Earnings Call: Q2 2018

Nov 9, 2017

Good morning, everyone. Today, I would like to go over business results for the 1st 6 months of fiscal year ending March 31, 2018. I will go over financial highlights and forecast for the fiscal year ending March 31, 2018. First, financial highlights. The net sales, 131,100,000,000 yen compared with previous period 10.4 percent growth and operating profit 28,000,000,000 3.6 percent growth. And profit attributable to owners of the parent, JPY 19,100,000,000. That is due to the previous year, we had a division of a tax treaty with Germany, favorable treaty and a tax benefit of 5,100,000,000 yen and because of that, we had a negative growth. But overall, sales increased on both the local currency and yen basis in all geographic regions. And because of our foreign exchange impact, we had a positive $5,000,000,000 for net sales and for operating profit, the cost of sales rate was 2% down and 1.4% was due to foreign exchange impact. As you see, exchange rate fluctuation rates, net sales 5,050,000,000 yen and lowered operating profit, 0.20000000000 yen. Last year, we struggled with appreciation of yen, but this year, we are seeing depreciation of yen or it is normal situation to me, but it is favorable to us. Let's move on to breakdown of net sales and operating profit. As you can see, China has the biggest growth. Japan faced a severe situation, but overall, we had an increase in net sales. For operating profit, we had a worsening cost of sales rate and S and G expense increase, but still we had a 900,000,000 increase. And as for breakdown of assets and liabilities, there is nothing special to note on this slide. Consolidated cash flows. Operating CFO had growth, but for investing cash flow, we had a major increase because of we acquired a company in U. K. Called Oxford Gene Technology. And also, we had a transfer of business of a distributor in Taiwan to start direct sales. So that was M and A related investing increase in investment. But overall, it is a healthy trend. Next topics, We have divided into core businesses and next core businesses. For core businesses, we expanded our XN Series product lineup. We launched the new SMIR Preparation instrument. And for coagulation and the reagent factory in the United States, some people have seen it, the new plant. And for next core businesses, we acquired Oxford Gene Technology and Sysmex, Silicon Genesis and MKI signed comprehensive collaboration agreement with a view to joint promotion of genomic medicine and also commenced a collaborative research with National Cancer Center, GVC Kenwood and Daiichi Sankyo on measurement of exosome in blood from cancer patients. And for other items, Sysmex Biomeru, a joint venture of Sysmex and Biomeru agreed to dissolve the joint venture agreement that may have impact in the second half. And net sales by geographic region, as you can see on the right hand side, it's a local currency base or capability base. For Americas, 3% growth, 1.5% growth for EMEA that is quite low and 16 point 4% growth for China. I will mention later as well for Americas, North America was strong, but Latin America struggled. And for EMEA, Mideast and Africa struggled. They had a major deal last year, but we didn't have it this year. For China, we saw 2 digit double digit growth and so was Asia Pacific. Japan was flat and we are facing severe environment in Japan toward the division of insurance points next year. We have been informed that will be a tough change. And as for foreign exchange, as you can see, we have a depreciation of yen, especially for euro. Now it is over JPY 130. So the situation second half will be more favorable in my opinion. Sales by business, Hematology, it's 8.8% growth year on year and 4.2% at the previous year's rate. In Japan, we had a new product launch. And in China and Europe, it's growing. And in the United States, FDA approval has not been granted yet. And for immunochemistry, it was quite good. And clinical chemistry, we have in Asia partially and we purchased both the agents and instruments. And next core business, FCM is still in development and not yet in full swing. But other than that, they are slightly growing. Next, geographic segment information for Americas. As mentioned earlier, 3% growth overall. But U. S. Alone, it was 8.1% growth, 12%, 9% growth for Canada. But unfortunately, Latin American performance was minus. One of the reason is that we did not have a large scale tender this year And also economic situation in Brazil is quite bad. And in Brazil, Roche is a distributor there but their performance has not been so good. But either way, in Americas, they had a steady growth. And in United States, especially, we have something to look forward to. Recently, we had a clear waiver FDA approval. And probably we will see the full launch activities in the second half and later. And EMEA, 1.5% growth. Especially UK, due to the impact of Brexit, the market is very slow, 5.5% down year on year. France is quite good. For Middle East and Africa, they had a major deal last year, but so far we have not had one this year. And for Eastern Europe and Russia, they are growing at a good pace. China enjoyed 16.4% growth local currency basis. And we had a new product launch for urinalysis. Hematology is good. And the agent price was increased 10%. And now we have intention to shift to direct sales and that is a background for 10% increase for the price. And now we are paying 10% to distributors, but now we would like to take gradually shift. Especially in Sichuan province, we have 300 sites using IT services and we could reduce costs while increasing the value of the service by shifting to direct service. And I am sure some were wondering about inventory in China. China, as you can see, had a double digit growth and a very good situation currently. And due to new product launch, the inventory level has not been reduced dramatically, but there is nothing to be concerned of at this point. And China, as you can see, has a strong demand. They are now introducing new systems. How are we going to address them will be challenged, but the market itself is very promising. For Asia Pacific, very good activities there. Yen basis, it's 17.1% growth. Last year, we had a large scale tender in Australia. Sonic Healthcare, we have not had one this year. But in India, they won a big government deal. And overall, we are seeing increasing trend. And in Taiwan, we are shifting to direct sales. Japan, as you can see, the growth is flat, almost flat for domestic Japan. And as mentioned earlier, now we expect simultaneous revision of medical services and long term care fees next year, April next year and now they're having currently having discussion, but we have been informed that that will be a very tough change. On the other hand, as seen in the newspaper yesterday, the hospital and the general practitioners, the business management situation has been worsened. So we expect a political tug of war. The sales has been slow. The market has been slow. But in Tokyo, large university hospitals in Tokyo are going through construction for new buildings in preparation for the Olympic Games in 2020. We do not know either next fiscal term or the one after we expect the major deal. So however, we do not expect a significant growth in Japan considering the current situation. Next, consolidated earnings forecast. Let's look at the revised earnings forecast. Previous forecast was 275,000,000,000 yen at the additional 5,000,000,000 yen and the current forecast is 280,000,000,000 yen is due to foreign exchange impact and that is a reason for division. As you can see, announced in May 2017 for exchange rate was 110 yen against U. S. Dollar, but the euro has been increased from 115 to 128.1. And Chinese yuan too increased from 16 to 16.5 So I think the current situation is quite comfortable for us. And if depreciation of yen if yen depreciates further and that is certainly our hope, that will be very favorable to us. And operating profit, 1,000,000,000 yen plus to 58,000,000,000 yen and profit attributable to owners of the parent, 500,000,000 yen plus to 41,500,000,000 yen as the current forecast. Consolidated earnings forecast, As I mentioned earlier, overall, the net sales is 2 80,000,000,000 yen Operating profit remains the same. And so and the profit attributable to owners of the parent is almost the same as well. We have adjusted the foreign exchange impact. Next, revised earnings forecast for by region. Americas slightly minus. EMEA major significant plus due to foreign exchange impact and so is China. And Americas, we are thinking of the next step for Latin America. Market itself is going through quite tough time. However, it is a very promising market. And Roche is our distributor, but we have started a direct sales for urinalysis. For dividend forecast, 16th consecutive year of increases. Initial forecast for fiscal year ending March 31, 2019 was 30 yen for interim dividend, 30 yen for year end and 60 yen total. And interim dividend for previous term was 28. So we expect an increase of dividend. No change from the initial plan. And dividend increase for the 16th consecutive year. And this is our current forecast.