Earnings Call: Q2 2019

Nov 8, 2018

Good morning, everyone. My name is Ietsugu. Thank you for coming today. Today, I will go over business results for the 1st 6 months of fiscal year ending March 31, 2019. Specifically, I will go over financial highlights and consolidated earnings forecast. First, the financial highlights. As you can see, net sales is 100 and 36,100,000,000 yen 3.9 percent growth. In the past, we saw 2 digit growth, so we're not doing too well. And as for operating profit, JPY 28,500,000,000 1.8 percent growth. So the first half financial results are pretty tough. And while we saw good sales of reagents, we struggle with instrument sales. And as for exchange loss, we saw a loss of 1,310,000,000 yen And in China, we make our transaction is in dollars. So stronger dollars and weak Chinese yuan. We saw that during the trade war. And as a result, it led to exchange loss. And that is the overall situation. And this is the net sales and operating profit. We saw negative growth in Japan and other areas saw slight increase. And for operating profit, we invested in R and D expense. And overall, it was 400,000,000 yen growth. Here are assets and liabilities. Overall, JPY 3,400,000,000 growth. Here is cash flow. The investing cash flow, we see significant negative because biodiagnostic reagent center in Kobe is being constructed to be opened next April. And that is the capital investment, the significant contributor. As for topics, we started direct sales in Egypt. And Sysmec and JVC Kenwood jointly established Creative Nanosystems Corporation. JVC Kenwood had strength in micromachining, including CDs and Blu rays. And we utilize their micromachining technology for the development in immunochemistry arena. And that is how we started a joint venture. And for DIKEN Genesis, the Todai Onco panel started for sequencing analysis. And Sysmex launched new products using the Osuna method. And in the United States, we opened center for learning, training facilities for customers. We have a studio opened and very well accepted by the customers for e learning opportunities. And in China, we employed a knockdown production method in September for the launch of new XS series product and full launch after the Q3. Next is sales by business and product type. For hematology, 3.5% growth, not so strong. And in Japan, we see negative growth. That is because in the United States, the qualitative or chemical with AKEN, the FDA submission has not been approved. And in Europe, the dissolution of a contract with Miomero for UK and France, those are 2 contributing factors. And SCM business has been delayed. And by product type, instruments see 8% down. And the reagents and maintenance services are pretty good. As for net sales by geographic region, by local currency base, Americas, 3% EMEA, 3.7% growth China, 4.2% growth AP is flat. Japan, negative growth. And compared with the first half last year, China recorded 16% growth. Americas and EMEA performance were quite similar, but the significant change for this first half is the dramatic decrease in China, and I will explain the details later. And geographic segment information, starting with Americas. In Americas, local currency basis, 3% growth. For reagents, we see pretty good growth. And in the United States, they recently had a midterm election and we are starting to see some movement soon. The machines are installed, but there is a delay in acceptance. So that is why we struggled in the Q2. But since the democrats won the Congress and Obamacare should continue, and that has been concerned by our customers. And that is the reason why they refrain from accepting such machines. And for Latin America, the launch sales was slow. For EMEA, local currency basis, 3.7% growth. For EMEA, hematology performance was quite good. The currency in the region, ruble and Turkish lira are weakening, and that resulted in 600,000,000 yen exchange loss. The Europe itself is quite unstable with Brexit and struggling economy in Italy. And that is the situation in EMEA. And that resulted in slow growth. For Middle East, they have a pretty tough situation, but due to situation in Saudi Arabia, however, we are confident that we can catch up with the sales. And for China, as mentioned earlier, we had a 4.6% growth. First half last year, they had 16% growth. And the number of the instrument sales was low because of product failure that resulted in shipment suspension. It was immunochemistry machines. And that issue is already resolved. The root cause was pipette and that resulted in shipment hold in house. And another issue is the new product SB 50, the Sumire machine. And we had some issues for the new product as well. Although we have good presence for Tier 3 Institutions, our presence is still weak for Tier 1 and 2, and Chinese government has a by China policy to have a favorable treatment for domestic products. But we would enhance our operations for Tier 1 and 2. And overall, the market itself is quite strong in China. And we had some internal issues for the first half of the year. And those issues are already solved. And that wasn't the that was not the market issues. The issues found in the market, it was internally found. And for Asia Pacific, it's almost flat. Last year, we had a major tender acquisition in the same period, and we do not have such opportunities this year. We are especially focusing on India. And we are working toward direct sales, even though we are using distributors now. And the distributors are not buying the product as we expected in India. Next, Japan. For domestic Japan, we had negative growth. As explained earlier, it is due to the impact of the dissolution of our joint venture with Biomeru And that resulted in about 1,000,000,000 yen opportunity loss. But number of samples is increasing following the aging society, But the growth is not as expected not as many as we expected. Moving on to consolidated earnings forecast. Unfortunately, we made a downward revision of the earnings. This is the first time to have a downward revision for a reason other than foreign exchange loss. It was originally 310,000,000,000 yen now it is revised to 300,000,000,000 and operating profit too from 62,000,000,000 yen to 59,000,000,000 yen So the figures in red have been devised, 10,000,000,000 down for top line and yen 3,000,000,000 down for the operating profit. And next, I would like to explain the lower instrument sales reasons and countermeasures. The first reason is the hematology lengthening instrument upgrade cycle. From 7 years in the past for main products to 10 years. The interval has lengthened from 7 years to 10 years. And in addition to longer upgrade cycle, It's also due to delayed launch of new products. And how we are going to boost upgrade demand is that we have to continue to provide attractive products to our customers, and that will be the biggest incentive for customers for upgrading. And in China, we have intensifying competition, especially with Mindray. For Tier 1 and Tier 2, Mindray is winning against us. But for Tier 3, Mindray is launching new product, but our product is definitely superior. And for urinalysis, as mentioned earlier, we are in the FDA submission now. And we are asking AKEN Chemistry. And that is not our product. We are marketing authorization holder, but Eiken is doing the process. And for your analysis, we had a falling sales and due to dissolution of alliance contract with alliance partners in UK and France and direct sales to start in the second half of this year. And for Hemostasis, our alliance with Siemens started in 1995. And their selling capability is not as strong as we expected. In the past, we worked with date bearing and SEMA succeeded. And we have been negotiating with them, including the use of sales network in the United States. And FCM is finally launching in the United States. And another development is Kia Sphere, our software. Our plan is to include this software in our products. CareSphere has data aggregation and conversion to valuable information. And it does data analysis as well. It may be replaced by AI in the future. These are the applications: lab management, productivity improvement in the laboratory, quality management, operation management and clinical support. How we are going to utilize such data in actual clinical setting and standardization of laboratory data. And it will also result in shorter waiting time for the patients. And we will launch this as an additional value to our XN model. And next, the dividend forecast. Interim dividend, 34, year end dividend 34. No change from the initial forecast at the beginning of the year. And dividend ratio, 35.9 percent. And dividend increases for the 17th consecutive year. And thanks to our customers, we continue to grow and we always thought about returning in accordance with our revenue growth. This concludes my presentation. Thank you for your kind attention.