Terumo Corp

TSE:4543

Earnings Call Transcript 2020-Q4

[Naoki Muto, executive]

I am the CAFO, Muto. I will explain the financial results for the fiscal year ended March 2020.

First, an overview. As the title expresses, despite some COVID-19 impact, Terumo achieved its highest ever revenue and operating profit. Revenue, particularly that of the Cardiac and Vascular Business in China, was affected by COVID-19 in Q4. However, the impact on the total for the 2019 fiscal year was not severe. All companies achieved revenue growth. Overall, revenue grew 5%, and 8% when excluding FX impact.

Regarding adjusted operating profit, each company increased its proportion of high profitability products. In addition, good performance by the Cardiac and Vascular Company in the first half enabled some promotional expenditures to remain unspent. All this resulted in the group achieving 9% adjusted operating profit and 11% operating profit growth when excluding FX impact.

Profit for the year grew 7% due to factors including less FX impact than the previous fiscal year.

Next slide, please. Here is the comparison with original guidance that we announced at the beginning of FY '19. Cardiac and Vascular finished below revenue guidance due to sluggish sales of drug-eluting stents in Japan and elsewhere, in addition to the impact of COVID-19 in the fourth quarter. However, adjusted operating profit was JPY 1.9 billion above guidance due to factors, including that some expenditures for recovery from the shipping delay did not need to be made.

General Hospital ended up as planned for revenue and profit. Blood and Cell Technologies ended up above its plan for revenue and profit when excluding FX impact. Please note that starting this fiscal year, the company previously known as Blood Management will now be called the Blood and Cell Technologies Company. Its revenue exceeds JPY 100 billion, and its business has expanded beyond transfusion-related products to also include therapeutic apheresis and cell therapy technologies. So we have changed its name to more accurately express its business.

Next slide, please. Here is the adjusted operating profit variance analysis. Due to sales of the TIS business of Cardiac and Vascular, and some Blood and Cell Technologies products, coming in below volume plans, gross profit increment by sales increase was JPY 30.8 billion, lower than the JPY 33 billion guidance. In addition to product mix improvement in the Cardiac and Vascular Company, production cost reduction progressed well, leading to gross margin improving JPY 5.7 billion, above the guidance of JPY 4.8 billion.

In price, the introduction of new software to the Trima blood component collection system of Blood and Cell Technologies helped to prevent some of that company's anticipated price erosion, leading to a smaller drop of JPY 2.9 billion rather than the expected JPY 5.0 billion. The Japan price reimbursement revision impact was JPY 2 billion, which was less of an impact than guidance. This was partially because revenue was below expectations in Cardiac and Vascular, and because of delayed timing in some customers agreeing to the new prices.

Costs for the new EU MDR regulations were JPY 1.4 billion, instead of the JPY 3.2 billion guidance. Spending on MDR increased in the second half, the fourth quarter in particular, but reconsideration of some product updates and shortened testing periods led to reduction of these costs in addition to the postponement of system audits that were scheduled for March. In any case, our preparation for MDR to come into effect is progressing on schedule. IT investment amortization expenses came in according to guidance.

SG&A increase was JPY 8.1 billion against the JPY 12.5 billion guidance. We had anticipated costs for TIS recovery from the shipping delay. However, good business performance eliminated the need to spend that budget. And also, the neurovascular product, WEB, saw higher demand than expected, leading to a reduction in SG&A.

R&D increase was JPY 5.7 billion as anticipated in guidance. FX impact was JPY 7.8 billion, exceeding annual guidance of JPY 5.0 billion due to yen appreciation against the euro, the Chinese yuan and emerging market currencies in the second half.

COVID-19 impact on the Cardiac and Vascular Company in the fourth quarter was JPY 2.7 billion. Analyzing this JPY 2.7 billion, 2/3 of it was impact on gross profit increment by sales increase and 1/3 was impact on gross margin of the variance analysis chart.

Next slide, please. Next is revenue by region. In Japan, the pain management and Alliance businesses of the General Hospital Company grew in double digits, driving growth overall. Outside Japan, all regions grew in the high single digits or double digits when excluding FX impact. In China, double-digit growth continued through the third quarter. But in the fourth quarter, the Cardiac and Vascular Company saw COVID-19 impact that resulted in a drastic slowdown.

Next slide, please. Here is revenue by business segment. In Cardiac and Vascular, the Neurovascular business grew nearly 20% in the fiscal year, driving the company overall. There was COVID-19 impact centered in China in the fourth quarter, but the company still maintained double-digit growth.

In General Hospital, good performance by pain management and adhesion barrier products added to that of the Alliance business for double-digit growth driven by Japan and other regions. The fourth quarter saw increased demand for thermometers, disinfectant and other products used in COVID-19 measures.

In Blood and Cell Technologies, the automated blood component collection systems for blood centers drove the company overall.

Starting with the next slide, I will give more detail on each company's results. First, Cardiac and Vascular. Revenue and profit both grew in double digits when excluding FX impact. TIS was impacted by COVID-19 in the fourth quarter, especially in China, but it maintained double-digit growth for the fiscal year when excluding FX impact. In the Neurovascular business, COVID-19 impact was limited up through March. WEB and stroke devices led by SOFIA drove growth to nearly 20% globally. In Cardiovascular, heart-lung machines returned to the product lineup, making customer approaches easier, in addition to strong performance by oxygenators, driving the growth.

In the Vascular Graft business, there was some slowdown in the fourth quarter due to COVID-19 impact. Profit increased with sales expansion of higher profitability TIS and neurovascular products. Also, there were anticipated expenditures for TIS recovery from the shipping delay, and for starting neurovascular WEB product promotion in the United States, which did not need to happen in the first half as expected. Because of these, profit increased 7% year-on-year and 16% when excluding FX impact.

Next slide, please. Next is the General Hospital Company. Despite a temporary decrease in demand for General Hospital products outside Japan, the Pharmaceutical and Alliance business grew in double digits to drive the company as a whole. DM Healthcare saw increased demand in Japan for thermometers in the fourth quarter due to their use in COVID-19 measures.

As a whole, the General Hospital Company achieved its guidance in both revenue and profit.

Next slide, please. Next is Blood and Cell Technologies. Revenue growth was driven by a software update to the Trima automated blood component collection systems for blood centers and disposable products.

In addition, in the fourth quarter, there was a contribution from increased demand for collection of convalescent plasma from recovering COVID-19 patients. In therapeutic apheresis, emerging markets in Asia and Latin America grew in double digits, while there was a recoil of replacement with the latest version of consoles in developed countries. Overall, revenue grew 2% and 6% when excluding FX impact.

Due to cost and expense control, profit grew in double digits when excluding FX impact, coming out above plan.

Next slide, please. Regarding the dividend for the end of FY '19, we have assessed the COVID-19 impact and decided not to change the anticipated dividend of JPY 14, making the total annual dividend amount JPY 28. This is a JPY 1 year-on-year dividend increase.

Next slide, please. We will skip over the FY '19 major topics.

Next slide, please. This slide regards the COVID-19 crisis. As was noted in the press, the Cardiac and Vascular Company contributed ECMO systems for the treatment of severe COVID-19 patients. General Hospital products, including thermometers and hand sanitizer, contributed to preventing the spread of infection, while Blood and Cell Technologies products, including blood component collection and therapeutic apheresis systems, were utilized in the United States and other places. This means that all companies of the Terumo Group are contributing to prevention or treatment of COVID-19.

Next slide, please. There are several products which will enter the market in FY '20 rather than FY '19. But overall, the pipeline is on track for product launches.

Next slide, please. Regarding guidance for fiscal year 2020, it is extremely difficult to rationally figure out. So we will refrain from issuing guidance at this time. We will disclose our guidance as soon as circumstances permit us to do so. We ask for your kind understanding in this matter. Some Terumo Group companies are more heavily affected than others. Due to postponement of elective procedures, the Cardiac and Vascular Company is comparatively more affected. Type of procedure, region, timing of effects and other factors all have an impact, making estimates very difficult.

The General Hospital and Blood and Cell Technologies companies are also somewhat affected, but in a more limited way than the Cardiac and Vascular Company.

The next slide explains our thinking in more detail. I will now explain our thinking regarding the COVID-19 impact on the Cardiac and Vascular Company. The vertical axis of the graph shows revenue and the horizontal axis shows the procedure segments of urgent, elective, time-sensitive and elective non time-sensitive. Within the same cardiovascular field, you can see that there are various circumstances for each segment.

When analyzing the impact on actual sales, we are unable to estimate solely based on the procedure segment. Rather, a given hospital's financial situation, status of procedures being conducted at that hospital or office, whether the sale is direct from us or through a distributor and many other factors affect the situation.

I realize that you may require further information. So please allow me to share the latest regarding our April revenue, although the information is not on the slides. The percentage of revenue decrease of the Cardiac and Vascular Company in April is in the mid-30s year-on-year. There is regional variance within that. The decrease is most pronounced in the United States, followed by Europe, China, other Asian countries and Japan.

Because May is still in progress, we cannot say with certainty, but we see signs, albeit faint, of a recovery. So we anticipate a bottoming out in April and May.

Next slide, please. Many General Hospital Company products relate to healthcare infrastructure and hospitalization. Also, many of the products and technologies of the DM and Alliance businesses are used in treating chronic illnesses. So we expect impact on them to be comparatively small.

In the Blood and Cell Technologies Company, there is some decrease in demand for blood collection due to factors including postponement of surgeries. However, the scale of impact on automated component collection, which collects targeted blood components more efficiently, is small. In cell therapy, we need to monitor for potential slowdown in development activities by pharmaceutical companies and research institutions, but we do not see major fluctuations in therapeutic apheresis because it is mostly used to treat chronic cases.

This is also not in the slides, but April revenue of the General Hospital and Blood and Cell Technologies Companies did not see significant negative impact. They were in line with normal years. There is impact on April revenue of the group as a whole, with a percentage year-on-year decrease in revenue in the mid-teens. I want to reemphasize that we do see signs of recovery for Cardiac and Vascular in May, and we will continue to carefully monitor for recovery momentum.

Next slide, please. Here are the new products for this fiscal year. I will skip over the details of these.

Next slide, please. Next, I will speak briefly on the situation of liquidity and cash allocation. First, regarding liquidity. We moved swiftly to secure JPY 40 billion during the previous fiscal year, and currently have sufficient cash on hand. For further preservation purposes, we have concluded additional commitment-line contracts for JPY 60 billion.

Next, regarding cash allocation. With a healthy financial situation despite the COVID-19 situation, we continue to make mid- to long-term investments. We will also continue to pursue M&A opportunities, which will contribute to sustainable and profitable growth. However, we will also reconsider expenses and investments, which we deem nonurgent.

Finally, regarding our FY 2020 dividend. Because the COVID-19 impact cannot yet be determined with certainty, we will keep the annual dividend at JPY 28, which is the same as FY 2019 for the time being. After recovery from the COVID-19 situation, we anticipate restarting our policy of increasing dividends.

Thank you for your attention.

[Shinjiro Sato, executive]

Good afternoon. I'm the Terumo President and CEO, Sato. I want to, again, apologize for this meeting being postponed due to the COVID-19 crisis.

In January, Terumo established 3 principles for its COVID-19 crisis response, and has implemented them globally. First, secure associates health and safety; second, stable supply to sustain health care; third, proactive contributions to infection prevention and treatment. The third principle is based on our corporate mission, contributing to society through health care.

I will now talk about our current situation. Regarding impact on our business. Of our 3 companies, the Cardiac and Vascular Company has been the most affected. Since April, some elective procedures have been postponed for nonurgent patients. On the other hand, we see decreases in demand for products of the General Hospital and Blood and Cell Technologies Companies as being limited.

In sales activities, all businesses are limited due to restrictions on access to hospitals throughout the world. In production, some of our factories around the world were temporarily shut down or operating on a limited basis. But overall, production is stable. In particular, all factories in Japan are in 100% operation, providing a stable supply of products.

R&D has had some activities restricted, but continues to move forward with product development as much as possible. The progress of some clinical trials has slowed down. We hope to see improvement of this situation in the second quarter.

The base scenario is that we anticipate seeing a recovery pattern in the second half. However, we will remain vigilant for a scenario, in which normalization is delayed, as long as 6 months beyond the base scenario. At the very least, we will execute careful management in the first quarter to be ready for either scenario.

In addition, we keep in mind the possibility of downward swings in revenue due to risks including demand stagnation, price erosion or supply chain interruption. Cognizant of this crisis situation, we enacted crisis mode across the Terumo Group as of April 1. It consists of the following 3 points. One, secured financial health. Two, faster cycle of assessing performance and updating forecasts, detailed expenditure management and discipline. Three, maintain flexible operations in preparation for contingencies.

We are also considering more preparation for contingencies, and will act according to how the situation worsens.

I will change perspective now and talk about how strong Terumo is against risks in a crisis. I believe that because Terumo has a balanced portfolio that is getting more diversified, we have been able to lessen some of the shock of the COVID-19 crisis. From the business portfolio point of view, the percentage of business that comes from our most affected company, Cardiac and Vascular, is 56%. The remaining 44% is comparatively stable. This balance has saved us in the current crisis.

Regionally, with the United States and Europe expected to be the most impacted, Terumo has over half of its business outside the U.S. and EU. Our perception is that we will suffer less impact than the U.S.-led large players in the industry. I am aware that there are various opinions regarding portfolio balance. However, when experiencing an unprecedented crisis like COVID-19, I do feel a certain value in having an appropriate level of balance.

Terumo is currently in a very healthy financial state. 3 years have passed since we made 3 large acquisitions in FY 2016. And in that time, we have improved our financial state. Our equity ratio is high, and our level of leveraging is not very high. Even if we see a 6-month delay in recovery going forward, our balance sheet is at a level to withstand it. Additionally, to increase our certainty of safety, we took actions in the last fiscal year, the end of March 2020, including short-term borrowings to increase liquidity. This has resulted in a higher level of liquidity on hand than many other companies.

In addition to financial risk, this crisis has the potential for operational risks to emerge. On this point, we feel in this crisis that our several past years of work to strengthen operations have made us more risk resistant. In particular, the strengthening measures we took after the Ashitaka factory shipping delay 2 years ago has contributed to our supply stability in this crisis.

I want to emphasize the following 3 points. First, we have eased the overconcentration of activity that existed at some of our Japanese factories, and our global optimization of production is progressing. Second, we have strengthened our BCP system with actions, including optimizing inventory and securing redundant capacity. Third, we established the position of CMO, greatly improving coordination among Terumo Group factories. We will continue to control our supply risk as much as possible through these measures.

I will now talk briefly about the strategic implications of COVID-19 on health care and our industry going forward. In our COVID-19 response efforts, we are already seeing some of the specific needs for our companies to fulfill or expectations for Terumo. Many of these needs and expectations fit essentially with the themes of Terumo's existing mid- to long-term strategy. Meeting these challenges will expand our contribution to health care, and also will bring growth opportunities to Terumo. We will, of course, incorporate the new themes into our next mid- to long-term strategy conceptualization. While realizing the importance of weathering the current crisis, we plan to also remain aware of opportunities in the transition to a post-COVID-19 phase to maintain our competitiveness. This COVID-19 shock will change the consciousness of governments, customers and patients in a fundamental way. It could greatly change society itself. Therefore, we need to be ready for large-scale changes. One such change we may see in the post-COVID-19 new normal is acceleration of the paradigm shift already underway in healthcare. The focus on controlling medical cost efficiency, digitalization, remote care, simplification and other trends will certainly not stop post-COVID-19.

Terumo will accelerate product innovation, but also devote more energy to promoting a solution-based business model. We also feel urgency to pursue digital transformation and introduce technologies, including robotics.

Another aspect is that there will be adjustment of some policy priorities on the healthcare side. Specifically, I believe there will be a reassessment of safety and peace of mind and of healthcare infrastructure enhancement. To meet this change, Terumo will begin a group-wide infection prevention initiative. This is a field in which Terumo has built a wealth of capability that it can utilize towards playing a proactive role.

We will offer medical institutions and public administration a strong value proposition in this area. It will be important for us to build on our diverse product lineup to offer a unique Terumo solution that includes assessment of hospital infection prevention systems and workshops and training for medical professionals.

One unique Terumo capability is the simulation functionality of the Terumo Medical Pranex facility. Through this COVID-19 crisis, society is questioning the purpose of companies. Terumo has always been faithful to its corporate mission of contributing to society through health care. It has a long history of fulfilling big, important needs, building public health, infection prevention in medical settings and patient-friendly health care, along with many others.

In this regard, I think Terumo is a company with a very clear purpose. Making a contribution to medical settings in the COVID-19 crisis is perfectly aligned with the Terumo purpose, it is our most cherished hope.

We will continue to aggressively pursue transformation to be a company that continues to be needed by medical settings in the post-COVID-19 world, leading to greater long-term enterprise value, we ask for your continued support. Thank you.