Meiji Holdings Co Ltd
TSE:2269
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Meiji Holdings Co Ltd
Earnings Call Analysis
Q2-2024 Analysis
Meiji Holdings Co Ltd
The company kicked off its financial story with a promising start to FY 2023. During the first half, they witnessed an increase in both sales, which hit JPY 546 billion, and operating profit at JPY 44.4 billion. The company attributed this rise to sound performance, particularly within two crucial segments: Food and Pharmaceuticals.
Net income reached JPY 27.9 billion despite a share of losses from equity methods and a rise in tax expenses. Interestingly, this figure surpassed initial expectations by more than JPY 7 billion due to operating profit outperforming plans and strategic sales of shareholdings. This has enabled the company to increase dividends for the tenth consecutive year, underscoring a consistent commitment to shareholder returns.
The Food segment saw a healthy 5.9% year-over-year upsurge in sales, amounting to JPY 445.4 billion, which was nearly aligned with projections. This robust growth contributed to an increase in operating profit, marking a period of expansion for the segment.
Turning to Pharmaceuticals, the narrative continues positively with sales growing by 3.8% to reach JPY 100.8 billion, and operating profit climbing by 8.5%. The uplift was primarily driven by rising sales of antibacterial drugs. However, challenges such as reduced contract revenue from AstraZeneca's COVID vaccine, national health insurance (NHI) drug price revisions, and increasing raw material costs have impacted profits. Despite these headwinds, improved production efficiency and better cost management at both domestic and international subsidiaries have led to substantial performance beyond plans.
When casting our gaze forward, the company is cautiously optimistic. Full-year sales are predicted to slightly miss the initial target, settling at JPY 1,098.5 billion. Nonetheless, forecasts for both Food and Pharmaceuticals suggest growth. The operating profit outlook is even brighter, revised upwards to JPY 80 billion, with the Food segment particularly expected to exceed earlier profit forecasts due to lower energy costs and successful price hikes. The Pharmaceuticals segment, however, has downsized its forecast for sales and profit as R&D costs surge and the ARCT-154 COVID-19 vaccine's contribution to earnings is excluded for the year. In response to increased R&D expenses, the company expects to see a decline in second-half profit, but with a focus on sustaining base business performance, the company is working to ensure this is at the very least at the forecasted minimum level.
A strategic approach to pricing has paid dividends in FY 2023, as price hikes across all products yielded a positive impact of JPY 12.5 billion. While these increases have been absorbed into retail prices, the company remains vigilant of cost trends and continues promoting value-added products to sustain its recovery and boost sales volume.
The yogurt and cheese business is a linchpin for the company, leveraging established and new products to retain and expand market share. Notable are efforts to revise the product mix and the introduction of innovative offerings like Chocolate Kouka W plus with functional claims. With the goal of recovering volume in certain products and fostering new growth drivers, strategies include remodeling product types and capitalizing on the trend of personalized nutrition.
In Pharmaceuticals, the company has embarked on structural reforms to mitigate risks associated with NHI price cuts, disruption in the value chain, and emerging technologies. A pivotal focus is on vaccines and essential drugs less susceptible to price revisions. The potential in new drugs is high, with the company nearing the launch phase of several key products like the breakthrough drug Belumosudil and a pediatric 5-in-1 combination vaccine. Furthermore, the company aims to cement its position by addressing unmet medical needs with new drugs, while also progressing on vaccine development for COVID-19 variants.
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Now I would like to begin my presentation about first half results in FY 2023. And the followings are the key points. As for the Pharmaceutical segment, for which we received many questions after the announcement of the first quarter results. Kobayashi, COO of the business, will explain the key points of growth strategy.
First, let me explain the key points in first half. Consolidated net sales for first half was JPY 546 billion and operating profit was JPY 44.4 billion, resulting in an increase in both sales and profits. Especially operating profit exceeded the initial plan by JPY 12.4 billion, maintaining the strong performance of first quarter. Details will be explained later by segment.
Net income was JPY 27.9 billion. This was mainly due to share of loss of entities accounted for using equity method, which was recorded in profit in previous year and an increase in tax expenses. This was more than JPY 7 billion from the initial plan, but this was due to operating profit significantly exceeding the plan as well as progress in the sales of strategic shareholdings. The dividend was increased by JPY 5 per share in first half, making it the 10th consecutive year of annual dividend increases.
This is a summary by segment. Sales in the Food segment totaled JPY 445.4 billion increased by 5.9% against previous year, almost in line with the plan. Operating profit increased 1.2% to JPY 29.6 billion, resulting in an increase in both sales and profit. Looking at the factors behind the increase in profit as shown in the graph, an increase in raw material costs was a negative factor of JPY 17.2 billion.
In contrast, the positive effect of price hike was JPY 30.4 billion, which as in the first quarter exceeded the cost increase and after excluding the JPY 10.5 billion effect of volume and product mix. While marketing expenses are being invested to recover volume, energy cost and manufacturing, including subsidies are decreasing and have turned into profit increase.
As for subsidiaries, the business in the United States performed well, but China in the feed business decreased in profit. The operating profit increased 14.6% compared to the plan announced in May. The main reason for this were the energy costs and IT expenses were less than expected, while the volume of mainstay products in yogurt and cheese did not reach the plan and the profit and loss of overseas business did not deteriorate as much as expected.
Next is the Pharmaceutical segment. Net sales was JPY 100.8 billion, up 3.8% year-on-year. Operating profit was JPY 15.9 billion, up 8.5% year-on-year. Again, both sales and profit increased. As shown in the graph, mainly sales of antibacterial drugs increased as in the first quarter, but a decrease in the contract revenue of AstraZeneca's COVID vaccine had a negative impact on profits. In addition, there was a negative impact from NHI drug price revision and increase of raw material costs.
On the other hand, at the cost level, although R&D expenses increased, the growth of domestic and overseas sales improved the production efficiency, including subsidiaries and the decrease in expenses due to more efficient operation became apparent. We have significantly exceeded the plan announced in May. This is mainly due to the postponement of the some R&D expenses to the second half, together with sales growth in Japan and increased profits at overseas subsidiaries.
This is a slide we showed at the financial results meeting in May. We positioned FY 2023 as a period for making preparation for the new midterm (sic) [ Medium-Term ] Business plan that will start next year, and we are focusing on the initiatives drawn here. We've made good progress in the first half. And as I explained earlier, the numbers are [indiscernible]. In the second half, we will continue to make steady efforts to ensure this trend to continue into the next [ Medium-Term ] Business plan.
From here, I'd like to explain the key points of the second half and the full year outlook based on the initiatives mentioned earlier. First, about the numbers. Sales for the full year have been revised to JPY 1,098.5 billion, although slightly below the initial plan, there is no change in both Food and Pharmaceutical expected to increase.
On the other hand, operating profit was revised upward to JPY 80 billion. By segment, Food sales and profit are revised upward for full year. Sales for the second half are expected to be in line with our initial plan, but profit for the second half are expected to be higher than our initial plan due to lower energy and other costs in the first half. Price hike have had a positive effect on profitability, but the recovery in volume is still in progress. We continue to address this issue in the second half.
In the Pharmaceuticals, we have revised our full year forecast downward for both sales and profits. Sales are expected to remain strong in the second half, but profits have been revised down significantly. This is mainly due to postponement of R&D expenses to the second half and exclusion of the contributions of ARCT-154 COVID-19 vaccine from the plan as we do not expect it to contribute to earnings this fiscal year.
In the second half, we expect to [ post ] year-on-year decrease in profit. Sales are expected to increase, particularly for antibacterial drugs and influenza vaccine returns are expected to be on par with typical year, but R&D expenses are expected to increase by approximately JPY 4 billion. Since the base business itself is performing well, we will aim to have an upside based on the current forecast at a minimum level.
Next, I will explain our efforts to achieve this plan. First, we will address cost increases. As shown in the graph on the right, price hikes were implemented for all products in FY 2023. In the first half, as shown in the bar graph on the left, price hikes had a positive effect of JPY 30.4 billion and cost increases of JPY 17.9 billion, resulting in a positive effect of JPY 12.5 billion. Price hikes to date have been reflected in street prices and are now firmly in place. We need to keep monitoring the trend towards lower prices seen in some distributors as well as trends in domestic milk prices, the cocoa market and exchange rates and continue to promote value-added products to keep prices firm, which will lead to recovery and growth in sales volume.
Next, I will give an overview of our core business. First, the yogurt and cheese business. In our mainstay products, Probio based on the trend in the first half, we plan sales in the second half to be at the same level as the previous year. In the second half of last year, we strengthened our promotional activities. So the key point is how we can achieve this level.
In R-1, R-1 The GOLD shown in the lower left image was launched in October, containing double the amount of EPS and at a higher unit price. The promotion campaign is designed to emphasize the function of EPS. The aim is to develop new users of regular R1 and to cultivate loyal users through R1 The GOLD.
Next, I will explain about yogurts other than Functional Yogurts. As shown in the graph above right, the sales price is on an upward trend after a series of price hikes. There are 2 challenges. One is to recover the volume of Bulgaria Yogurt and the other is to nurture growth drivers other than Bulgaria Yogurt. First, about Bulgaria Yogurt. We will significantly review the product mix in the second half of the year, focusing on a drink-type yogurt, which has been a factor in weak sales. The key phrase will be reinforcement of personalized yogurt products that respond to the diversification of customers eating scenes. The large-volume, 900-gram drink type for which price competition has become severe, has been discontinued.
The medium volume product has been redesigned with added nutrients and priced at the higher unit price of JPY 235. Considering that the suggested retail price for the large volume type has been around JPY 300, you can understand how high the price for the medium volume type is. The Plain type, which was renewed with a new manufacturing method in March is now available in 180 grams a portion for 1 person to finish. In this way, we will change our product lineup to suit the current times, and this will lead to a recovery in sales volume.
In terms of growth drivers other than Bulgaria, we are nurturing SAVAS Yogurt and Meiji Kyusyu support. SAVAS yogurt enjoyed double-digit growth in the first half of the year. With the launch of a new product in October, we have high expectations for the second half of the year as well. Meiji Kyusyu support is a yogurt that uses [ B1 ] lactic acid bacteria to support nutrient absorption contained in vegetables, and then we will steadily expand the lineup of this product as well.
Next is the chocolate and the gummy business. We have increased prices repeatedly, and the business has been performing well, supported by such factors as a recovery in people's activities. In order to maintain the strong performance in the second half of the year, we will work on improving product quality and strengthening marketing, as I said. We are particularly looking forward to the October launch of Chocolate Kouka W plus, which has 2 functional claims. Chocolate Kouka itself has been performing well despite the price hikes while expanding its customer base, but we will cultivate a new customer base by adding products that can further appeal its functionality.
We will also work to enhance the value of existing products such as milk chocolate. The hook in this process will be sustainable cacao. We will create the logo mark like the one on the lower left, which will be placed on product packages. We will make sourcing ratio visible and display as a differentiation factor not found in other companies. We are thinking of taking in new trends such as ethical consumption or creating such a trend ourselves. We will promote added value that is not only functional and lead to sustainable growth.
Next is the nutrition business. First is sports protein. Soy protein sales, which have been sluggish have finally bottomed out and we expect the growth of strong products to make a straightforward contribution to overall growth. We will enhance our web promotions for SAVAS Milk with increased protein content and empowered SAVAS with new premium ingredients and expand the series as a whole.
Infant formulas are also performing well. The contribution of liquid milk and in cubes is increasing year-on-year. And I think this is a good example of how products with technology and added value that other companies do not have can conquer the market.
Next, about the food business for B2B, which has been performing well. We are redefining and reinforcing this business as one that contributes to expanding sales channels and strengthening development capabilities. First, about sales channel expansion. In the retail and the restaurant industries as inflation continues to rise, there is a growing need for value-added products. To meet this need, we are not only expanding our existing B2B products, but also expanding our branded products for B2B use.
Specifically, in the second half of this fiscal year, we plan to have Bulgaria Yogurt used as an ingredient in the products of a major convenient store, and we plan to put the Bulgaria [indiscernible] on the packages of these products. In terms of strengthening development capability, we have higher expectations for our self-developed product called Mizuneri. This is the ganache developed as an ingredient for B2B and it can be stored at room temperature. We have received strong inquiries from various fields, and we are working on the development of recipes and menu using Application Center. We hope to gain new insights from these effects with our business partners and leverage them for the development of [ mixed ] products for consumers.
Next, our overseas business. The graph on the left shows sales by region. The figures in the balloon show growth rate in local currency terms, with double-digit growth in both China and the United States, which have a large share of sales. In the current fiscal year, profits are expected to be negative due to increased costs associated with the operation of a new plant in China and business expansion.
At first, we will strive to achieve solid sales growth. To give you details by region, first of all, in the United States, the Meiji branded chocolate snacks with high added value and the Stauffer brand, which has penetrated market as a commodity brand are contributing to stable growth in the market that is bipolarized after COVID. Having those brands has contributed to the stable growth of the company. At the same time, we are working to improve profitability and plan to reduce the number of SKUs by more than 10% this fiscal year as well as last year. We are concentrating management resources on product lines that can increase sales with profits.
Next, China. Although there has been much talk about its sluggish economy and consumption, the scale of our business there is still not that large, and we have achieved double-digit growth on the local currency basis. Of course, we are keeping a close eye on consumption trends. But since all of our businesses are mainly in the medium to high end price range, we believe that the key to success is to offer products that awards the price. In this sense, we have been able to increase sales of confectionery, ice cream and B2B products because they are recognized for their unique value. We will continue to strengthen our product capabilities so that we can maintain our superiority and differentiation from other companies' products.
On the other hand, as we have reported in the past, we are currently reviewing product and then channel policies, utilizing local human resources and making use of their knowledge and know-hows of the strong businesses of Meiji China, the regional headquarter as a hub. In particular, we are working to strengthen local development of [ chilled ] milk products in light of the fact that the chilled milk products are suffering as local manufacturers are catching up.
In the future, we intend to introduce new products developed through this process and grow them together with existing products. I have explained the first half results summary, full year forecast and the key points on sales in the Food segment. Mr. Kobayashi will now explain about the Pharmaceutical segment. Thank you for your attention.
I am Kobayashi, COO of Pharmaceutical segment. I will talk about the key points of our growth strategy for the Pharmaceutical business. In order to shift to the infectious disease business, our specialty area, in the midst of pandemic, the Pharmaceutical segment has decisively implemented structural reform as described here, to build a stable revenue base. We believe that there are 3 risks in developing our Pharmaceutical business. One, is the decline in the unit prices due to NHI price cut. The second is the breakdown in the value chain. And the third is the emerging new technologies, which has greatly accelerated due to pandemic.
We believe that responding appropriately to these 3 risks is a strategic perspective that will support the sustainable growth of our business. The left side of the schema is an image of revenue contributions of ethical drugs after the 2023 Midterm (sic) [ Medium-Term ] Business Plan. With the exception of vaccines, we have been forced to operate our business in a highly volatile environment due to the impact of the NHI price revisions. Under circumstances, we have decisively implemented the structural reforms shown in the middle section and have now shifted to the product portfolio shown on the right side for the future.
Specifically, we have established essential drugs such as vaccines and antibacterial agents as a product portfolio that is not affected by NHI price revisions and has become a stable foundation for our domestic business. In addition, we are designated as a stable supplier of essential antimicrobials. We believe that our efforts to strengthen the [ penicillin ] supply chain under the support of Japanese government have also contributed to the strengthening of our business foundation.
In addition, as for the red portion of the product portfolio on the right, we intend to strengthen our portfolio of new drugs in our priority areas and accelerate growth by responding to the risks with new technologies. This slide describes the upside of the growth with new drugs. I'd like to introduce here other than COVID vaccines. We are finally approaching the launch phase of our new drug pipelines.
First ME3208, Belumosudil, a drug for a rare hematological disease called chronic GVHD is a breakthrough new drug with a completely new pharmacological action as a selective ROCK2 inhibitor. It has already been approved in the United States and designated breakthrough therapy. If all goes well, it will be approved in March and launched in May next year in Japan. We have licensed Belumosudil from Kadmon Corporation in the Sanofi Group, and we have the rights to market the product in Japan and 12 Asian countries and planning to roll out gradually.
Next is a 5-in-1 combination vaccine. KM Biologics pediatric tetravalent combination vaccine was already approved in September this year and is scheduled to be launched in the first half of next year. We plan to start supplying the vaccine as a routine vaccination as early as possible. We hope that this will expand the market for pediatric routine vaccination and lead to the hexavalent vaccine, which is currently under development only by us. The 2 agents on the left are new drugs expected to be launched in the first half of next year.
On the right are the 2 new drugs in the late-stage development. OP0595 and ME3183. OP0595 Nacubactam is currently in the midst of Global Phase III study supported by AMED which is expected to demonstrate the efficacy against the carbapenem-resistant bacteria, Carbapenem is the most potent antibacterial drug currently in clinical use. As a breakthrough antimicrobial agent, this drug expected to be approved as soon as possible.
Lastly, about ME3183. It's a PDE4 inhibitor for psoriasis treatment being developed in-house in the United States. The result of the Phase II clinical trial conducted in Canada showed that it met the primary endpoint, which is a very good result. It is expected to become a global product of our company in the future. In any case, other than vaccines, we are now finally close to the launch timing for such new drugs. In order to counter the threat of new technological substitutes, we would like to strengthen our product lineup based on unmet medical needs in specific areas that we are good at.
Next, please. This shows the COVID-19 vaccine development status in Japan. This document is published by the Ministry of Health, Labor and Welfare. As you can see, the Meiji Group is currently developing 2 modalities of vaccine. Meiji Seika Pharma's self-amplifying messenger RNA vaccine, ARCT-154 and KD -- KM Biologics inactivated vaccine KD-414.
In particular, as you can see, the domestic Phase III clinical trial of ARCT-154 has already been completed, and we have already submitted an application for ARCT-154 as a primary immunization drug and as a booster drug. The result of this Phase III trial are very favorable to the existing drug. And if all goes well, we expect to receive approval at the end of this month.
The results of this trial have also been accepted for publication in a sister journal of The Lancet and are expected to be published in December. If approved, this will be the world's first approval of self-amplifying mRNA vaccine, and we believe it will be of great significance for Japan, which has lagged behind vaccine development to take the lead in this next-generation vaccine. However, following the recommendation of WHO as well as the policy of the Japanese government that vaccination after fall and winter this year should respond to the variant strains such as XBB1.5. ARCT-154 will not unfortunately be purchased by the government, even if it is approved this time.
However, as I mentioned earlier, development is progressing smoothly, and we expect to succeed in the development for the original strains. So we are currently receiving guidance and support from the authorities, and ARCT-154 have started an additional clinical trial for the variant strains. If all goes well, we believe that we will be able to respond to the various strains in the fall and the winter of next year. We expect to be able to commercialize it next year.
In addition, we are now working on initiatives to internalize this vaccine and are currently constructing a manufacturing base for the API in Minami-soma, in cooperation with ARCALIS and a manufacturing base for formulation in [indiscernible] plant. Both of which have been designated as dual-use projects by the Ministry of Economy, Trade and Industry. We are required to deal with the variant strength every year in the future. We believe that the domestic manufacturing platform for inoculation will be completed by the end of next year. In this way, we aim to play a role in strengthening the vaccine development and production system in Japan.
Next, please. Finally, I would like to mention the significance and potential for the practical application of these 2 COVID-19 vaccines. We tend to forget the hardship we have gone through when it is past the peak. And although COVID seems to be overshadowed by the influenza -- the number of cases is still being monitored at the fixed point and approximately 12,000 cases have been reported in 1 week. Although it has been subsiding, it is still occurring on a nationwide scale. As for the necessity of the COVID vaccine, according to the data released by Ministry of Health, Labor and Welfare, the autumn and winter inoculation began in September 26 of this year. And as of today, about 15 million people have been inoculated and the vaccination is still ongoing.
As COVID will become like an endemic after next year, I believe that the similar vaccination to that for influenza will be given for COVID in the next year and beyond. The significance of developing 2 vaccines is to offer choices of vaccines that can be safely taken by both children and adults and hence, to increase the vaccination rate. Above all, if we can successfully develop self-amplifying mRNA vaccine, we can demonstrate the efficacy and the usefulness of the new self-amplifying mRNA technology, which we've pioneered in the world for the first time in Japan, and we believe that we can lead the development of vaccines in the world.
So the COVID-19 vaccine is the only entrance to this platform. We would like to use this modality to create valuable drugs that can contribute to a wide range of diseases. In addition, we would like to complete the creation of platform to quickly respond to variant strains that will continue to emerge in the future and contribute to strengthening the vaccine development and production system to steadily provide the vaccine to the public without being affected by the circumstances in other countries. In any case, we would like to further enhance our competitive advantage as a corporate group that is unique in the field of infectious diseases that we're good at.
This concludes my explanation. Thank you very much for your attention.