Terumo Corp

TSE:4543

Earnings Call Analysis

Record H1 Revenues and Profits; Robust Outlook

With its strongest revenues and profits ever for a half-year period, the company experienced a 6% revenue growth and a 15% increase in operating profit, both excluding FX impacts. The company is on track with the annual guidance, fueled by improvement measures outpacing inflation. Notably, the robust performance of the Cardiac and Vascular and Blood and Cell Technologies sectors significantly contributed to this success. The company looks forward to a promising Q4 with projected drastic improvements, thanks to cost reduction initiatives such as global freight contract consolidation and ongoing improvements in factory operations in Japan. The regions of the United States, Europe, and emerging markets, including China and other Asian countries, have been key drivers for the growth rate. Despite some challenges in Q1, revenue has recovered, and future impacts from major tenders are expected in H2. Finally, continued growth is anticipated for GS26, with significant contributions projected from key therapeutic businesses and aggressive price revisions.

Record-High Revenue and Operating Profit

The company kicked off with a significant milestone, marking the highest ever revenue and adjusted operating profit for a half-year period. A steady traction was observed in business inquiries globally, with a reported 6% revenue growth when negating the effects of foreign exchange. This growth translated into an impressive 15% increase in operating profit when foreign exchange impacts were excluded. Additionally, the company reaffirmed its commitment to an announced treasury stock acquisition valued up to JPY 20 billion, to take place within the fiscal year.

Double-Digit Growth in Key Business Segments

Performance was notably accelerated by the double-digit growth of the TIS and TA businesses within the Cardiac and Vascular Company as well as the blood center business of the Blood and Cell Technologies Company. Price policy revisions outside of Japan and group-wide cost reductions complemented this growth, while one-time profits from business portfolio optimization also made a significant contribution.

Positive Outlook in the Face of Inflation and Diverse Market Conditions

Despite the headwinds of inflation, the company successfully offset negative impacts through cost reductions and business mix improvement. Effective global price policies and reimbursement price revisions in Japan were highlighted as key drivers behind this progress. Subsequently, it was noted that both gross and adjusted operating profitability have improved compared to the prior year, with second-quarter year-to-date (YTD) profit variance items tracking according to plan.

Strategic Cost Management and Margin Improvements

The company's financial strategy appears robust, with an incremental profit of JPY 17 billion from revenue increases and ongoing margin management. Furthermore, significant improvements are anticipated for the fourth quarter, as the negative influence of certain one-time expenses will no longer be present. These improvements are underpinned by proactive measures such as global freight cost reductions and manufacturing efficiencies.

Geographical Revenue Distribution

The U.S. and European markets, along with emerging markets including China, are major revenue drivers for the company. Japan's revenue stabilized due to positive impacts like the reimbursement price revision, offsetting challenges such as the normalization of thermometer demand. In China, limitations on sales promotion due to anticorruption campaigns showed minimal negative impact, indicating the company's resilience in diverse market conditions.

Performance by Business Unit

An 8% FX-excluded revenue growth for the Cardiac and Vascular unit demonstrates strong global performance, with an anticipated annual guidance margin rate of 24%. The Medical Care Solutions Company projects to achieve an annual guidance margin rate of 10%, reflecting revenue stabilization and profit increases due to improved inflation and product mix. The Blood and Cell Technologies Company also shows promising results, aiming for annual guidance fulfillment bolstered by their profitability improvement measures.

Long-term Strategic Initiatives and R&D Focus

CEO Sato highlighted the importance of product pipeline innovation to sustain growth beyond the immediate strategic period, GS26. The company places emphasis on entering new markets like the U.S. with dual sensor systems for diagnostic catheters and expanding in interventional oncology through acquisitions. The Medical Care Solutions Company's focus on the CDMO business with pharmaceutical companies is expected to significantly contribute to business performance within and beyond the GS26 period.

Cutting-Edge Products and Technology Deployment

Several innovative products and technologies are poised to drive the company's growth, like the 'DSS' system, the expansion in oncological treatment with 'Quirem,' and initiatives in the Pharmaceutical Solutions business. Notable advancements include partnerships to deliver less burdensome prescription options and a first CDMO contract with a non-Japan pharmaceutical company, positioning the company for rapid expansion and boosted market reputation.

Optimizing for Sustainable Growth

Lastly, Terumo communicated a clear commitment to both the addition of strategic growth drivers and the subtraction, or divestiture, of non-core assets. This dual approach, adhering to corporate governance norms, suggests a disciplined strategy to achieve sustainable growth and profitability. The overview of their R&D focus areas indicates dedicated efforts towards innovative disease-centered technologies that supersede their traditional business models, enhancing the company's long-term growth trajectory.

Earnings Call Transcript 2024-Q2

[Naoki Muto, executive]

Hello. I am the CAFO, Muto. I will explain our earnings results for the first half of the fiscal year ending March 31, 2024.

Here are the highlights of this earnings report. Both revenue and adjusted operating profit in the first half were our highest ever for a half. Business inquiries continued to be strong globally as revenue grew 6% when excluding FX. Operating profit increased 15% when excluding FX. Positive impact from our earnings improvement measures continued to exceed the negative impact of inflation as we saw progress as planned toward achieving the annual guidance. In addition, the treasury stock acquisition of up to JPY 20 billion that we have previously announced is scheduled to be performed within the fiscal year.

Next slide, please. Here are the P&L results. Revenue was driven by the TIS and TA businesses of the Cardiac and Vascular Company and by the blood center business of the Blood and Cell Technologies Company, all of which grew in the double digits. In operating profit, the positive impacts of price policy revisions outside Japan and cost reductions throughout the group occurred as anticipated, while onetime business portfolio optimization profits also contributed to large growth.

Comparing the 3 months of Q2 against the previous year, both gross profitability and adjusted operating profitability improved. I will explain this in detail on the next slide.

Next is the profit variance analysis comparing the 3 months of Q2 against the same quarter of the previous year. First, in gross profitability on revenue. The impact of inflation that worsened in the second half of the previous fiscal year was canceled out by the positive impact of cost reductions and business mix improvement. Compared to the same quarter of previous year, Q2 improved to plus/minus 0 from negative JPY 700 million in Q1.

In price, the impact of price policies that were revised globally starting last fiscal year expanded to combine with positive impact from the reimbursement price revision in Japan. In SG&A, the effect of increased sales force continued from Q1 to expand therapeutic device sales in North America. In FX, the impact on stock was slight, resulting in positive impact on flow only. With these Q2 results, Q2 YTD profit variance items are each progressing as planned.

The next slide explains this. Here is the Q2 YTD adjusted operating profit variance analysis. Profit increment by revenue increase is JPY 17 billion for the year, and therefore, progressing as planned. Gross margin remains at the same negative level it was as of Q1. Later, I will explain in detail the quarterly progress and outlook for gross margin.

SG&A increase is also progressing as planned against the annual guidance. In FX, the positive impact on flow exceeded the negative impact on stock. The FX breakdown is JPY 4 billion positive in flow and JPY 1.5 billion negative in stock.

Next slide, please. The variance analysis chart on the left of the slide is the annual guidance for profit variance that we announced in May of this year. The gross margin results for Q1 and Q2 and outlook for Q3 and Q4 are shown on the upper right bar graph of the slide. Improvement is happening each quarter, and Q4 in particular will be an especially positive improvement as the onetime expenses of Q4 last fiscal year go away.

The breakdown of each item is shown on the lower portion. The 3 items shown our inflation, profitability improvement and mix improvement and other. In inflation, impact worsened in the second half of last fiscal year as electricity prices rose in Japan, but they have trended flat since then and are expected to ease going forward.

In freight cost, we began cost reduction efforts during the first half. Freight contracts were previously executed separately in each region, but we will now consolidate them into global tenders. In the second half, we expect to see the positive effects of this.

In profitability improvement measures, the effects of the Costa Rica production transfer are already appearing. And in the second half, we expect to see further gains as Japan factory operations improvements also bear fruit.

Regarding mix improvement and others. In addition to second half increases in sales of high-profitability businesses such as Pharmaceutical Solutions, the absence of onetime expenses that occurred in Q4 last fiscal year, for example, emergency freight costs associated with Blood and Cell Technologies delivery delays and the cost of transferring Cardiac and Vascular and Blood and Cell Technologies production to Costa Rica, lead us to anticipate a drastic improvement in Q4.

Next slide, please. Here is revenue by region. In the main markets of the United States and Europe, therapeutic devices including Neurovascular and stent grafts continued to be strong. In addition, emerging markets including China and other Asian countries drove the growth rate.

In Japan, although negative factors continued, including the revenue decrease due to selling off the nutrition business and the return to normal of thermometer demand, the reimbursement price revision and other factors had positive impact, returning the region as a whole to the previous year levels.

In China, despite limitations on sales promotion activities under recent anticorruption campaigns, there was only slight negative top line impact due to a decreased number of procedures. Also, although there was impact from Neurovascular product sales being held back by distributors during Q1, this eased in Q2 and revenue has recovered.

Finally, regarding TIS access product group purchasing. In September, there was a joint tender held for 20 government ministries. The impact of this is expected to appear in the second half. In Asia, a tender in which the Blood and Cell Technologies Company participated occurred in the first half instead of the second half, causing a drastic increase in revenue.

Next slide, please. I will now explain the results by company. First, Cardiac and Vascular. Revenue grew 8% when excluding FX, the TA and Neurovascular businesses, and Americas and Europe regions led strong global performance. Profit decreased in Q1 due to inflation and FX stock impact but increased drastically in Q2 due not only to increased revenue, but also price policy revision impact. Cost reduction effects will further increase in the second half, and we look to achieve the annual guidance margin rate of 24%.

Next slide, please. TMCS is the Terumo Medical Care Solutions Company. In revenue, negative impacts included the return to normal of device demand in the Life Care Solutions business. The positive impact of reimbursement price revisions in the Hospital Care Solutions business helped to push back the negative impact of delivery timing changes in the Pharmaceutical Solutions business to result in a slight revenue decrease when excluding FX.

In profit, Q2 saw a Q-on-Q improvement due to inflation easing and product mix improvement as well as a first half YTD Y-on-Y profit increase. In the second half, the effect of the price policy revision we enacted on October 1 will appear, and we anticipate seeing progress as planned toward achieving the annual guidance margin rate of 10%.

Next slide, please. The final company is TBCT, which is the Blood and Cell Technologies Company. In revenue, a higher-than-anticipated growth was maintained even though the revenue increase due to elimination of back orders that had continued from last fiscal year into Q1 was gone by Q2. This was because tenders scheduled for the second half were moved earlier into the first half.

In profit, there was a large increase in Q1 due to the onetime impact of inventory evaluation adjustment. However, this calmed in Q2. In the first half, we were able as a group to make progress as planned in both revenue and profit. In the second half, we aim to achieve the annual guidance by realizing further impact from our profitability improvement measures.

[Shinjiro Sato, executive]

This is the CEO, Sato. As Muto-san just explained, the Q2 results were as we anticipated, with steady top line growth and the emergence of positive impact from price policies and earnings improvement measures. In the second half, we anticipate achieving the annual guidance by realizing another level of earnings improvement through additional price increases in the Japan market.

Today, I will return to the starting point of our growth strategy and introduce the company solution pipeline that, above all, bridge the GS26 period and beyond.

Next slide, please. As we see in the term growth strategy, our most important need is to grow the top line. In the GS26 strategy, of which we are now in the second year, we aim for a high single-digit annual growth rate. Today, rather than going over the products on which GS26 is centered, I want to instead introduce what will appear for the first time during GS26 that drive growth in our next midterm plan, in other words, each company's solutions that will bridge GS26 and beyond. I will also touch on the R&D-focused themes that look even further into the future.

Next slide, please. Here is the product pipeline that I will introduce today. I have selected 2 from each company. You will already know some of them well and others will need more explanation than we have previously provided. I will state in simple terms the anticipated market size and unmet needs of each and how Terumo will provide value in response to those needs. I'll also touch on time line. At the same time, I first also want to emphasize that with each of our companies, these are by no means the only products that we will look to grow.

What I mean is that when we consider the amount of increased sales we anticipate in GS26, in particular in the case of Cardiac and Vascular Company, most of that amount will be in growth of therapeutic business in Neurovascular and Aortic, in addition to the radial approach expansion. In MCS, the price revisions we are aggressively pursuing already this fiscal year are playing a major role in establishing the base of growth. In BCT, strong performance of existing businesses is making up for delays in launching new ones.

With that, let's take a look at the solution pipeline that rest atop these stable foundations. Next slide, please. First, in Cardiac and Vascular, the dual sensor system, DSS, is a good example of new products in the pipeline that we haven't yet sufficiently explained. This is a revolutionary system that integrates the 2 imaging systems which Terumo has previously introduced to the market, the IVUS and OFDI.

In recent years, adoption of endovascular imaging before and after interventional procedures to assess the condition of blood vessels has contributed to better clinical outcomes. However, the 2 main technologies used to perform this imaging both have strengths and weaknesses so they are, in reality, selected according to the indication of the procedure and condition of the patient.

Specifically, intravascular ultrasound, IVUS, provides a deep view of blood vessels without requiring the use of contrast media, which places a burden on renal function. However, it is weaker at imaging calcified blood vessels. Conversely, optical frequency domain imaging, OFDI, enables detailed visualization of calcification breaks and provides 10x the resolution detail of ultrasound. However, it has the disadvantage of requiring the injection of contrast media into the blood vessels.

As the first company to successfully develop IVUS in Japan, we have developed a dual-use system that addresses the need to eliminate this trade-off by combining into one catheter both IVUS and OFDI. We intend for this to contribute to safer and more effective interventional therapy. We are confident in securing solid #1 position in the field of diagnostic catheters. Our primary targets are the markets of the U.S. and Japan.

To date, Terumo has sold neither the IVUS or OFDI in the U.S. market. As such, pioneering a new market in the U.S. with our DSS certainly comes as a challenge, but one which we hope to strengthen our business competitiveness through synergies with our existing catheter products. Therefore, we have high expectations that this element of our pipeline will sustain continued growth beyond GS26 after achieving launch during GS26.

Next slide, please. Next again in Cardiac and Vascular, I will introduce an example of our efforts to provide new solutions through acquisition. Since long 2015, Terumo had been investing in a company called Quirem, which develops oncological therapy products. And in 2020, it became a 100% subsidiary. As you know, the interventional oncology market is over $1 billion in scale and growing at an average of 7% annually.

In the liver cancer field, Terumo possesses high market share in the field of liver cancer catheter treatment products, represented by our microcatheters. Terumo has established a strong presence by offering a wide range of Terumo-developed products for selective therapies, including embolization beads, drug-eluting beads and bioresorbable drug-eluting beads.

We also have gained therapeutic microspheres through acquisition of Quirem. We are now a company that stands to toe with its competitors when it comes to available product portfolio. Quirem exceeds the scope of mere treatment devices, offering also solution tools. These radioembolization beads are combined with beads for preoperation diagnosis and the software that supports treatment planning and evaluation to enable consistent imaging throughout treatment from the pre to postoperative stage.

Each of these elements was acquired along with Quirem. This unique technology is intended to bring about individualized medicine that is optimized for each patient. We will continue to offer a wide range of treatment options in the liver cancer field while also applying the technology to cancer treatment in other organs and offering the products and markets beyond Europe, furthering our sustainable growth.

Next slide, please. Next, we will look at MCS. Since last fiscal year and into this one, the Medical Care Solutions Company has been revising its prices in the Hospital Care Solutions business, which accounts for 70% of its total current sales, in order to improve earnings and overcome inflation impact. These effects, along with positive reimbursement price revision impacts, are included in the annual guidance of which you are all aware.

However, the source of sustained and strong top line growth will be expansion of the Pharmaceutical Solutions business, and most of all within that, the CDMO business, whose customer base is pharmaceutical companies. The first example of this introduced on this page is the combination product that includes Eisai's drug for treatment of Alzheimer's disease. Specifically, the project is joint development of the auto-injector and drug product.

While the current practice is to prescribe this medicine to patients at medical institutions once every 2 weeks via hour-long IV injection sessions, a less burdensome prescription option should be available to patients. Terumo participated in the development of a product that patients will instead be able to inject at home. We are about to commence regulatory applications, but this is an important project that we anticipate will make a meaningful contribution to business performance within the GS26 period and yield further gains beyond GS26 through investment and production expansion.

Next slide, please. The next item is also an expansion of the CDMO business. We are currently working toward the start of collaboration with non-Japan pharmaceutical manufacturers as well. What I can share today is limited, but with promotion activities centered in the U.S., EU, Korea and India, we are fielding a number of inquiries. As early as within this year, we anticipate signing our first CDMO contract with a non-Japan pharmaceutical company.

With this, we expect to further increase our reputation with overseas pharmaceutical companies in this field. Going forward, we will expand the diseases that we target and the range of companies with whom we collaborate in new drugs and biosimilars, but also with generic manufacturers to further enhance our CDMO pipeline.

Next slide, please. Next and finally, we have BCT. Reveos, the product you see here, is the only automated device that can process whole blood into platelets, plasma and red blood cell, RBC components in single centrifugation cycle, U.S. blood centers have relied on a manual method to process whole blood donations. Traditionally used methods take as many as 18 to 20 steps. Reveos simplifies this process and eliminates over half of the steps.

By removing the manual steps, Reveos can reduce the working hours needed by laboratory staff by up to 30% in health blood centers, address staffing retention and shortage challenges. Already used in 52 countries, it was approved by the FDA this summer, see August press release, as the first fully automated whole blood component collection system in the United States. And its sales will expand to blood centers around the U.S.A.

The demand for blood products is on the rise, especially the need for platelets. These are used by patients facing conditions such as cancer or trauma and are also needed for surgeries. In general, blood donations are down due to lingering impacts from COVID and because younger people don't donate platelets at the same rates their older counterparts historically have.

Reveos' ability to automate whole blood processing is positioned to enable blood centers to produce more blood products with the same number of whole blood donors more efficiently and meet the needs of patients in their communities. Contributing to business results starting next fiscal year, this solution is positioned to drive top line growth beyond GS26 as well.

Next slide, please. The last example is Rika. Some of you are familiar with what was presented at the CSL IR event a month ago: rollout of Rika, in which you have expressed great interest and is expected to happen slightly earlier than previously anticipated. At multiple previous earnings announcements, I have stated in a reserved way the full U.S. deployment of Rika is expected to be complete within the GS26 period and that the speed would be determined by the customer, CSL.

There is a possibility of an early completion. A speedy rollout of Rika is in the mutual interest of both parties. We are confident with our world-class infrastructure capability to deliver on equipment and disposables needed for the rollout. We also demonstrated our ability to convert any center overnight. We are helping CSL manage the adoption of our new technology, software and entire ecosystem, which is already bringing CSL significant productivity, efficiency and sustainability gains.

We continue innovating on the Rika ecosystem nomogram algorithm to bring even higher efficiency with increased plasma collection volume per donor. Similarly to the Reveos system for blood centers that I just discussed, Rika is a revolutionary innovation that is already bringing efficiency gains, quality improvement and increased plasma collection volumes to enable plasma fractionation companies to achieve their growth demands.

Through such continued innovations from our part, we are poised to bring major transformations to the plasma industry, offering new values to both plasma donation separations and plasma donors. I will continue to share the progress of this new business expansion with you going forward.

Next slide, please. To this point, I have shared the growth drivers that bridge us into beyond GS26. Now I would like to also discuss a perspective that goes even further into the future. We will nurture new businesses that will sustain Terumo growth on an even more long-term basis through innovative thinking from disease center developmental technology perspectives that may not fall within the boundaries of our current business domains. In other words, they may go beyond our current company framework.

The slide shows the focus areas of illness and approaches for our corporate R&D: heart failures, cancer and vein in the area of illness; minimally invasive and patient journey in the area of approach. Then the 3 Ds is also emphasized in GS26: delivery, devi-ceuticals and digital. Demands for these areas in the modern society is strong. At the same time, it is where application of strength in Terumo's core technology and accumulated experiences is relatively easy. Thus, we consider it worthwhile to proceed intensively in the aforementioned business areas.

About 250 R&D engineers engaged in the projects for these focus areas. Acquiring these technologies is in itself a new field and a very long-term endeavor. That's why it's not a simple choice of whether to develop in-house or find through acquisition. Rather, in most cases, it will likely require a combination of the 2 to acquire complementary capabilities for the running R&D projects. We will continue to update you on this going forward.

Next slide, please. This will conclude my explanation of growth by addition. Now let me address subtraction. We are aware that the corporate governance code requires us to explain in an understandable way the basic policies and procedures by which we review our business portfolio. The time line you see on the top here was previously focused only on our acquisition history. Now we have added the subtractions as well, in other words, events of divestiture and exiting.

Looking back on the past 10 years, acquisitions made during that time are now our primary GS26 growth drivers. However, a look at the subtractions as well reveals that we performed 2 in the last fiscal year and 1 this year. As the bottom portion of the slide expresses, we take actions to carry out and regularly review the results of our additions and subtractions to our business portfolio optimization. We will continue to run the PDCA cycle to achieve both sustainable growth and profitability improvement.

Next slide, please. This concludes today's introduction of the solutions pipeline that will bridge the current GS26 with Beyond GS26 and of our efforts to optimize the business portfolio. Terumo will continually strive to make contributions that advance health care and enhance patients' quality of life, creating value for society to achieve sustainable growth. Thank you.