Earnings Call: Q3 2025

Jan 31, 2025

Summary

9M revenue, operating profit and net profit reached records, led by strong core and growth-segment sales. Full-year guidance and the dividend forecast were raised, while fewer Q4 business days and higher R&D spending are expected to temper results.

Hello, everyone. Thank you for joining the financial results briefing of Japan Lifeline for the nine months ended December 31, 2024, of fiscal year 2025. I am Takeyoshi Egawa, Chief Financial Officer and Head of Corporate Management Group. Before diving into our results, I would like to take a moment to acknowledge our dedicated team members across the organization. The exceptional performance we are reporting today would not have been possible without their unwavering commitment, innovation, and hard work. In a challenging market environment, they have continued to deliver outstanding value to our customers and shareholders. Their contributions have been truly remarkable. Now, let me walk you through our presentation materials. Please turn to page 4 of the presentation, which summarizes the key highlights of our nine-month year-to-date financial results. I am pleased to report strong performance across the board with growth in both top and bottom lines. Revenue increased by 11.8% year-over-year to JPY 42.81 billion. Operating profit grew by 17.2% year-over-year to JPY 9.90 billion, while net profit rose by 14.5% year-over-year to JPY 7.07 billion. All three key metrics represent record nine-month performance in our company's history. It is worth noting that these results include a one-time SG&A expenses of approximately JPY 350 million. Excluding this non-recurring item, operating profit would have increased by 21.4% year-over-year and net profit by 20.1% year-over-year. Let me highlight five key factors that contributed to these strong results. Regarding external market conditions, the trend we observed in the first half continued, with procedures for atrial fibrillation, or AF, increasing by 10%, significantly driving our sales. On the downside, a reimbursement price revision implemented in June resulted in a seven-month negative impact. In Japan, the government periodically reviews and revises the reimbursement prices for medical devices, which can impact our selling prices. This led to a revenue reduction of JPY 700 million and a gross profit decline of JPY 360 million. Turning to internal factors, there are three key drivers that have continued throughout the nine-month period. First, hemostatic devices, which are part of our core product portfolio, have significantly driven performance due to an increase in procedure volumes and the introduction of new products. Second, our strategic growth segments, which are a key focus in our midterm management plan, have seen a 71% year-over-year increase in revenue, driven by new product launches. Third, as a headwind, we incurred a one-time SG&A expenses of approximately JPY 350 million, leading to higher costs compared to the prior fiscal year. Despite these mixed factors, overall revenue and profit have grown, and our performance is tracking favorably against our initial guidance. Given our strong nine-month performance and our outlook for the final quarter, we are raising our full-year earnings guidance, along with an upward revision to our dividend forecast. I will provide more details on this later. Moving to page 5, let me walk through our overall P&L. Robust revenue performance has driven strong operating profit growth. As a result, we achieved record figures across all key financial metrics, from revenue to net profit. Regarding gross profit, the mix of in-house products declined by 140 basis points from 59% last year to 57.6%. This shift was primarily due to strong growth in hemostatic devices and neurovascular products, which are distributed items, leading to a lower proportion of in-house products. However, the discontinuation of low-margin businesses helped mitigate the impact on gross profit, resulting in only a 30-basis point decline in gross profit margin. Although the mix of in-house products decreased, the negative impact on overall gross profit remained limited. Additionally, our EPS increased significantly by 23% year-over-year. While this was primarily driven by profit growth, another key factor was the reduction in the weighted average number of shares outstanding due to our share repurchase program during the period. This contributed to the substantial increase in EPS. Let's move to page 6, which presents an operating profit bridge analysis comparing the year-over-year changes. Overall, operating profit growth was driven by strong sales in core product categories, which more than offset the increase in SG&A expenses, resulting in a 17.2% year-over-year increase in operating profit, achieving double-digit growth. I'll now break down the factors affecting revenue and cost of sales, followed by SG&A expenses. There are five key factors, with the first three on the left side of the chart attributed to volume growth, contributing to a total profit increase of JPY 2.9 billion. Volume growth in our core products, including defibrillation catheters, hemostatic devices, frozen elephant trunk, or FET, and S-ICD, contributed an increase of JPY 1.80 billion. Each of these product categories contributed between JPY 100 million and JPY 700 million in profit growth. Furthermore, higher volumes in our strategic growth segments contributed an increase of JPY 431 million. This was driven by neurovascular products, which increased by JPY 265 million, and gastrointestinal products, which increased by JPY 166 million. In addition, volume growth in our other products, excluding core and growth segments, contributed an additional JPY 761 million in profit growth. Turning to headwinds, the reimbursement price revision implemented in June negatively impacted profit by JPY 446 million. In addition, a reduction in inventory write-downs compared to the prior year positively contributed to gross profit, resulting in a JPY 150 million increase. These combined factors resulted in a total operating profit increase of JPY 2.605 billion from revenue and cost of sales contributions. The factors affecting SG&A expenses include both non-recurring items and ongoing operational costs. Excluding non-recurring items, SG&A expenses resulted in an operating profit decline of JPY 800 million due to increased spending. Personnel expenses contributed to this increase. Salary adjustments and higher performance-based incentives compared to the prior fiscal year led to a JPY 349 million reduction in profit. Additionally, increased commercial activities resulted in higher sales-related expenses, leading to a JPY 241 million decline in profit. IT infrastructure costs also had an impact. The new system implemented in November last year increased depreciation and related expenses, further affecting profitability. The combined impact of these costs resulted in a total operating profit decline of JPY 800 million. Regarding non-recurring SG&A expenses, we recorded a JPY 199 million provision for doubtful accounts, though collection efforts are progressing well, and the amount has decreased compared to the first half. Additionally, in the prior fiscal year, we benefited from a JPY 148 million reversal of previously recorded SG&A expenses, which did not recur in the current period. These non-recurring factors resulted in a total operating profit decline of JPY 348 million. Despite the total SG&A-related profit reduction of JPY 1.148 billion, the increase in revenue and gross profit more than offset this, leading to an overall increase in operating profit of JPY 1.456 billion, up 17.2% year-over-year. Excluding non-recurring expenses, operating profit would have increased by 21.4% year-over-year. Next, let's turn to pages 7 to 8, where I'll break down revenue by product category. The analysis is divided into 5 segments, with revenue trends for each illustrated on page 9. Excluding discontinued businesses and the cardiac rhythm device business, all product categories recorded year-over-year revenue growth. Within our established segments, cardiac rhythm management, EP/Ablation, and cardiovascular products collectively contributed to a JPY 3.806 billion increase in revenue. Meanwhile, our strategic growth segments of neurovascular products and gastrointestinal products saw a revenue increase of JPY 934 million. These factors resulted in a total revenue increase of JPY 4.74 billion. However, due to the discontinuation of certain businesses, there was a revenue reduction of JPY 231 million, leading to a net revenue increase of JPY 4.508 billion, or 11.8% year-over-year. Now, let me provide a deeper dive into each product category. Please refer to page 10, which outlines the performance of our cardiac rhythm device segment. For cardiac rhythm management, despite headwinds such as reimbursement price revisions and challenges in the pacemaker segment, strong sales of S-ICD helped offset these impacts. As a result, revenue saw only a marginal decline of 0.2% year-over-year, essentially flat compared to the prior fiscal year. Regarding market dynamics, continuing the trend from Q2, competitors' leadless pacemakers have gained significant market traction and are now driving the pacemaker market. Additionally, the reimbursement price revision in June led to a notable decline in average selling prices. In terms of performance highlights, our pacemaker-related sales declined by 8.4% year-over-year due to the growing adoption of leadless pacemakers and the impact of price revisions, resulting in a significant revenue decline. However, S-ICD, one of our core products, achieved a 10.2% year-over-year revenue increase, driven by growth in new implantations. This strong performance helped boost our market share in new ICD implant procedures to 40%. Next, let's turn to the EP/Ablation segment on page 11. For EP/Ablation, our 2 core products, defibrillation catheters and hemostatic devices, drove growth, resulting in a 17.6% year-over-year increase, achieving double-digit growth. Regarding market trends, the underlined sections indicate changes from the second quarter. A notable development in the third quarter is the entry of a third competitor into the PFA market, accelerating PFA adoption in Japan. Currently, we estimate that approximately 25% of AF procedures utilize PFA technology. The primary impact on our product portfolio is reduced utilization of esophageal temperature monitoring catheters, which became more pronounced in Q3. Now, let me highlight 3 key performance drivers. Our flagship intracardiac defibrillation catheter, BeeAT, recorded a 10.1% year-over-year revenue increase. Despite the growing adoption of PFA treatment, BeeAT continued to maintain strong utilization, supported by a 10% increase in AF procedures. As a result, revenue grew in line with procedure volume growth. While competition has intensified, we have successfully maintained a dominant 95% market share, consistent with Q2. Secondly, hemostatic devices saw a 26.7% revenue increase compared to the second quarter. This was driven by successful penetration in high-volume centers. At this point, deployments at major institutions have been largely completed. Finally, esophageal temperature monitoring catheters showed a 9.8% cumulative revenue increase over the 9-month period. However, in the third quarter alone, due to the accelerating adoption of PFA, the growth rate moderated to 1.5%, below the year-to-date average. Let's discuss the cardiovascular segment on page 12. This segment has maintained strong momentum, driven by an increase in FET procedures. Additionally, abdominal stent grafts have also delivered solid revenue growth, continuing their positive trajectory. Regarding market dynamics, the growth rate of FET procedures was 9% through the first half of the year but has now accelerated to approximately 10%. Let me highlight two key performance drivers. First, FET revenue increased by 8.6% year-over-year, while our market share remained exceptionally strong at 91%, consistent with the second quarter. In Q3, to further strengthen our position, we introduced larger-sized products that were previously in limited supply, aiming to capture additional market share. Second, abdominal stent grafts have also performed well, achieving a 7.6% year-over-year revenue increase. As a result, the cardiovascular segment as a whole delivered a 7.6% year-over-year revenue increase. Moving to page 13, let's examine our neurovascular segment. This segment has continued to deliver exceptional growth, with revenue doubling year-over-year, demonstrating significant market expansion. Additionally, in the third quarter, we launched a new stent retriever product. Regarding market trends, the number of flow diverter procedures for cerebral aneurysms is increasing. While this trend may potentially impact coil utilization in the near term, we see this as a growth opportunity as we prepare to introduce phenox's flow diverter technology in the future. Although we are not yet commercializing this product, we believe it represents a significant market opportunity upon launch. Let me highlight three key performance drivers. First, embolic coils achieved 1.7 times year-over-year revenue growth, driven by portfolio expansion. Second, aspiration catheters delivered strong performance, with our low-profile model receiving positive clinical feedback, resulting in 2.2 times year-over-year revenue growth. Third, stent retrievers were newly introduced and officially launched in Q3. These factors contributed to the continued robust growth of our neurovascular segment. On page 14, let's review our gastrointestinal segment. This segment has shown steady expansion, primarily driven by growth in biliary and pancreatic-related products. The introduction of innovative products has further accelerated this growth, resulting in a 38.9% year-over-year revenue increase in the gastrointestinal portfolio. In terms of performance highlights, biliary tube stents achieved a 1.5 times year-over-year increase in revenue, despite a 5% reduction in reimbursement rates. Additionally, in the biliary and pancreatic segment, the relaunch of our papillary dilation balloon in the second quarter and the introduction of a new double-lumen dilator in the third quarter positively contributed to growth. Furthermore, revenue from colonic stents and gastric duodenal stents also increased, contributing to the overall 38.9% year-over-year revenue growth in the gastrointestinal segment. This concludes my review of our business performance. Next, let me discuss our revised financial guidance and dividend outlook. Please refer to page 16, which presents the updated forecast table. Column A represents our initial guidance, while column B shows the revised figures. Based on our strong nine-month performance, we are raising our revenue guidance by JPY 2.8 billion to JPY 56.8 billion. While the increase in operating profit is proportionally slightly lower than the revenue uplift, this reflects anticipated investments in R&D and other strategic SG&A initiatives, resulting in a JPY 1.4 billion increase in our operating profit forecast. For ordinary profit and net profit, we project increases of JPY 1.6 billion and JPY 1.2 billion, respectively, consistent with the growth in operating profit. Turning to EPS, reflecting the increase in net profit, we now forecast EPS of JPY 129.78. In line with our dividend policy, which targets a 40% payout ratio, we are raising our dividend forecast to JPY 53 per share. This brings us to the final page of the presentation. On page 17, we present our forecast for the fourth quarter. By subtracting the 9-month year-to-date results from the full-year guidance, we can derive our expectations for the final quarter. Compared to our 9-month average quarterly performance, the fourth-quarter figures are projected to be somewhat lower. Let me provide context for this outlook. Revenue is expected to decrease sequentially compared to the third quarter. The primary factor is that our business model is directly tied to the number of daily surgical procedures, which drives our sales. Consequently, the number of business days has a significant impact on quarterly performance. While the first three quarters averaged 62 business days each, the fourth quarter will have only 57 business days, a reduction of five days. Regarding daily revenue run rate, as noted in the materials, it ranges from JPY 220 million to JPY 245 million per day. The reduction of five business days is expected to impact quarterly revenue by over JPY 1 billion. However, looking at revenue per business day, we continue to see an upward trend, supported by new product introductions and increasing procedure volumes, indicating improving revenue productivity. For SG&A expenses, we anticipate approximately JPY 400 million higher spending compared to previous quarters. This is primarily due to significant R&D investments planned for the fourth quarter, with expected spending exceeding JPY 500 million to be recognized in the final three months. As a result, operating profit margin is projected to moderate to 19.3%, below the levels achieved in previous quarters. Taking these factors into account, we have adjusted our full-year financial guidance accordingly. This concludes my presentation. Thank you for your attention.