Meiji Holdings Co Ltd

TSE:2269

Earnings Call Transcript 2023-Q2

[川村 和夫 (かわむら かずお), executive]

I am Kawamura, CEO of the company. Thank you very much for taking time out of your busy schedule to join us today. I would also like to take this opportunity to thank you all for your continuing support.

I think you have already reviewed the first half results in the material we disclosed last week. So today, I will focus only on key points and spend more time to projections for the second half and beyond.

First, a financial summary for the first half of fiscal '22. In the first half, we had higher sales and lower operating profit. Net sales was JPY 517.5 billion, increasing in both Food and Pharmaceutical segments. Sales exceeded the plan announced in May. On the other hand, operating profit at JPY 43.1 billion was down year-on-year, but was above the plan. By segment, operating profit decreased for Food, but increased for Pharmaceuticals.

Profit attributable to owners of parent was JPY 33.3 billion for the quarter. Although it increased in the first quarter, the total for the first half was down. This was mainly due to having gains on the transfer of DM Bio shares in Q2 of the previous fiscal year, offsetting the gain on the transfer of the logistics subsidiary in Q1 of this fiscal year.

Next is a summary by segment. In the Food segment, net sales were up and operating profit was down. I will focus on the factors impacting operating profit. As shown in the graph, raw material costs, which are part of the change on cost of goods sold, lowered profit by JPY 8 billion. In addition, the distribution costs and energy costs, which is part of the indirect manufacturing costs, also rose. Although we have countered this with price hikes and other measures, some of them are being implemented from May or the second half and not from the beginning of the year. So as of the first half, we have not been able to offset the impact.

Also, the recovery of sales of yogurt and cheese business, which have high profit margins, hasn't fully materialized, leading to volume decline and product mix deterioration. Due to these factors, operating profit for the first half fell 26% to JPY 29.3 billion. This was also 14% lower than the plan due mainly to higher-than-expected cost increases and lower-than-expected sales volume of mainstay products.

Next is an overview of the Pharmaceutical segment. Here, we saw both net sales and operating profit increase. As you see in the graph, profits were down, impacted by the NHI drug price revision and lower contract revenue of COVID-19 vaccine formulations. On the other hand, sales trend recovery, both in Japan and overseas, contributed to higher profits. Especially in Japan, the growth of injectable antibacterial drugs led the growth. Profits were up by approximately 90% compared to the plan. This was mainly due to strong performance in Japan and overseas as well as the shifting of some R&D expenses to the second half of the year.

Next, I will explain the second half outlook and key points. The slide shows the key points for fiscal '22 that we showed in May, and our focus remains the same for the second half. We will continue to focus on these 4 points. Based on the business environment and performance trends in the first half, we have revised our plan for the second half. Net sales have been revised upwards, and operating profit has been revised downwards.

Although the Food segment will be heavily impacted by cost increases, we plan to secure the same level of profit as the previous year by implementing price hike and demand stimulus measures in the second half. Pharmaceutical's results are expected to fall far short of the initial plan due to shifting of R&D expenses, but full year sales and profits are expected to increase, supported by strong sales trend.

Next, I will explain the key points by segment. First, strategies to overcome cost increases, which is our most critical issue for the Food segment. Looking back at the first half, as indicated by the gray bars, in May, we expected a cost increase of JPY 7.8 billion for raw materials and energy costs. We plan to offset that by JPY 4.9 billion through price hikes and reduction in volume. Since price hike for some products did not start at the beginning of the fiscal year and it takes time for price hikes to penetrate the market, our initial plan did not intend to offset the increase fully in the first half.

The actual results were that the effects of the price hike and reduction in volume were almost in line with the plan at JPY 5 billion. Sales volume of some products such as processed cheese declined, but there was no impact on sales volume of products for which demand had originally been growing, such as Chocolate Kouka and SAVAS Milk.

On the other hand, cost increases, shown in the pink bar, was higher with JPY 2.7 billion additional increase from weakening yen and soaring raw material prices, resulting in a total cost increase of JPY 10.5 billion in the first half. As a result, the gap between cost increase and countermeasures in the first half became wider than planned.

Based on that, here is our outlook for the second half. As shown in the graph, cost increase is expected to be JPY 18.2 billion, approximately JPY 12 billion higher than the initial plan. Exchange rate is set at JPY 145 to the dollar, and the domestic milk price increase has also been reflected from November.

The plan is to offset JPY 15.3 billion by price hike for yogurt and milk and a second price hike for cheese and other products. Even with this, as was the case in the first half, it will be difficult to offset all the cost increases. Therefore, it is important to not just take additional measures, but maintain an increased sales volume to try to fill this gap.

Given that the volume of high value-added product did not decline much in the first half, we believe that promoting added value will have a certain effect despite consumer sentiment being not so strong. We will continue to spend marketing expenses for this kind of marketing.

Next, I will explain the yogurt and cheese business. We plan to have higher sales and profits in the second half. Since there will be a price hike of main products, we plan to spend a certain amount of money on marketing measures such as strengthening promotions and extra portion campaigns.

The line graph on the right is an illustration of the impact on volume. As shown by the gray line, especially when consumer sentiment is not so strong, sales volume will decline for a certain period of time after a price hike. By implementing marketing measures from an early stage around the time of the price hike, we aim to limit the decline and recover sales volume as early as possible.

Since Yogurt and functional yogurt products are important in terms of company-wide profitability, we will implement solid measures for them. Functional yogurt has been struggling in recent years, but there was a positive news in the first half of the year with LG21 beginning to show signs of recovery. As you know, the functional yogurt market is in a tough situation with competition within the market as well as with other product categories.

With many products on the shelves, we are seeing the hypothesis that promoting health functions and building trust for its functions are effective. Since LG21 was accepted as food with function claim for both cup- and bottle-type products, we will change the packaging to emphasize its functionality and trust in order to accelerate recovery.

For R-1, we intend to strengthen its appeal through enhanced marketing. In the second half, there is concern about a twindemic of COVID and influenza. So we have started broadcasting commercials early to emphasize the need for health management.

Also, our newly launched yogurt for body fat reduction has been selling well, and we plan to expand the channel to convenience stores from November to boost sales. Market for body fat improvement is larger than that of the intestinal environment health and immune system. There is an ample room for growth, but differentiation is important. With this food with functional claim, we will effectively promote its unique mechanism, different from existing products.

Next is our Nutrition business. Sports protein as a whole looks weak, but this is weighed down by soy protein, which means that whey, protein bars and SAVAS Milk are performing well. In terms of sales channels, e-commerce is growing both for Meiji and for the market. Therefore, we intend to expand our product lines and focus our efforts on digital marketing.

In the Nutrition business as a whole, sales of infant formula and liquid diet have been performing well. In particular, the volume growth of liquid diet has been strong even after the price revision as these products have high market share. Although profits are expected to fall in the current financial year, mainly due to an increase in depreciation costs, we aim to increase profits from the next financial year by firmly developing the 3 pillars of sports nutrition, infant nutrition and elderly nutrition.

Next is Overseas business. Overall, sales are expected to increase by double digits in yen terms. In local currency terms, sales in China and the U.S. are planned to increase by 19% and 6%, respectively. Profits will be lower at the first period since we plan to invest in new plant construction and marketing.

First, in China, the negative impact of the lockdown around Shanghai in the second quarter, April through June, was offset by the positive impact of ice cream, thanks to our differentiated product range, including new locally developed products. We intend to use this strength to expand our sales areas, particularly in regions where new factories will be built in the future.

In confectioneries, sales declined in the second quarter due to the shutdown of the Shanghai factory, but have already recovered. Milk and yogurt on the market continue to struggle. Price competition is intensifying, particularly due to an increase in inventories of raw ingredients in China. Learning from the good examples of confectioneries and ice cream, it is effective to add value to products and differentiate them. We will continue to leverage this by expanding and improving our product lines.

Next, in the U.S., we have finally been able to cope with the increase in raw ingredients costs through multiple price revisions. Sales of Meiji brand chocolate snacks remained strong. We intend to increase the contribution to earnings by reviewing the number of SKUs to focus on areas for growth.

Next is the Ethical Pharmaceuticals segment. I will first explain the factors behind the large fluctuations in operating profit in the first and second half compared to the plan at the beginning of the year. The initial plan was a decrease in operating profit in the first half due to the impact of the absence of the contract income from the formulation of COVID vaccine compared to the previous year.

In the second half of the year, we had planned an increase in profit due to the fact that certain level of sales and profit have been factored in, in anticipation of the early approval of inactivated COVID-19 vaccine. However, first half results showed a significant increase in profit due to strong sales both in Japan and abroad as well as phasing of R&D costs. In the second half of the year, this R&D cost will push down the profit compared to the plan.

In addition, it was decided not to include the early approval of our COVID-19 vaccine in the revised plan as it became difficult to foresee. As a result, profits will be significantly lower than the plan in the second half of the year. However, the top line is performing well. So we have decided to plan for an increase in profits for the full year.

I will now explain the highlights of this plan. First, the Ethical Pharmaceutical business in Japan. As I explained earlier, the sales trend is strong. Pediatrics and the otolaryngology, where we have the strength, have not yet returned to pre-COVID-19 pandemic levels, but are recovering. In addition, our volume of generics has increased significantly despite the NHI price revisions and its driving performance. This point will be explained in greater details now.

Of the total sales of the Ethical Pharmaceutical business in Japan, generics will account for JPY 50.2 billion, growing by 9% compared to the prior year. Generic drugs are generally subject to higher rate of price revision than branded drugs and may be expected to face a greater downward pressure on sales. However, in line with the reform of the NHI drug pricing system, our generics have shifted to a structure that is less susceptible to NHI price revisions.

First, we have a large number of fundamental drugs. Through the drug pricing reform in 2016, a system was established whereby drugs that have been listed for a long time and meet certain requirements are designated as fundamental drugs and their drug prices are maintained. Among our products, Meiact and Sulbacillin fall in this category. This has had the effect of supporting the drug prices of such items.

Second, while various issues have emerged in the generic market, our quality management and efforts to ensure a stable supply have been well received and led to an increase in sales. We believe that these are not one-off factors just for this said term and will continue to contribute to our performance in the future. And it's vaccines that we expect to be the growth driver.

Although performance appears to have stagnated in the current fiscal year, partly due to the absence of contract income compared to the previous fiscal year, we will work to expand existing products such as influenza vaccines and routine childhood vaccination vaccines while developing future growth drivers, the most important of which is the inactivated COVID-19 vaccine.

The slide shows our development schedule. Clinical trials for both adult and pediatric are going well -- progressing well. But in view of trends of other companies and other factors, we have decided that the approval during this fiscal year would be unlikely. With the results of the clinical trials currently underway, we will work towards approval and supply during FY '23.

Another challenge for vaccine is gaining new technologies. We are currently discussing the production and marketing of a replicon vaccine, a next-generation messenger RNA vaccine in Japan, and hope to make progress in this area. I have explained the outlook and the key points for FY '22.

Next, I would like to move on to the financial strategy and shareholder returns. In FY '22, we plan to allocate capital in a way that emphasizes the balance between appropriate profit returns and investment for growth. Capital investment is expected to amount to JPY 88 billion for the full year. Due to delays and revisions to the construction schedule, capital investment is expected to be lower than initially planned. However, there will be no change to the investment set out in the '23 midterm business plan.

In terms of shareholder returns, we have decided to implement a share buyback of JPY 10 billion. The dividend remains unchanged from the plan from the beginning of the year. Despite the difficult business environment, financial measures such as the reduction of strategic shareholding are being steadily implemented. The decision was made with a comprehensive consideration of various perspectives, including capital efficiency as well as total return ratio. And on April 1, a 1:2 stock split will be implemented.

Looking at the plan of the current financial year. Despite the positive effects of stronger pharmaceutical sales, the overall cost increase burden of food products is heavy, and it will be difficult to cover all of this during the current financial year. Still, during the second half of the year, we will invest in marketing expenditure in areas where we need to spend money to implement measures to stimulate demand. We believe that this will lead to a recovery in performance in the following years and beyond.

Uncertainties remain in the business environment, such as foreign exchange rates and consumption trends, but we still steadily do what we need to do and show the results. While tackling the immediate challenges of responding to the current changes in the business environment, we also work on the medium- to long-term challenges. We will also broadly take up the challenge of creating a path of ESG initiatives, leading to business growth.

That concludes my presentation. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]