Meiji Holdings Co Ltd

TSE:2269

Earnings Call Transcript 2022-Q2

[川村 和夫 (かわむら かずお), executive]

This is Kawamura, CEO.

I would like to review our financial results for the first half of fiscal year 2021. Net sales were JPY 500.7 billion. Excluding the impact of revenue recognition accounting standard applied from this fiscal year, it was up 1.5% year-over-year. Operating profit was largely unchanged from last year at JPY 50.3 billion. Details by segment will be discussed later in my presentation.

Profit attributable to owners of the parent was JPY 36.6 billion, an increase of 27.5% from the same period last year. Extraordinary income increased due to the sale of shares of DM Bio, an equity method affiliate, while extraordinary losses decreased due to a decrease in impairment losses incurred by the closure of a subsidiary last year. Tax expenses also decreased, resulting in a large increase in net income.

In comparison with the plan for the first half, sales were almost in line with the plan, while operating profit was slightly down. Net income was up but this was mainly due to the gain on sale of investment securities.

The slide shows a summary for the Food segment. Net sales were JPY 409 billion. Excluding the impact of the revenue recognition standard, results were roughly in line with the previous year as well as the guideline announced at the beginning of the fiscal year. Operating profit was JPY 39.5 billion, down JPY 4.3 billion from the same period last year. I will explain the factors behind this.

Changes in sales were a negative factor of JPY 3.9 billion. Businesses such as chocolate and professional used foods, which had struggled in the previous year due to the impact of COVID-19 recovered, and thus continue to grow. But yogurt and functional yogurt declined from a high base recorded last year. Changes in costs were a negative factor of JPY 1 billion. Raw material costs increased such as for overseas dairy, oils and fats and sugar. Marketing expenses were a positive factor of JPY 0.9 billion. Other SG&A expenses were a negative factor of JPY 1 billion due to an increase in depreciation and other indirect expenses. In addition, improved profits of subsidiaries were a positive factor of JPY 0.6 billion.

Operating profit was lower than the plan of JPY 42.9 billion. This was mainly due to lower sales as well as the impact of raw material prices being higher than expected.

Next is the Pharmaceutical segment. Net sales were JPY 92.1 billion. This was slightly lower than the plan, but excluding the impact of the revenue recognition standard, sales was up 9.2% year-over-year.

Operating profit was JPY 11.2 billion which is a significant increase of JPY 4.6 billion over the same period last year. Let me explain the factors behind this.

Changes in sales were a positive factor of JPY 4.4 billion. In addition to a recovery in domestic pharmaceutical sales, which had been severely affected by the decline in outpatient visits to medical institutions last year, there was a net increase in contract manufacturing orders from AstraZeneca for COVID-19 vaccines, offsetting the impact of the NHI price revision of JPY 2.5 billion. Changes in costs contributed JPY 0.5 billion as a result of cost reduction efforts. Marketing expenses were a positive factor of JPY 0.1 billion. Other expenses were a negative factor of JPY 1.1 billion due to an increase in R&D expenses. Changes in results of subsidiaries were a positive factor of JPY 3.2 billion. KM Biologics performed well including the orders for contract manufacturing of COVID-19 vaccines from AstraZeneca.

The operating profit was significantly higher than the plan of JPY 8.5 billion. This was mainly due to the cost control being better than expected as well as R&D expenses postponed to the second half of the year.

That was my brief explanation of the financial results for the first half of FY 2021. Next, let me explain the outlook for the second half and an overview of major businesses.

First is the outlook for the second half. We have revised our forecast for net sales to JPY 513.2 billion for operating profit to JPY 49.6 billion and for profit attributable to owners of the parent to JPY 53.3 billion.

In the Food segment, both sales and operating profit are expected to be almost unchanged from the last year. Based on the first half results, we are cautiously optimistic about consumption trends as well as the risk of raw material cost increases. In other words, we have factored in the risks that can be expected at this point in time and are aiming to outperform the forecast by making further efforts in each business.

In the Pharmaceutical segment, both net sales and operating profit are expected to fall below the previous year's level, which means that we have increased sales and decreased profit from the plan announced in September. This reflects the fact that we shipped influenza vaccines ahead of schedule in the first half of the year, while the COVID-19 vaccine orders and R&D expenses were shifted from the first half to the second half. For the full year, except for the impact of the transfer of the agricultural chemical business, results are in line with the initial plan.

Next, I will go over the highlights by segment, starting with the Food segment. The major focus of the 2023 medium-term business plan is to promote Meiji's new ideas for wellness and create new demand. In this effort, the Meiji Nutrition Statement formulated in June will serve as a guideline based on which we are focusing on the development of new products that will take us to the next stage of growth. TANPACT is one example of this approach, and the recent examples include SAVAS yogurt and Oligo Smart drinks, which are products that go beyond the conventional frameworks.

Looking back at Meiji's history, the company has pioneered the market with products that solve social issues related to nutrition and health through innovation, based on its founding spirit of contributing to the country through nutrition. By combining this value creation process with DX, open innovation and other new initiatives, the company hopes to achieve further success. We are currently running a number of specific projects and will be showing the results as soon as they are available, so please look forward to them.

Next, let me give you an overview of the existing businesses, starting with yogurt and cheese. During the first half, both sales and profits decreased due to the significant growth in the previous year, driven by the stay-at-home trends. The impact, however, is gradually subsiding from a negative 11% for the first quarter to a negative 5% for the second quarter. With functional yogurt, which has a significant impact on the overall performance, going back to the pre-COVID FY 2019 level as shown by the red arrow on the lower right chart.

In the second half, sales are expected to be almost at the same level as in the previous year. As shown in the lower right chart, the forecast for functional yogurt was set at a conventional conservative level with a seasonal peak demand for the second half, as shown by the blue bar.

In addition to the impact of this, we expect an increase in logistics costs and depreciation expenses, which will result in a decrease in profit. Growth for this fiscal year may look limited if you compare with the previous year when we experienced special demands associated with the COVID-19 pandemic. We do have some positive developments, however, in some areas, which I will explain on the next slide, focusing on functional yogurt and yogurt.

The pie chart on the left shows the breakdown of yogurt market. Out of the total market of approximately JPY 480 billion, functional yogurt accounts for one quarter today. We sustained a market share of more than 70%, thanks to competitive advantages we believe we have maintained in areas such as production capacity.

Despite the limited growth year-on-year, due to the impact of brisk sales last year supported by the stay-at-home trends, the sales of R1 is 9% higher than in the first half of FY 2019. The number of core users is increasing steadily as people become more conscious of their health management, and this is the foundation for solid growth in the future. During the second half, we will aim to further increase the number of core users while maintaining this foundation through ongoing promotions, including in-store promotions.

As for LG21, we will strengthen our marketing efforts to stop the ongoing downtrend and achieve an early recovery. Suhada no Mikata has undergone a major renewal while SAVAS yogurt made a successful launch nationwide. We will strengthen the marketing communication of each product in order to establish a solid presence in the market while keeping our focus on new product development, such as the fifth functional yogurt product.

In the first half, the growth of functional yogurt and yogurt was negative due to a high base recorded in the previous year. We believe, however, that the fundamental growth trend is positive over the years. Our strength lies in our ability to discover new value out of basic research of lactic acid bacteria and to maintain and improve product quality. We will continue to take advantage of this competitive advantage and aim for long-standing growth.

Next is Nutrition business. Sales and the profit increased in the first, half owing to the main products such as SAVAS, SAVAS Milk and enteral formula. In the second half, while the sales trend over the first half is expected to continue, we expect profit decrease due to the increase of raw material costs such as overseas dairy ingredients and depreciation costs for the investment in restarted construction work in Saitama plant which was postponed due to COVID-19 pandemic.

SAVAS series, which drives sales and profit in the Nutrition business, is making a significant growth with market expansion. A number of new competitors have entered into market, and they are trying to appeal to consumers by price competitiveness, but we are emphasizing the value of our products to distinguish us clearly from them. Recently, raw material costs are rising, and the business environment is getting more difficult for players engaged in competition by price, and we will continue to promote the functionality of our product and take advantage of variation of product lines to grow further.

Next is the Chocolate and Gummy business. In the first half, both chocolate and gummy products recovered from the previous year in which we had struggled mainly in the convenience store market to record increased sales and profit. In the second half, both sales and profit are expected to grow as in the first half. As second half is the peak season for chocolate demand, will enhance marketing activities mainly for our strong Chocolate Koka and Oligo Smart, which continues to make rapid growth, as well as seasonal Meltykiss to achieve further business growth.

Regarding gummy, the main focus so far was to satisfy the stomach when you are a little hungry. But as demand in office is not expected to make a full recovery, we intend to find new needs. Specifically, we will launch a new gummy product with a focus on the benefits of chewing and appeal to consumers about the value.

Next is Overseas business. In the first half, China business was the main driver. In addition to the recovery from the COVID-19 pandemic in the previous year, demand for ice cream and chilled milk is growing. In the second half, while sales will continue to follow the trend of the first half, operating profit is expected to decline as we are investing to increase human resources to strengthen the organizational structure.

We launched 2 functional yogurt products in China in April. The initial phase of the product launch is going in line with our plan. Also, we are making steady progress in establishing evidence, which is critical for future business expansion. The yogurt market in China is not yet mature, and we need to raise awareness of the functional yogurt itself. We are not aiming for a short-term increase in sales volume. Rather, we focus on sustained growth by carefully communicating the product value.

That is all for the overview of the Food segment. Now let me move on to the Pharmaceutical segment.

The most important point in the medium-term management plan is structural reform, and we could make a significant progress in the first half. The first point is the transfer of DM Bio and agricultural chemicals business. With a policy to concentrate management resources in infectious diseases domain, we decided to transfer these businesses after careful examination from various perspectives, including their future potential, required investment in the future and business efficiency.

The other point is integrating management of KM Biologics and Meiji Seika Pharma. First, on the R&D side, the R&D steering committee was established with COO Kobayashi as Chairman. Members from both companies participate in this committee to discuss key themes: The go or no-go decisions and allocation of R&D resources. They create a united R&D policy in the Pharmaceutical segment and centrally managed the portfolio so that we can focus on themes with better productivity and higher probability of success.

Regarding businesses, we are strengthening vaccine business and veterinary drugs business. Phase II and III clinical trials for COVID-19 inactivated vaccine began on October 22, and the clinical trials will be carried out jointly by the 2 companies going forward. We aim to put the vaccine into practical use in FY 2022. We have also decided to integrate the veterinary drugs businesses in April 2022. With a strong product lineup covering from prevention to treatment, we will strive for further growth of the business.

Next, I will explain about an overview of our major businesses. First one is the Human Vaccine business. A positive factor in sales is a net increase in revenue from the contract manufacturing of AstraZeneca's COVID-19 vaccine formulation. On the other hand, a negative factor is the net decrease in revenue due to absence of contract manufacturing of prepandemic influenza vaccine, which was recognized in the previous year. These factors are affecting both first and second halves.

In the first half, production of influenza vaccine, our mainstay product, was stronger than expected, and we could ship the vaccine ahead of schedule. And together with the revenue from the contract manufacturing of COVID-19 vaccine, both sales and profit increased. Supply volume for influenza vaccine will be largely unchanged from the previous year, in which we recorded the record high. However, the supply volume of other manufacturers is expected to decrease significantly. We will fulfill our responsibilities as a top manufacturer as we make efforts to raise awareness of the importance of vaccination.

In the second half, we expect a decrease in sales as we have shipped influenza vaccine ahead of schedule in the first half. Profit is also estimated to decline, affected by a net decrease in revenue from contract manufacturing of prepandemic vaccine and lower sales of Bimmugen and Quattrovac. However, we plan to secure profit growth for the full year.

Next is the Domestic Ethical Pharmaceuticals business. As shown in the graph on the right, the trend in patient visits to pediatric and otolaryngology department, in which we are strong, tell you that the number of patients has increased from the previous year, but it has not recovered to the pre-COVID level. Under such a circumstance, both sales and profit increased in the first half. Antibiotics such as Meiact and Tazopipe as well as BILANOA, a drug for allergic diseases, grew. And antigen test kits for COVID-19 recorded a net increase, and the contract manufacturing revenue from AstraZeneca's COVID-19 vaccine contributed to the results as well.

While we expect a similar trend in sales in the second half, profit is expected to decline. R&D costs will increase due to progress in clinical development stage, and we plan to increase promotion expenses as we will enhance promotional activities for HIYASTA for treatment of leukemia and lymphoma.

Next is Overseas Pharmaceutical business. We expect increase in sales and profit in the second half despite lower sales and profit in the first half. The overseas proprietary product business operated by subsidiaries in countries like Spain and Indonesia is influenced by the COVID-19 situations in each country and region. However, CMO and the CDMO business of Medreich in India has continued to perform successfully. Global demand for fair-priced generic drugs is increasing due to the growing population in Asia and Africa. CMO and CDMO business of Medreich will take advantage of this demand and will accelerate the growth by expanding its production capacity.

That is all for the overview by segment. Next, I will explain the consolidated outlook for the full year.

Based on the progress and outlook for each business, we revised estimated net sales to JPY 1.014 trillion and operating profit to JPY 100 billion.

Profit attributable to owners of parent is now expected to be JPY 90 billion due to the transfer of DM Bio and agricultural chemicals business as well as gain on sale of investment securities.

In the 2023 medium-term management plan, the basic policy is to strike a balance between investment for growth and shareholder return. We expect a significant improvement in cash flow in this fiscal year, mainly due to the transfer of businesses. Therefore, we have decided to acquire treasury stock. This will make ROE 14% for this year to exceed 11% target of the 2023 medium-term management plan.

The dividend will be unchanged from JPY 160 as announced at the beginning of this fiscal year.

In the 2023 medium-term management plan, ROESG is set as the integrated goal, and we are steadily implementing initiatives to improve ROE, which is the basis of ROESG.

Next, let me explain the other element of ROESG that is ESG initiatives. The Meiji Group aims to contribute to the resolution of social issues through its business. In order to achieve this, it is important to bring in external views and to be constantly conscious of the vision of what the company should be instead of just an extension of the current approach and to incorporate it into management. Therefore, we have evolved the former dialogue with external experts and established the ESG Advisory Board. The first Advisory Board meeting was held at the end of August with 3 external experts to discuss human rights, environment, and sustainability activities in general. The points made by the external experts during the meeting are provided on the slide. Based on this discussion, will continue to link sustainability with innovation so that we can achieve both sustainability and profit.

As pointed out by the experts, demand for addressing climate change and environmental issues is increasing, and we are implementing initiatives without delay. We implemented the initiatives shown on the slide in this first half. We have set a goal to achieve net 0 greenhouse gas emissions across our entire supply chain by 2050. We will continue to actively work towards the realization of a sustainable society.

This is my last slide. In the current fiscal year, which is the first year of the 2023 medium-term management plan we believe that we have taken a steady step forward in each area of business strategy, financial strategy and sustainability strategy. As we respond to changes in the business environment, including the prolonged impact of COVID-19, raw material price hike and foreign exchange rates, we will continue to practice ROESG management.

That concludes my presentation. Thank you.