• 02.1
  Operations and Business Environment
• 02.2
  Results of Operations, financial Situation, Assets and Liabilities
• 02.3
  Non-financial Performance Indicators
• 02.4
  Risk Report
• 02.5
  Subsequent Events
• 02.6
  Outlook

02.1

Operations and Business Environment

STRATEGY, OBJECTIVES, AND CORPORATE MANAGEMENT

Our long-term strategy is geared towards continuously increasing our Company’s value. We focus our business activities on the health of patients, improving the quality of their lives, and raising their life expectancy. The Management Board uses a number of different instruments and key figures to evaluate the Company’s business performance, develop the corporate strategy, and make investment decisions. Overall, we see ourselves in an excellent position to achieve our growth goals and stay ahead of the competition in the long term.

CONTROL CRITERIA

The Management Board operates the Company using various financial ratios and follows its growth strategy for the future, GOAL 10, which Fresenius Medical Care has been pursuing since the spring of 2005. GOAL 10 stands for “Growth Opportunities to Assure Leadership in 2010” and defines our scope for growth in the years to come. Fresenius Medical Care is pursuing four paths in parallel to successfully capture a broader spectrum of the worldwide dialysis market and achieve its growth objectives (see the “Growth Strategy” section on this page).

In our view, EBIT (earnings before interest and taxes) is one of the most useful yardsticks for measuring the profitability of the Company. Consequently, we control the activities of our business segments based on their EBIT. Another good indicator to assess Fresenius Medical Care’s ability to achieve positive financial results is EBITDA (earnings before interest, taxes, depreciation and amortization). The Management Board evaluates each segment based on target figures that reflect all of the segment’s controllable revenues and expenses. Financing is a corporate function, over which the Company’s segments have no control. Therefore, interest expenditure for financing is not included in the segments’ target figures. Neither are “corporate costs”, which relate primarily to headquarters’ outlays in the areas of accounting and finance, professional services, etc., or tax expenses, as the Company believes that these costs are also not within the control of the individual segments.

Fresenius Medical Care evaluates its operating cash flow based on days sales outstanding (DSO). The number of DSO is used to assess the extent to which a company can generate the necessary cash to maintain the assets depicted in the balance sheet and to make expansion investments.

The debt / EBITDA ratio is another important criterion for assessing corporate performance. This ratio compares the Company’s debt to its EBITDA and other non-cash charges. The debt / EBITDA ratio is an indicator of the amount of debt and the length of time needed to service it. It provides more reliable information about the extent to which a company is able to meet its payment obligations than simply taking absolute debt into account. Fresenius Medical Care is active in the dialysis industry and has a strong position in a global, growing, and largely non-cyclical market. The industry is characterized by stable and sustained cash flows that can be planned, as most of the Company’s customers have a high credit rating. This means that we can draw on a relatively large share of debt capital, in comparison to companies in other industries.

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We also gear our corporate management towards operational ratios such as ROIC (return on invested capital), ROOA (return on operating assets) as well as ROE (return on equity). ROIC rose from 8.4 % in 2007 to 8.6 % in 2008. ROOA decreased slightly in the same period from 12.5 % to 12.3 %. ROE (after tax) improved from 12.9 % to 13.7 % in the last business year.

Our investments are generally controlled in a detailed coordination and evaluation process. In a first step, the Management Board sets the complete investment budget for the group, as well as investment targets based on investment proposals. Subsequently, the operating units and an internal Acquisition Investment Committee (AIC) examine the individual projects and measures taking into account the overall strategy, the total budget, as well as the return on investment and potential yield. The investment projects are evaluated based on commonly used methods such as internal interest rate and incremental capital methods.

Details on the development of these financial indicators as well as other financial figures can be found in the „Results of Operations, Financial Situation, Assets and Liabilities” section as well as in the Financial Report.

GROWTH STRATEGY

We presented GOAL 10, a long-term strategy with defined objectives, back in the spring of 2005. GOAL 10 stands for Growth Opportunities to Assure Leadership in 2010 and describes four paths (see below) that Fresenius Medical Care intends to follow in order to boost its success across the broadest possible spectrum of the global dialysis market and to achieve its long-term growth objectives. We aim to pursue the four paths of GOAL 10 in a financially responsible way and bolster our position as the world’s market leader in dialysis. In addition to expanding our production capacities and significantly enlarging our clinic network, one of the most important measures we took in 2008 was to enter into alliances in the field of intravenously administered iron preparations, a move that will help us ensure long-term growth. We have elaborated on the GOAL 10 strategy in detail in previous annual reports and will therefore limit ourselves here to discussing a few important aspects.

PATH 1: ORGANIC GROWTH. By introducing dialysis services and innovative dialysis products such as the newly developed 5008 and 5008s series dialysis machines, we intend to achieve organic growth of between 5 % and 6 % annually in the years to come. We are planning to expand our clinic network in all important markets and growth regions worldwide to maintain and even improve our leading market position. At the same time, we aim to grow our range of integrated, innovative treatment concepts such as Ultracare and cardioprotective dialysis and combine them with dialysis drugs, for example. We believe that this strategy will make us stand out significantly against our competitors.

PATH 2: ACQUISITIONS. With our long-term growth goals and our aim to boost profitability in mind, we regularly investigate possible acquisitions to selectively expand our dialysis clinic network. In doing this, we concentrate on particularly attractive regions, although investments in future acquisitions in North America should be on a smaller scale than in previous years due to the fact that the consolidation of the North American dialysis market is proceeded farthest. However, we assume that most of our future growth will be generated organically. Acquisitions should help us achieve our longterm objectives. Further information on acquisitions could be found in the „Investments and Acquisitions”. section.

PATH 3: HORIZONTAL EXPANSION. Last year, we added intravenously administered iron preparations to our range of dialysis drugs. We did this through alliances, which enabled us to extend our range of products expediently and in keeping with our strategy. A detailed report on our activities related to dialysis drugs can be found in the „Portfolio Expansion and General Factors” section.

PATH 4: HOME DIALYSIS. As in the past, a relatively small percentage of dialysis patients (11 %) performs dialysis at home. Most patients receive their treatments in specialized dialysis clinics. We aim to assume an important global position in the home therapies market, which includes peritoneal dialysis as well as home hemodialysis, in the long term. To achieve this GOAL, we intend to combine our comprehensive and innovative product portfolio with our expertise in the area of dialysis services. More information can be found in the „Portfolio Expansion and General Factors” section.

Our strategy encompasses concrete and measurable growth objectives. At the same time, it takes into account long-term trends that we forecast for the dialysis market. In addition to a growth in patient numbers, we expect the quality of dialysis services and available products to become more important. Thus, compensation for dialysis care should in the future depend to a greater extent on certain quality criteria being met. More information on this can be found in the „Quality and Environmental Management” section well as in the „New Reimbursement Models” section.

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Moreover, we are convinced that in future there will be a growing need for integrated care of kidney patients. As a result, our business will not only focus on individual services or dialysis products, but will combine the different areas of application related to dialysis.

GROWTH OBJECTIVES

We have set ourselves ambitious goals again for the years to come. Overall, we expect to boost our revenue by 6 % to 9 % on average per year at constant currency as a result of strategic measures – the horizontal expansion of our product portfolio through dialysis drugs and the further development of our home therapies products – as well as through organic growth. Our revenue GOAL for 2010 remains unchanged at over $11.5 billion. Annual net income should increase by more than 10 % per year, in case the exchange rate relations remain constant in 2009 and 2010.

Financial prudence will guide us along all four paths of GOAL 10 to enable us to service our debt and make investments. The operating cash flow should comprise at least 10 % of revenue. A continued increase in earnings and improved management of our current assets should contribute to this development. Furthermore, we aim to sustain the tax rate at the present level of between 36 % and 37 % by 2010. Expenditures for investments and acquisitions as part of ordinary operating activities should be at around 8 % of revenue.

Our GOAL 10 objectives can be found in the table 02.1.3. For further information phase refer to the „Outlook” section.