Earnings Call: Q1 2020

Aug 2, 2019

Thank you for waiting, and we appreciate you participating in the conference call for the 1st 3 months of fiscal year ending March 31, 2020 for Sysmas Corporation. Today's presenters and those who answer your questions will be Senior Managing Director and CFO, Yukio Nakajima and Senior Vice President of Corporate Business Administration, Tomo Aramaki. First, Nakajima will present the first financial highlights for 15 minutes, followed by 30 minutes for Q and A session. This call will be recorded. We'll be starting shortly and Nakajima will explain the financial highlights. My name is Nakajima of Sysmex. I would like to go over the financial highlights for the 1st 3 months of fiscal year ending March 31, 2020. Please take a look at Page 1. Financial highlights. Net sales 68,500,000,000 yen growth rate is 3.9%. Operating profit is 11,200,000,000 yen 18.4% down. Profit attributable to owners of the parent, 6,600,000,000 yen 28.9% down. Net sales rose centered on hematology in each region despite the impact of yen appreciation. Operating profit was down due to the impact of yen appreciation, a worsening cost of sales ratio on instruments and services and expenses, including those related to our biodiagnostics reagent base. Please take a look at the lower left table for foreign exchange. U. S. Dollars, 6.6 fluctuations reduced net sales 2,410,000,000 yen and operating profit 1,130,000,000 yen Profit attributable to owners of the parent was down due to lower operating profit and the impact of an exchange rate loss. The tax rate is 31.5%, 4.9 points down compared with the previous fiscal year. That is mainly due to the refund of withholding tax following the division of Japan Germany tax treaty. Let's take a look at the next page, breakdown of net sales by region. As shown in the center of the slide, net sales year on year is decreased in China yen terms due to the yen's appreciation, while it increased in local currency basis. Net sales increased in other regions, both in yen terms and local currency basis. As stated earlier, FX impact is minus 2,410,000,000 yen in total and by region, 30,000,000 yen of positive impact in Americas, 1,100,000,000 yen of negative impact in EMEA, 1,140,000,000 of negative impact in China and 190,000,000 of negative impact in AP. Moving on to the next page, sales by business and product type. IVD business is mainly driven by hematology and hemostasis, which resulted in 7.4% year on year increase if previous year's rate is applied. Hematology sales increased driven by reagent sales. Hemostasis sales increased driven by instrument sales in China and Japan. Hearing analysis sales increased driven by instrument and reagent sales in EMEA despite the delay in FDA approval for urine qualitative analyzer. Immunochemistry sales slightly increased driven by the reagent sales in China and Japan. Life Science business sales increased by 11.1% if previous year's rate is applied. The business grew in Japan and EMEA and resulted in sales increase. Further, NCC Onco Panel sales in Japan is not included because its order taking started in July. Next page. Here is the breakdown of operating profit. Operating profit was down due to impact of yen appreciation, a worsening cost of sales ratio and increasing SG and A and R and D expenses. Cost of sales ratio worsened by 2.9%, excluding the FX impact of 0.4%. Out of 2.9% of deterioration, 1.4% is attributable to reclassification of SG and A expenses to cost of sales in China. Other attributable causes include impact of an increase in purchases of 3rd party instrument and other products in Japan, higher service commissions for Chinese distributors, increase in service cost to reinforce the U. S. Service structure, while improvements were made to the product mix. SG and A expenses increased due to higher labor costs in Americas and EMEA and temporary expenses including biodiagnostic reagent relocation expenses. R and D expenses increased to enhance biodiagnostic reagent development capabilities. Other income and expenses decreased due to Chinese government grant of 0.51,000,000 yen received in Q1. We expect to receive the Chinese government grant for this fiscal year after 2nd quarter. Negative impact of exchange rate fluctuations is minus 1,130,000,000 yen Moving on to information by destination, starting with Americas. Sales was 15,800,000,000 yen grew by 5.8% year on year. Sales for this region rose, thanks to higher sales in the United States and Canada in the hematology field despite lower U. S. Sales in the urinalysis and hemostasis fields entered distributors in Brazil. It grew by 5% in local currency basis. Sales in United States grew by 3.5% as the result of higher agent and service sales stemming from an increase in the installed hematology instrument base despite being affected in the urinalysis field by delays in the FDA approval of new products and lower cells in the hemostasis field reflecting deals to major commercial laboratories in the preceding fiscal year. Sales in Canada grew by 13.5% due to strong performance in hematology. Sales in Central and South America grew by 0.9%, slightly increased despite lower sales in Brazil. Sales were up in other regions. We have entered an agreement with Roche, which involves a change to our sales structure for the mid range to low end hematology markets in Brazil. We plan to commence operations of a new sales structure to allow Sysmex direct marketing in Q3. Moving on to the next page, EMEA. Sales was 19,200,000,000 yen grew by 5.5% year on year. In addition to higher sales of hematology reagents in the Middle East and other emerging countries, hematology system deals increased in Netherlands and direct sales in the uni analysis field started last October were favorable in United Kingdom and France. Sales grew by 11.1% in local currency basis. Sales rose in 5 major countries by 2.3% due to higher direct sales in the urinalysis field in United Kingdom and France despite sales decrease in Spain. In other parts of Europe, sales rose by 24.5% on an increase in hematology system deals in the Netherlands and Northern Europe. Sales were up in the Middle East by 28.8%, stemming from the start of direct sales and service in Egypt and the commencement of direct service in Saudi Arabia and Oman. In Eastern Europe and Russia, 6.2% increase, while sales decreased for Russia due to limited instrument sales. Due to acquisition of deals for commercial laboratories in Poland, it increased. We established a reagent factory in Russia, which is scheduled to start operations in Q2. Moving on to the next page. Let's take a look at the next page, China. Sales in China was 17,600,000,000 yen down by 1.2%. Sales were down due to the impact of yen appreciation and the demand surge in Q4 of the preceding fiscal year. It grew by 5.4% in local currency basis. Instrument sales decreased, thanks to the growth in the hemostasis field. The agent sales increased by 3.3%, thanks to the growth in the hematology, urinalysis and immunochemistry fields, excluding the impact of reclassification. The impact of reclassification is approximately 900,000,000 yen Hematology sales increased by 2.7%, thanks to the reagent and service sales. Because of quality issues, we saw a demand surging Q4 of the preceding fiscal year and the instrument sales were sluggish due to such impact. Quality issues are already solved. Hemostasis sales increased by 11.7% despite decrease in the agent sales, thanks to the strong sales of instrument utilizing the transportation system. Immunochemistry sales decreased by 4.5% due to the impact of a demand surge in Q4 of the preceding fiscal year caused by instrument quality issues. Quality issues are already solved. Moving on to the next page, Asia Pacific. AP sales was 5,700,000,000 yen grew by 6.3%. Sales expanded due to increases in Southeast Asia centered on hematology and immunochemistry reagents as well as higher sales in India where we devised our sales structure. Sales of instruments were down, reflecting major hematology deals in the preceding fiscal year in Taiwan. The agent sales increased, spurred by higher sales in the hematology field in Indonesia, Thailand and the Philippines due to an outbreak of dengue fever and an increase in the installed base. Sales in the Southeast Asia increased by 15.8% 15.8% increase. Though instrument sales dropped in Indonesia due to a decrease in instrument tenders affected by fiscal deficits in the national health insurance plan, hematology DH and sales grew following the outbreak of dengue fever and the increase in blood tests. Sales in the South Asia decreased by 3.9%, impacted by major deals in the preceding fiscal year in Bangladesh and Pakistan, but our strategy targeting in the mid range and high end markets in the hematology field is kicking off smoothly after devising our sales structure in India. Sales in Korea and Taiwan is down by 4 point 0%, impacted by major deals in the preceding fiscal year in Taiwan, while sales increased in Korea with growing the agent sales. Let's take a look at the next page. Sales in Japan is 10,100,000,000 yen grew by 6.0%. Sales grew as a result of higher sales of instruments in the hematology, hemostasis and life science fields. Instrument sales increased by 49.6% due to an increase in deals involving the large scale replacement of hematology systems and favorable sales of new hemostasis instruments. The agent sales were down by 0.7% due to a shift in delivery period on hematology reagents for quality control. As mentioned earlier, we plan to begin full fledged assay services in Q2 for NCC OncoPanel system for cancer genome profiling after confirming the readiness by cancer core hospitals. Please take a look at the next page. It is consolidated earning forecast. While we need to closely monitor the foreign exchange rates, consolidated earning focus has not been changed since our last disclosure in May, and we will continue efforts to achieve the target. This concludes my presentation.