Terumo Corp

TSE:4543

Earnings Call Transcript 2019-Q1

[Kazuaki Kitabatake, executive]

I will now give an overview of the Terumo financial results for the first quarter of the period ending March 2019.

Previously, we have had an earnings call for the first quarter announcements. However, due to the Ashitaka matter, we have decided to ask you to gather so we can offer direct explanation. In addition, we have taken the approaching typhoon into consideration in providing the option of a live audio broadcast as well. Thank you for attending today despite the heat and inclement weather.

Regarding the current status of the Ashitaka factory, not everything is yet firmly established, and some things remain unclear. However, I will do my best to provide an explanation that aids in gaining some understanding of the situation. With that, I will now explain the quarterly results.

Looking overall, despite the Ashitaka situation, the first quarter results alone came out in the line with our guidance for the period.

I will now discuss specific items. This period differs from previous trends for Terumo performance in 2 ways. The first is in revenue. The General Hospital and Blood Management Companies drove growth in place of the Cardiac and Vascular Company, which had previously driven overall growth but, in this quarter, slowed down due to impact from the reimbursement price revision and shipping delays. The second is the trend in SG&A. In previous fiscal years, expenses tended not to reach planned levels in the first half, but in the first quarter of this fiscal year, we saw expenses occur in line with the actual plan. As a result, our adjusted operating profit was negative year-on-year. However, this is in line with our guidance.

Our profit before tax is significantly lower than the previous year. This is due largely to FX loss. Specifically, this FX loss largely resulted from appraisal loss due to emerging market currency and euro depreciations. When excluding the FX loss, profit for the year is in line with annual guidance.

Next slide, please. Starting this fiscal year, we adopted IFRS accounting and, with that, began using the item adjusted operating profit. I will explain how that number is calculated. In the first quarter, the main item adjusted was amortization of acquired intangible assets, and the remainder was composed of an accumulation of small amounts, without any other significant ones.

Next is the adjusted operating profit variance analysis. Gross profit increment by sales increase was the largest factor. However, the Cardiac and Vascular Company, which has the highest margins, did not grow significantly. Because the General Hospital and Blood Management companies grew the most, the improvement in gross profit increment by sales increase grew less than usual.

In the price item, the reimbursement price revision occurred as expected, but the price erosion was below plan.

Increased SG&A and R&D appear larger than plan. However, this is because those items were smaller than planned in the same part of the previous year, resulting in this year's first quarter expenses appearing higher despite occurring as planned.

Next is revenue by region. In Japan, revenue came out slightly negative, with the General Hospital and Blood Management Companies nearly absorbing the negative Cardiac and Vascular number.

Outside Japan, the Ashitaka situation has not yet had the same revenue impact as in Japan due to the following reasons. First, shipments sent by sea transport will not see impact until the following month. Second, some of the products sold overseas is also produced outside Japan, and such factories as Maryland, U.S. and Vietnam are not experiencing the same issues as Ashitaka. Third, there is remaining inventory to absorb shipment delays. These factors prevented impact from reaching outside Japan as of the first quarter.

Some areas of Asia were impacted in the first quarter, but General Hospital and Blood Management growth were able to absorb the Cardiac and Vascular impact.

I will now explain in more detail for each company. First, Cardiac and Vascular Company. The TIS business saw negative growth due to the reimbursement price revision and the Ashitaka factory shipping delay issues. Growth was positive outside Japan but could not completely cover for Japan, resulting in a slight decline for TIS overall.

Neurovascular remained strong, with double-digit year-on-year growth of 15%. In CV and vascular graft, the same quarter of the previous year saw double-digit growth following the lifting of the consent decree and acquisition. This year, the first quarter went back to normal.

In adjusted operating profit, gross margin improved, while operating profit decreased due to higher expenses.

Next is General Hospital Company. Alliance grew robustly inside and outside Japan at over 20% year-on-year. In health care, diabetes management products showed steady growth. Pharmaceutical and nutrition, IV solutions paired with AdSpray and pain management for good overall growth.

Adjusted operating profit increased thanks to lowered manufacturing cost and increment of gross profit driven by high-margin products performance, even with increased R&D expense.

Next is Blood Management. The company saw steady growth with blood center products in emerging markets and therapeutic apheresis.

Adjusted operating profit was negative year-on-year. However, this was due to the significant year-on-year increase in R&D expense. This increase will slow down in the second quarter and beyond.

Next, the major topics from the first quarter. Major projects were launched on schedule, which are expected to contribute to future performance. For example, the Bolton stent graft RelayPro was launched in the EU in April. The drug-eluting stent Ultimaster Tansei also launched in the EU in April and will launch in Japan in the second half. Further, in May, we acquired exclusive Japan distribution rights for the Dexcom Continuous Glucose Monitoring device, CGM. There are other products in the 2018 pipeline, but I will keep my explanation to those with movement in the first quarter.

Now I will explain the shipment delays at the Ashitaka factory. We have already covered the cause of the occurrence in the press release, so I will give an update on the progress since then, addressing that progress on 3 different levels.

The first is restoration of sterilization capacity. All ethylene oxide gas, ETO, sterilization was halted in late May. Since then, each sterilization chamber was confirmed separately and restarted upon confirmation. Sterilization capability is now back to the level it was at prior to the stoppage, and we will increase capacity going forward.

Next, regarding shipment volume. Volume bottomed out in June and has been recovering through July and August. However, residual gas must escape from the product over a 10- to 14-day period to meet shipment criteria. This means that restoration of shipments takes longer to restore than sterilization capability. We expect to see full restoration of shipments to pre-stoppage levels in September and beyond. Further, impact on revenue will continue beyond the resumption of shipments due to 2 reasons: the inventory and the distance from Japan.

Next is our handling of the challenge going forward. We are taking the following 2 actions to handle the situation, including from a business continuity perspective.

One of these is expansion of our sterilization capability. In addition to expanding our capability in Ashitaka, we will utilize open sterilization capacity at our Fujinomiya and Vietnam factories. We are also studying the use of third-party sterilization facilities.

Another action is to transfer production of some products from Ashitaka factory to other locations to reduce the overall level of dependence on Ashitaka for sterilization. In the midterm, we have already begun to transfer some products to the Terumo Yamaguchi factory. With the occurrence of this challenge, we are looking at the possibility of transferring production to Yamaguchi on expedited time lines in order to more quickly respond.

Last, regarding the impact on performance, I will explain for inside and outside Japan, respectively. For Japan, impact was felt earliest around June. Restoration began in July and has continued since and should be complete in August. Outside Japan, impact was limited up to June but is expected to fully hit thereafter. And we expect that the second quarter will be affected.

Next, regarding revision of our FY 2018 guidance. Taking into account the impact of the Ashitaka factory situation, we have revised the FY 2018 guidance as follows. For the first half, we have reduced the revenue guidance by JPY 11 billion, both the adjusted operating profit and operating profit by JPY 650 million each and profit for the year by JPY 500 million.

For the second half, our guidance remains unchanged. Therefore, our guidance for the year is revised minus JPY 11 billion for revenue, minus JPY 650 million for both adjusted operating profit and operating profit and minus JPY 500 million for profit for the year.

Regarding the thinking behind our guidance revision, we are limiting it primarily to the second quarter where most of the Ashitaka impact will occur. As I mentioned, there was some impact on the first quarter, but results were more or less in line with the guidance.

Of course, some impact will appear in the second half. However, we feel that the following factors allow us to refrain from revising at this time. First, both negative and positive impacts may result from the situation. One negative impact is customer loss, which we expect to occur to some degree. However, it is impossible to accurately predict the scale of that loss. On the other hand, strengths of the Terumo TIS access products include their high quality and the aspect of training. These will not be affected by the shipment delays.

A positive impact of the situation is inventory restoration. We expect that after having consumed some of the inventory they were carrying, distributors and hospitals will purchase more to restore that inventory. It will be difficult to accurately predict what that amount will be, however.

Therefore, with both negative and positive impacts likely but an inability to predict either accurately at this time, we will make our best efforts to achieve the current second half guidance, which is originally higher than the first half. Neurovascular remains strong. General Hospital Company and Blood Management have good momentum. These will also provide support. In the case that TIS does not grow in subsequent quarters as planned, we will be able to control some expenses to meet the second half bottom line guidance. There are some uncertainties in the second half, but for now, we believe its guidance is achievable.

Next, our regional strategy in China. In July, we announced our acquisition of Essen Technology, a drug-eluting stent manufacturer in China. In addition, on Monday of this week, we announced the acquisition of regulatory approval of a peritoneal dialysis solution by Wego Terumo, a joint company of Wego and Terumo Group. We consider China to be our most important market in the midterm, and we are taking various specific actions to localize there. In addition to these 2 examples, we are working on a partnership in neurovascular with a local partner for production and sales as well as local development in renal denervation.

Thank you very much.