two questions, please. Firstly, on the California ballot. Can you describe your lobbying efforts and also what you think of the wording on the ballot? It's kind of interesting, I think, the way it's been worded. Also, what do you think the financial impact would be if there is unfortunately a yes vote against the dialysis industry? Question number two is on ESCOs. Can you describe the profit or the booking of profits going forward for the next four quarters? How do you see the volatility of those ESCO profits being booked into your P&L? Thank you.
Michael, it's Reece. Relative to California and the wording on the ballot initiative, it's certainly not what we would've wanted. It was done in a way that I thought was fairly unfair, but I'm not going to cry about it. The way it works is wording was developed, and both parties got to comment on the wording, and it just didn't go our way, is I guess the way I would say it. We continue to say that this is going to be too close to call. We will know probably sometime during the day on November 7th how it went. What I would tell you then is I'm not going to make any commentary till I know whether it went our way or not.
If it didn't go our way, we'll talk to you about what we're going to do and what we think those impacts could be, but let's not get the cart before the horse. At this particular point in time. Secondly, I think Mike can talk about ESCOs and profit, but that may be another cart before the horse. Go ahead, Mike.
No. I take it because you're really talking about the year-over-year change related to the expanded sites in 2017. When you think of the program, they're not allowing additional sites in 2018. As we introduced new sites in 2017, we went through the same kind of process with them that we had with the original sites. For 2018, since you're dealing with just new patients in existing sites with all the control procedures set up, it's a much smoother process. Thinking about when you said next four quarters, I think, relative to the expansion, since we're dealing with the same sites and just new patients, it's very smooth. We're pleased with the performance, and what we're doing for the patients in these ESCOs. We'll have to just go through the reconciliation process, which is an annual event.
Mike, just a follow-up on these ESCOs. What is the chance or so that we'll be surprised in a quarter or so of booking a material amount like we've seen in the past? Is that likely, or is the smoothness that you've described as the volatility that we've seen in the past is no longer an issue?
Yeah. I think, well, the smoothness I'm referring to relates to operationally new sites, new patients, and going all the way back to the beginning, establishing the whole process. We went through the same thing with the BPCI. Relative to any abrupt change, I'm not anticipating anything operationally in that regard in terms of patient care aspects. I think relative to discussing the reconciliations with the government, these are very detailed discussions because you're dealing with benchmarks, you're dealing with adjustments to benchmarks. I can't really comment on that today, because we have to just sit around the table, work through the questions that you typically have from year to year, and then come to an agreement.
Great. Rice, on this ballot, just a follow-up question, please. Given that the industry or the dialysis industry has spent over EUR 110 million fighting maybe around 15,000 patients, is that spend an indication that this is such a material win for the future of, let's say, reimbursement rates or profitability in the U.S.?
Well, couple of things, Michael. You're mixing things here. The EUR 110 million was an industry-wide spend. The 15,000 patients is just our patients. The total number of patients in California, I think, runs around 65,000, so it's quite a large number. Without waxing too political on this, what I would say is we're fighting this fight because we think what's happened is egregious. We think they're putting patient lives at risk versus them dealing straightforwardly about do we want to unionize or not. The answer is, there is a process for that in the U.S. We can't stop it. We don't stop it. They just decided to not make that effort and just go take this to the public in California. I'm a pretty rational guy till you poke me in the eye, and then I can get aggressive back.
We're just defending our territory, and we'll see where this goes. That's probably as much as I'll say.
Great. Thank you.
The next question is from the line of Oliver Metzger of Commerzbank. Please go ahead.
Yeah. Hi. Thanks for taking my question. The first one is on M&A. Could you comment how or to which territory your external growth projections have changed? You mentioned that you still project 1% positive external growth. Can you give us an indication at which level you were earlier this year? That's my first question. My second question is on healthcare products in Europe again. Your decline, it's the first decline for more than two years in a quarter. Can you just comment how long you expect this negative momentum to last?
Oliver, I'll turn it over to Mike here on the M&A. The one thing I do kind of just want to point out to people, and I think Mike said this earlier, is obviously we had pretty big expectations on the M&A front as we had a big budget, and we took that down. I would also just kind of get people to realize the same folks that buy things for us sell things for us. You just have to keep in mind the business development team in the U.S. spent a number of months selling Sound, and when you're selling something, you're not necessarily looking to buy other things right at that point in time. There's a little bit of just priority and what was going on here.
I know you want a more technical answer. I'll turn it over to Mike, but I wanted to give you just a sense of how we're looking at this big picture.
Yeah. I wouldn't add much to that, Rice. I would say that as we did our planning for this year, as a board, we wanted to see an accelerant there. Part of why we're not seeing what we had hoped to see was, as Rice describes. You have the same people very focused on divestiture. We did look at some deals that did take some time from these folks, and they ultimately didn't get to a close. We'd be having a different conversation if we had.
Your second question on the product side of the business, relative to EMEA. We see ups and downs when you look at that book of business, 40 countries spread from Central Europe to Eastern Europe to the Middle East and Africa. We do see puts and takes there. I think one of the things that has put us in this downward trend, remember, a bunch of this business, probably 50% of it or so, is tender related. We do lose tenders from time to time, and those tenders aren't for necessarily three months or six months. They can be a yearlong on the product side. If it's a service tender, it can be multi-year. We've had some of that going on. The competition is there.
We fight it, we also have to make decisions about, do you want to fight it to the point that you trash your pricing and you destroy value, or do you not do that, sit on the sidelines, have a bad quarter or two, have to deal with that, come back in at the next opportunity? I believe that we are going to see continued pressure from our expectations in the fourth quarter, we've hinted that to you. Where will it go next year? We're not there yet. As I said, we're just starting our budgeting process. If there's anything that I've seen, Oliver, in my 21 years with the company, is that we generally find a way to continue to grow our product business. R&D is a big piece of that, obviously, in coming out with new products.
I'm not worried or panicked, but we are recognizing that we see a lot more competition around the world. Everybody's elevated their game, the battle is on, but we'll get our fair share, but it may not be ratable quarter to quarter to quarter. Sometimes you get these expectation surprises that you have to deal with, and we just have to lay it out for you that way.
Okay. Thank you.
The next question is from the line of David Adlington of J.P. Morgan. Please go ahead.
Hey, guys. Thanks for taking the questions. Firstly, on just your care coordination business in North America, just wondered, the 12% margin in Q3, is that at least a good starting point for where we are with the business now and how we should be thinking from here? Secondly, just on EM. Mike, I think you said that you sort of think on the hyperinflation side, thinking about Q4 being the same as Q3, but I'm pretty sure that Q3 had a catch-up for the entire first nine months. I just wanted to sort of clarify that Q4 expectation versus Q3. Thanks.
David, I'll take on the care coordination. I wouldn't lock and load on that 12.1%. As Mike took you through there, once you strip out that transactional gain from the sales gain, I think you should think about that in terms of 9%. That's kind of where we are. That's right in the range, the sweet spot that we gave you, we thought we'd be in. On the emerging markets-
I missed the question.
Okay. He was asking about inflation in the emerging markets, knowing that in Q3 we had to deal with Argentina and kind of the step up there. Do we really think it's going to continue that way? I think I know your answer on that we believe it will be another bad quarter in this one.
Yeah. For Argentina, when you look at the indices that we're using, they're already prognosticating into Q4. That's why I said I think we'll see a similar effect in the fourth quarter that we saw in the third, which is in the teens.
In terms of-
Mid-teens, I would say.
Yeah.
In terms of millions of euros.
We have taken that into our consideration.
Right
the way we've adapted our guidance and our expectations. We assume that in there, so that's not a newbie. It won't be a newbie.
It's in the guidance. Yep.
Mike, correct me if I'm wrong, but I think that mid-teens in Q3, you captured Q1, Q2, and Q3 all in Q3, right?
Correct.
For Argentina, that's correct.
Yeah.
I think what Mike's giving me the hand signal here that it accelerated as we got into the latter part of the year. It wasn't such a big deal in the first quarter and in the second quarter on that basis.
Got it.
It's not symmetrical.
Understood. Thank you.
The next question is from the line of Gunnar Romer of Deutsche Bank. Please go ahead.
Gunnar Romer, Deutsche Bank. Thanks for taking my question. The first one, again on care coordination. I think, when you last guided on the business, you said around 9%-11% or around 10% margin. Given your nine-month performance, even to get to the lower end, would, I believe, assume quite a significant step up in the margin in the fourth quarter. Can you help us understand how you really look at the earnings contribution from care coordination in the fourth quarter? Are you expecting a sequential improvement here, and what is this going to be related to? The second question would be on the transactional effects that you've seen in international. Can you comment what the combined effect was on EBIT if you take together the international markets? That would really help us helping out the operational performance here. Last question on corporate cost.
Can you update the guidance here now, in or excluding the FCPA charge? I don't mind, but just to help us understand what your current thinking is on the corporate cost. Thank you.
Okay. Gunnar, on care coordination margins, we're trying to take a look because I would've said year-to-date, I'm probably still in a range where the 9% or 10% that I gave you would probably mean coming down a bit off Q3, but you're still much better than we were at the beginning of the year. I just don't have the year-to-date figures in front of me. I think there's a little bit of moderation, but I think still at very high single digits, possibly teens.
Yeah. We'll get it for you, Gunnar. Hang on.
Double.
We'll answer your questions when we come back.
Yeah. On your second question, I don't do this all the time, but a couple of years ago, you saw this effect. I did disclose the transactional effects in the aggregate for the international markets. As I said before, we saw something substantial in Q1 with about EUR 15 million EBIT effect. That moderated in Q2. Yeah, that's just a little over one million EUR in Q2. Now we're back in Q3, in the range of the mid-teens, around EUR 17 million. You see the boomerang effect there.
It's a small point, you can understand now coming out of where we were in Q2, the surprise and the change, the missed expectation for us seeing that in Q3.
That makes perfect sense. The EUR 17 million does not include the hyperinflation charge, right? Otherwise, it doesn't make sense.
You're correct.
Yeah.
That is correct.
Yeah, that's just transact. Corporate costs, we're taking a look. I didn't come into the room today with an answer on that one. Why don't we go to the next, and I'll come back.
Maybe a follow-up question, just around your expectations regarding the conversions of the Site 11s. What's the current thinking on how fast you can get these approvals?
It's a tough one, Gunnar, because we're dealing state by state. I'm going to say it this way. I don't expect where we had an appetite for 40 to be done this year. Well, now we're looking at 29. I don't see anything that's going to tell me that I'm going to get the remainder done in the fourth quarter, so I think there's going to be some spillover effect into Q1. I would tell you that I would hopefully come out of Q1 of next year with the 40 that we wanted converted, done, certified, and up and running. I don't think we're going to get there in the fourth quarter given the delays and the issues we saw getting various states to certify for us over the course of Q3.
How many more would there then be left once you've reached the 40?
Yeah.
Right
centers. We didn't anticipate, we didn't expect that we would convert all 60 of them. At getting 40 of those done, we may still have another handful that we would do. Part of that will depend on geography and do we stay in at Site 11? Do we combine some? I think you probably got another handful that we would consider that we would probably do over the course of next year. We can give you color on that when we get to guidance for 2019.
Yeah, Gunnar, just to come back to you on the care coordination. You may need to do this offline with investor relations. What I'm looking at year-to-date through September is around seven. To get to the 9-10, we would have to see an uptick in the fourth quarter.
Quite a significant uptick then in the fourth quarter in terms of margin, I guess.
We have to be on the, I'd say the mid to high teens.
Yeah. Revenue-wise, I guess sequentially, Q4 should look pretty similar to Q3 for the care coordination business.
Yes, I think that's accurate.
All right, that's helpful. Thank you, guys.
Just up a bit. Yeah.
The next question is from the line of Hassan Al-Wakeel of Barclays. Please go ahead.
Thank you for taking my questions. I've got a couple. Firstly, could you elaborate on the countermeasures that you've identified, particularly in the U.S., other than the changes to management, as you highlighted? To this end, was the de novo delay here largely avoidable? Secondly, you pushed out the NxStage deadline for the second time, now to February 2019, although you note that you still expect a closing this year. What is driving this delay, and do you think other disposals may be required? Thank you.
We'll work backwards to forwards. No, I do not believe there are other disposals that'll be required. The reason it's into February 5th is we use 90-day windows of planning. That was what we agreed to in the merger agreement, so there's no magic to that. We just stuck to the formula that we had been using. That's why no more discussion on having to divest something else. That's why I'm still bullish we'll close this year. No magic around using an additional 90-day window. On the countermeasures relative to the commercial situation, relative to de novos, we had for years traditionally done around 45 to 50 de novos in a year. We then decided to step that up. We had a much bigger appetite over the last year or two. There's not anything that we could do.
This is not a self-inflicted gunshot wound, if you will, to our de novo practice. This is simply building them, literally hounding the government to come and inspect and certify the facility so that we can begin to take patients, and they are just very backlogged. The good news out of this is, as an industry, we went to Congress and complained bitterly and said, "Guys, we're not going to match the growth in the market if we can't get these facilities certified." That's how we ended up with the Balanced Budget Act that was passed back in July that will allow us to utilize third parties effective in January of next year. This is not something that I think is self-inflicted. I think we're dealing with the cards that we got dealt.
When the government doesn't get things done quick enough, we were able to go to Congress to try to get that speeded up, and I think that should help us tremendously in that regard.
Thank you.
Sure.
There are no further questions at this time. I hand back to Dominik for closing comments.
Sure.
I just want to understand again.
Okay. We get one comment.
Yeah, we're doing our best. I would say, I think we have guided to flat to maybe slightly up on corporate costs. I would say we're probably slightly up, fairly consistent with our guidance, and that's in currency. Go ahead. I can't hear.
Excluding FCPA.
Yeah, excluding FCPA.
Yeah.
Yeah.
Okay.
Okay.
Gunnar, we're managing the costs pretty much as the way we laid them out to you, ex FCPA.
That give you the answer you're?
Yeah.
To responses? Okay. Thank you.
Good. Thank you, ladies and gentlemen. The conference is now concluded, and you may disconnect. Afterwards, we would like to say thank you very much for sticking with us for that long call, and we hope it was helpful, and you gained a little bit more understanding of the topics you hadn't had two weeks ago. Okay? Thank you very much.
Thank you, folks. Take care.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.