Earnings Call: Q3 2019

Feb 3, 2019

Thank you for waiting. And we appreciate your participating in the conference call for the 1st 9 months of fiscal year ending March 31, 2019 for Sysmex. 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 financial highlights for 15 minutes, followed by 30 minutes for Q and A session. We will 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 9 months of fiscal year ending March 31, 2019. Please take a look at the Page 1, financial highlights. Net sales 208,300,000,000, growth rate is 2.9 percent, operating profit 42,500,000,000, 4.5 percent down. Profit attributable to owners of the parent JPY 28,900,000,000, 5.4 percent down. Net sales increased due to higher sales of reagents centered on the hematology, hemostasis, immunochemistry and life science fields. For operating profits, it was down due to the impact of temporary factors in the same period of the previous year, worsening cost ratio as well as to higher R and D expenses. Please take a look at the table, lower left for foreign exchange, JPY 0.6 appreciation against U. S. Dollar, JPY 1 down against euro, Chinese yuan remained the same. And we had a minus impact of JPY 1,630,000,000 and operating profit, JPY 0.22000000000 increase. And profit attributable to owners of the parent, despite a lower tax rate, profit was down due to the impact of a gain on sales of shares of Viomiryu, equity and losses of Medi Caroid and increase in foreign exchange losses in the previous term. The tax rate is 27.8%, 4.9 points down compared with the previous fiscal year. That is due to Tax Cuts and Jobs Act in the United States and the refund of withholding tax following the Japan Germany tax treaty. Let's take a look at the next page, breakdown of net sales and operating profit. External sales by region, while we had foreign exchange impact, mainly driven by the growth in Americas, EMEA and China, we our sales increased. And for foreign exchange impact yen depreciated, but yen appreciated against dollars. And due to emerging currency impact, total minus $1.6 impact. By region, Americas, yen 440,000,000 minus impact EMEA, yen 660,000,000 minus impact China, yen 210,000,000 minus impact and AP, yen 320,000,000 minus impact. For operating profit, because of sales increase, gross profit also increased. But due to worsening cost of sales ratio, SG and A and R and D expense increased, it went down. Cost of sales, while sales proportion of reagents went up due to steep rise in crude oil price and logistics cost increase and the service commission expenses transferred from SG and A to COGS in from our second quarter, it went down. SG and A, due to personnel increase in emerging countries in EMEA, including Egypt and Russia, SG and A increased. R and D expense, in addition to core and next core business and network solution investment, it increased. Due to the impact of dissolution of employees pension fund in previous fiscal year, cost of sales minus 400,000,000 down SG and A minus 1,200,000,000 down. Please take a look at the next page, sales by business and product type. For core businesses, mainly hematology, immunochemistry and hemostasis grew. That resulted in 3.3% increase. For hematology, reagent sales drove the sales. And urinalysis, even though it grew in Japan due to FDA new product approval delay, it went down. And for immunochemistry, the instrument and the agent sales grew in China. And for Hemostasis, the instrument sales in the United Americas and the reagent sales in China increased. Next core business, 19.4% increase. Life Science business, because of the growth of Osuna new products in Spain, it increased. Next page, net sales by geographic region. Please look at the upper right year on year, Americas, EMEA and China for both yen based and local currency base, they increased. And for AP, due to emerging currency impact, yen based it went down Japan flat and overall 2.9% sales increase. Next page. Starting here is the activities in each region, starting with Americas. Sales 45 600,000,000,000 growth, 3.2%. Sales were up due to higher sales of hematology reagents and hemostasis instruments in the United States despite lower hematology sales in Central and South America. Operating profit, JPY 2,500,000,000 Gross rate, 33.9 percent down. Operating profit was down as the impacts of our division in intra group transaction prices, higher service costs and other factors outweighed the rights in sales. Next, local currency basis sales went up by 3.8%, operating profit 33.6% down. By region, United States, 7.1% increase, While sales decreased due to delayed FDA approval of urinalysis product, sales rose due to expansion of the installed instrument base, which pushed up hematology reagent sales as well as higher sales of hemostasis instruments. For Canada, 15.9% down. Sales were down, reflecting deals for major commercial laboratories in the same period of the preceding fiscal year. Central and South America, 7.2% down. Sales fell as a result of a prolonged decrease in the sales of dermatology instruments to distributors despite positive performance in direct sales of new products in the urinalysis field in Brazil and Colombia. Next page, EMEA Sales, 56,700,000,000, growth rate 4.1 percent. Despite the ongoing impact of depreciation in the value of emerging market currencies such as Russian ruble and Turkish lira, sales grew as a result of higher sales in the hematology and life science fields. Operating profit, JPY 4,700,000,000, 8.2% increase. The cost of sales ratio improved due to a revision in intra group transaction prices and the sales increase pushed up gross profit. These factors outweighed such items as a rise in SG and A expenses following the establishment of direct sales in Egypt and others. Local currency basis, sales went up by 3.3%. Operating profit went up by 7 point 4%. 5 major countries, 4.8% increase. Sales rose due to higher sales of hematology instruments in France and Italy and the contribution of increased new product sales in Spain in the Life Science field, OSNA. For Eastern Europe and Russia, driven by the increased reagent sales, sales went up. But due to sales decrease in East Europe, sales went down. But excluding the ruble depreciation impact, Rochef's sales went up by 17.1%. For Middle East and Africa, 1.1% increase, while Middle East sales went down. In Africa, due to increased hematology reagent sales and large Project 1 in Burkina Faso last year, sales went up. Next page, please. China sales, JPY 54,700,000,000 growth rate 4.7 percent increase. Sales rose as higher reagent sales due to favorable increases in the immunochemistry and hemostasis fields offset lower instrument sales. Operating profit, 6,900,000,000 yen 15.2 percent increase. Although affected by a division in intergroup transaction prices, operating profit rose due to a rise in gross profit stemming from higher reagent sales. Local currency base sales went up by 4.9 percent, operating profit 15.4% increase. And the growth rate by fields. Hematology, 1.8% down. Sales dipped due to falling instrument sales, although reagent sales were robust. Hemostasis, 10.5% increase, Favorable performance in fibrin reagents pushed up sales. Urinalysis, 6.1% down. Sales in this field dropped due to lower instrument sales in comparison with the corresponding period of the previous fiscal year when the launch of a new product prompted a demand surge. Immunochemistry, 39.3% increase. Sales expanded owing to higher instrument sales and a rise in the agent sales centered on the agents for infectious diseases. We restarted the sales of the instrument, it was temporarily stopped. Next, AP sales, JPY 17,500,000,000 the growth rate 1.8% down. Despite firm sales in South Korea and Thailand, sales were down due to the impact of a major tender acquisition in the same period of the previous fiscal year in South Asia. Operating profit, JPY 2,200,000,000, 4.1% increase. Operating profit rose due to an improved cost of sales ratio stemming from higher reagent sales despite the impact of a revision in intra group transaction prices and increased SG and A expenses. By region, Southeast Asia, 2.4% increase. Sales rose due to higher sales in the hematology and urinalysis fields in Tallinn despite the drop in instrument sales affected by physical deficits in Indonesia's national health insurance plan. SAASI Asia, 31.1% down. Sales declined due to the impact of large tenders in the same period of the previous year in India and Bangladesh. South Korea and Taiwan, 8.7% increase sales increased due to mainly to higher sales in the hematology field in South Korea. It is following the installation of XN Series. Next, Japan. The total Japan sales including external intra area transfer, JPY 109,000,000,000, 2.5 percent increase. Sales in Japan fell affected by the dissolution of a joint venture with an alliance partner, Biomeru, in the preceding fiscal year. Overall sales grew due to exports to affiliated company overseas. Operating profit, JPY 28,000,000,000, 5.9 percent down. Operating income decreased due to temporary factors, including the dissolution of the employees' pension fund in the preceding fiscal year as well as to higher R and D expenses. Consolidated earnings forecast, no division subsequent November 2018 announcement, we included attachments such as progress on issues for sustainable sales growth and year on year growth,