Terumo Corp
TSE:4543

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TSE:4543
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Earnings Call Transcript

Earnings Call Transcript
2019-Q4

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S
Shinjiro Sato
executive

Good afternoon. Thank you for your attendance today. Today, I will review the Ashitaka factory shipping delay and speak about our efforts to strengthen global operations. Next slide, please.

First, a look back at the Ashitaka factory shipping delay of last year. Next slide please.

Fortunately, we successfully normalized operations within the last fiscal year. After the most difficult period during the second quarter of last fiscal year, shipments quickly resumed during the third quarter. The pent-up demand that had spiked then subsided within the fourth quarter and operations were normalized by the end of last fiscal year.

Regarding the business impact. While we unfortunately caused concern and there were temporary effects from the delay, we have now essentially recovered. We prioritized first resuming shipments to the Japan market where Ashitaka products have a very high market share and there was very little time lag, and therefore, no major impact. Outside Japan, there were, of course, some tenders in which we had to cancel our participation, resulting in temporary loss of share. We have since recovered. I visited sites around the world, and while I did so in autumn last year, I heard many associates express concern.

Now when I visit, things have calmed down. And I get the sense that the impacts have largely subsided. In particular, we have not lost major market share. So you can rest assured that there has been no significant permanent damage. In the end, we have recovered because our customers trust Terumo product quality. We will strengthen our operations going forward in order to maintain that trust. Next slide, please.

Regarding preventing recurrence of this problem, we had, of course, taken preventative actions in addition to the recovery activities we undertook over the past year. One lesson we have learned is that 2 larger proportion of our operations is focused in Ashitaka factory. As is written on this slide, we will be accelerating new actions toward both strengthening capability and improving production efficiency. We are also working to reduce the burden on Ashitaka factory and thereby resolve the bottleneck issue.

Secondly, as you see on the slide, we will collaborate to share information and countermeasures through our global production network toward improving our production engineering capabilities as listed here, including the sterilization problem that led to last year's delay. We are also enhancing our global collaboration regarding other aspects of production engineering.

Thirdly, we are strengthening our risk management. This was another important lesson from the shipping delay. As our business grows, we need to secure sterilization capability beyond just the current needs. Further, we need to more fully utilize the potential of other factories. We also plan to build a more strategic inventory policy that takes into account product and regional differences while ensuring that we minimize the impacts of emergencies on our supply capabilities. Next slide, please.

Next, I will speak about our efforts to strengthen global operations. One of our mid- to long-term focuses is strengthening global operations. Having experienced the Ashitaka factory shipping delay, we have recognized even more keenly than before the need to strengthen global operations and do so quickly. Therefore, we are treating this issue as one of our group-wide management focuses in FY '19. Next slide, please.

First, regarding the current state of the Terumo production system. Please briefly look at the distribution of production by company. Next slide, please.

This is the distribution of Cardiac and Vascular factories. There is the Japan cluster, centered on Ashitaka; in Asia, the factory in Beijing that was acquired with Essen; and the factory in Hanoi; in America, the MicroVention, TCVS and Bolton Medical factories; in addition to satellite factories in Puerto Rico and MicroVention factory in Costa Rica. In short, the Cardiac and Vascular Company now has factory clusters positioned throughout the entire world. Next slide, please.

In contrast, the General Hospital Company previously had its production in Kofu and Fujinomiya. But now has the Hangzhou factory in China, the Philippines factory and utilizes some Terumo Europe sites for its kit business products in the alliance business. General Hospital has significantly globalized its production. Next slide, please.

The Blood Management Company production is mainly centered in the BCT Lakewood factory and is supplemented by the Japan Fujinomiya factory and in recent years, the Ho Chi Minh factory. In addition to the India Penpol factory, which we have had manufacturing blood bags for some years, the company currently has its production distributed worldwide. Next slide, please.

In total, Terumo Group has 31 factories throughout the world, and our percentage of production done outside Japan has reached 53%. Compared to a few years ago, the percentage of production in the Americas has increased, resulting in vast improvement of the dollar FX sensitivity that we have so frequently explained in our financial announcements, particularly regarding impact on profit. Our percentage of production that lies outside Japan has brought us near to a neutral FX impact level.

I will now explain some of the specific measures we plan to strengthen operations globally. As you may be aware, there are new factors in our external environment, tightened regulatory, higher required level of quality management and demands to produce locally and others. Considering Terumo, we see that its continued strong growth will necessitate increased capability and enhancement of cost competitiveness. These will require strengthening our global operations.

We believe that operations are more important than ever in understanding our growth strategy and competitiveness. I recognize that in this era of the medical device industry, the level of complexity is increasing and the environment is changing, meaning that the level of our operations and strategy will determine our competitiveness. That is the background for these 4 key measures towards strengthening operations. Next slide, please.

The first is global optimization. The need for this became very clear with the Ashitaka factory shipping delays. Terumo, especially in specific segments, has built its production around mother factories, which tend to take on a disproportionate load. Now that we have factory clusters positioned globally, we want to rebuild our production from the perspective of optimization, distributing functionality across multiple factories and promoting inter-factory collaboration toward achieving our vision for the whole system. What you see here is the TIS example. Currently, all activities are centered in Ashitaka factory. And each satellite factory conducts its manufacturing from there.

Our plan is to raise sites like the Maryland factory or Yamaguchi factory to the level of sub-mother factory, which will enhance global distribution of functionality. Changing to this format will enable the progression of group-wide and TIS optimization. In the Blood Management and alliance businesses as well, we will strike a better balance that does not focus operations in just one mother factory but better distributes functionality across global clusters and strengthens the division of roles. Next slide, please.

To move these items forward, the headquarters will have to take the lead organizationally. As you see here, we have instituted CXO roles for the corporation. As part of this, we created the CQO position to control quality management on a corporate level. Our Director and Senior Managing Executive Officer, Takagi, has served in the position for a few years now, leading the corporation through recovery from the TCVS consent decree in particular.

Having the position has made corporate level leadership possible. We have also appointed a Senior Executive Officer, Hirose, as CMO, in order to further promote production optimization across the group. He will oversee global optimization, capacity expansion, sharing of monozukuri culture and ensure that these concepts are absorbed by their respective factory clusters.

As you see here, the TIS, Interventional Systems business has been centered in Japan without a single COO in charge of controlling overall supply chain and production. Reflecting our learning from the Ashitaka factory problem, we have appointed another executive class leader to that position. Mr. Sakaguchi has previously served as President of Terumo Yamaguchi and has experience heading the pharmaceutical business unit and will now lead all of our global TIS factory clusters. We feel that this new configuration will strengthen our organization. Next slide, please.

In the area of collaboration, we are moving from having independent production at factories to strengthening our system of collaboration across regions and companies in sterilization, production technology, optimization of acquired factories and so forth. This slide shows specific examples of activities that are happening as a result of this effort. We believe that raising synergy across the group will lead to savings in areas like cost of goods and expenses. Next slide, please.

Another key measure is to localize production. And this is something we plan to do amid globalization of production. Previously, we envisioned a standard strategy for global optimization. However, the emergence of the enormous China market and incentives are increasing for localizing production. An example of this is our acquisition of Essen Technology, which has a factory in Beijing, China. We will study producing new therapeutic devices with this factory as a core. Another example is in the peritoneal dialysis business where utilizing the factory of our joint venture with Wego in China will enable further expansion in the Chinese market. With these kinds of efforts, we plan to promote a special local production strategy in China. Next slide, please.

To promote these 4 areas, we need to spread and enhance across our entire group the unique monozukuri culture of Japan that informs our production philosophy. To leverage in production, our Terumo strength as a global corporation with unique excellence, we urgently need to make expertise explicit and shared. To enable this, we have held global manufacturing management meetings frequently for the past few years. These were not done previously. We also hold the manufacturing innovation exhibition every other year. Last year, 600 associates from the entire group attended in Shonan. This event also contributes to spreading our monozukuri culture globally. Next slide, please.

Through these efforts, we will further move toward being a global corporation with unique excellence and raise our supply capability centered on total quality. We will further polish and pursue the strategies I have outlined today to raise supply quality so that we ensure a continually improving total quality. This is how we intend to raise our position as a top global brand. We ask for your continued support. Thank you.

K
Kazuaki Kitabatake
executive

I will now explain concerning the financial results for the fiscal year ended March 31, 2019. First, the general overview.

During this fiscal year, we successfully resolved the Ashitaka factory shipping delays to achieve revenue and profit in line with the revised guidance that we issued in the first quarter. While the revenue growth rate was low, every company grew positively. Adjusted operating profit was virtually in line with the revised guidance. Profit was down year-on-year. However, year-on-year negative growth was diminished from the third to fourth quarter, and we achieved positive year-on-year profit growth when excluding FX impact. When excluding the temporary increase that occurred in the previous fiscal year, profit for the year also increased year-on-year. Therefore, we overcame the Ashitaka problems to achieving increased revenue and profit when excluding FX impact.

Next, the FY '18 results in comparison to the original guidance. As you can see, the negative variance was due to Cardiac and Vascular Company. The amount negative below original guidance was approximately the amount that guidance was later revised downward. In areas other than the Ashitaka factory shipping delays, drug-eluting stents also came in below forecast but businesses such as neurovascular covered for some of that shortfall.

In General Hospital, revenue and profit both exceeded original guidance largely. In Blood Management, revenue was above guidance. Operating profit was trending well below the previous year until the third quarter but then recovered in the fourth quarter. When excluding FX impact, its numbers were in line with guidance.

Next, an explanation of the adjustments that result in the adjusted operating profit figures. The largest adjustment item was the amortization of acquired intangible assets. Temporary gains and losses were a relatively small JPY 900 million in total. They consisted of the same items that we explained when announcing the third quarter financial results.

Next is the adjusted operating profit variance analysis. Increased revenue and improved gross margin, the 2 items to the left, grew as business performance improved in the third and fourth quarters. Specifically, 2 main factors with positive impact on gross margin increased greatly in the fourth quarter. The 2 main factors were: first, improved product mix by the increase of revenue in the TIS business. The other was gross margin improvement through increased production volume at the Yamaguchi factory.

In price, the Japan reimbursement price revision impact was approximately as we anticipated. Because of reduced sales during the Ashitaka shipping delays, the amount of price erosion impact was smaller than expected. Increase of SG&A was as planned. Increase in R&D was partially affected by the need for engineers to work on resolving the Ashitaka shipping delays, resulting in that number coming in slightly smaller than the plan. The euro and emerging market currencies had a negative impact, which increased in the fourth quarter to end with an impact of minus JPY 3.7 billion over the fiscal year. Our guidance for FY '19 includes a similar impact which I will explain in detail later.

Next, revenue by region. In Japan, General Hospital and Blood Management covered for negative impacts in Cardiac and Vascular to bring year-on-year revenue growth to approximately 0%. Outside Japan, the steady recovery of Cardiac and Vascular helps to overcome FX impacts and result in an increase in positive growth. China in particular experienced a large increase as the Essen acquisition begin to contribute revenue in the fourth quarter and as TIS shipments were increased amid recovery from the Ashitaka shipping delay. The Americas were slightly lower compared to the third quarter year-on-year growth. However, Cardiac and Vascular was steadily recovering while there was a negative impact from the decrease in the Blood Management therapeutic apheresis business.

Next is revenue by business segment. I will get into more detail when I discuss the companies individually. The Cardiac and Vascular Company normalized following the shipping delays to show positive year-on-year growth. The General Hospital alliance business maintained its strong performance. In Blood Management, the Blood Center business expanded steadily to cover the decrease in therapeutic apheresis for overall revenue growth of approximately 0%.

In Cardiac and Vascular, the TIS business pivoted to year-on-year positive growth in the fourth quarter. The neurovascular business continued to achieve double-digit growth. In adjusted operating profit, the recovery of TIS product sales resulted in a large reduction of the profit downturn from the third to the fourth quarter. The General Hospital Company alliance business was strong and other businesses also posted good sales. Specific products with good sales included infusion lines, pain management and adhesion barrier. In profit, strong sales of high-margin products absorbed the rapid increase in R&D expenses, resulting in increased profit year-on-year.

In Blood Management, the blood center business covered for decreased sales of therapeutic apheresis. Factors behind blood center business growth varied by region. In Japan, growth of the TACSI, automated blood processing system, contributed to the increase. In the Americas, next version of the automated blood collection system contributed to growth. In Asia, production increased at the Vietnam factory, leading to sales growth. Adjusted operating profit was down year-on-year until catching up in the fourth quarter for a final result of positive year-on-year growth. There was a large FX impact on Blood Management adjusted operating profit from the euro and emerging market currencies. When excluding FX impact, the company's adjusted operating profit grew 13% year-on-year.

As for major topics, since we don't have much time, please let me skip this part. I will also skip the FY '18 product pipeline. I will now explain our FY '19 guidance. Our revenue plan is to see significant growth despite yen appreciation through TIS recovery. Our guidance is for 6% year-on-year revenue growth, 8% when excluding FX impact. Adjusted operating profit guidance is lower growth than revenue. I will explain this on the next slide. This is the adjusted operating profit variance analysis. A strong sales increase and improved gross margin are the 2 positive arrows on the left. Negative factors unique to FY '19 include: the Japan reimbursement price revisions scheduled for this year, which will have a JPY 3 billion impact; the costs of compliance to the new European medical device regulation; and investment in IT systems, which will result in JPY 4.7 billion. The euro and emerging market currencies are expected to result in a negative FX impact of JPY 5 billion. These are the factors expected to negatively impact operating profit.

Next is our guidance by company. First, Cardiac and Vascular is expected to overcome the Japan reimbursement price revision and FX impacts to grow steadily. Excluding FX impact both revenue and adjusted operating profit are expected to see double-digit growth. General Hospital revenue is expected to grow steadily. However, the operating profit plan is for negative growth. This is due to increased depreciation, reflecting expansion of the Yamaguchi factory with a year-on-year impact of JPY 1.9 billion. Blood Management is the company most affected by FX impact. Excluding that impact, revenue and adjusted operating profit are both planned to grow 5%. Meaning that the company's base business is growing well.

Next is the FY '19 product pipeline. Please refer to the details listed here.

Lastly regarding dividends. This fiscal year, we have implemented a stock split so per share dividend is half the prior amount. However, I will express the amount based on that of the previous year for ease in comparison. Last year's dividend was JPY 54 for the year. This year, that is expected to be increased by JPY 2 to the equivalent of JPY 56.

This concludes my explanation. Thank you.

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