Terumo Corp

TSE:4543

Earnings Call Transcript 2023-Q4

[Naoki Muto, Chief Accounting and Financial Officer]

Hello. I am the CAFO, Muto. I will explain our earnings results for the fiscal year ended March 31, 2023. First, the highlights of this earnings announcement, the FY '22 sales revenue and operating profit results were both our highest ever. We also secured an increase in profit for the year.

Sales revenue grew 5% when excluding FX impact, as strong global demand continued, led by the U.S. market. At the same time, profit was greatly affected throughout the year by inflation. Although we achieved an increase in profit, the most recent Q4 saw not only an inflation impact but also onetime downward factors resulting in a shortfall against the guidance we announced in February Later, I will explain these onetime factors from Q4 in more detail.

Regarding the FY '23 guidance, sales revenue will continue to grow globally, and we anticipate 6% growth, excluding FX, to exceed the growth of the previous year, we will achieve improvement of operating profit in both amount and rate, growing profit in a double-digit percentage and improving profitability through expansion of high-margin products, even more assertive pricing policies, and cost reduction measures centered on manufacturing costs. Next slide, please.

Here are the P&L results. Sales revenue exceeded ¥820 billion for the full year, our highest ever result. Sales were driven by strong demand in the cardiovascular field globally, particularly the largest U.S. market. Operating profit was ¥117.3 billion, also our highest-ever result. However, inflation and supply chain disruption required us to continually take measures throughout the year. I will later explain how we plan to improve profitability in FY '23.

Next slide, please. Here is the profit variance analysis for all of FY '22. As you can see, we were unable to fully counteract the impact of inflation on gross profitability through measures like increasing sales and improving business mix.

Next slide, please. Here is our explanation of the causes of our profit shortfall against the downwardly revised guidance we announced in February. That guidance was based on adding our Q4 outlook to our results through Q3, resulting in a shortfall equal to the gap that occurred in Q4, as shown in the shortfall amount for the year shown on the lower left of the slide.

The shortfall was approximately ¥5 billion. I will explain the causes by company, starting with those that had the largest impact. First, in the Blood and Cell Technologies company, the limited market launch period of plasma innovation was extended beyond expectations. So, production and sales volumes came in less than anticipated, which in turn increased the fixed cost burden.

Specifically, an adverse variance of the manufacturing cost of internally produced product drove gross profit downward in the form of outsourced product fixed cost compensation. In existing businesses as well, supply chain disruption led to back orders, which required increased usage of air freight to eliminate.

In relation to the Costa Rica production transfer, there was a period in which production at the previous U.S. sites overlapped with that of Costa Rica, placing downward pressure on profitability. Additionally, legal fees were incurred in relation to lawsuits involving EtO, ethylene oxide gas emissions from our Colorado, United States facility, where the gas has been widely used to perform sterilization of medical devices. Our emissions from the facility are far below permitted levels but lawsuits were made alleging health effects and our legal response is expected to continue into FY '23.

Next, in the CDMO business of the Medical Care Solutions Company, the shipment of some products was delayed into the first half of FY '23. Also, as the COVID pandemic subsided, we adjusted our inventories of hand sanitizer and other infection prevention products, which was another expense increase.

Finally, in Cardiac and Vascular, despite beating the top-line sales goal, the profit contribution of sales revenue was reduced due to delays that occurred at CV products, which were transferred to Costa Rica needed to be manufactured using heavily manual processes. This meant that for a period of time, production was performed both at the previous sites and in Costa Rica, which reduced productivity. Next slide, please.

Next is revenue by region. Markets outside Japan, especially the United States, drove growth. In the U.S. businesses, including TA and Neurovascular as well as blood centers achieved growth in the double digits for an overall result of 9% when excluding FX. In Japan, demand for some infection prevention products return to normal levels, resulting in an unfavorable year-on-year comparison.

However, new products from businesses like Pharmaceutical Solutions and TA contributed to maintaining cumulative growth.

In the EU, TIS and others drove the increase in sales achieved by all companies. In China, there was impact in the second half due to a rise in COVID cases. However, there was a recovery in the latter part of Q4 for a finish of 7% growth when excluding FX. In Asia and others, TIS and blood centers were strong, growing in the double digits when excluding FX.

Next slide, please. I will now explain the results by company. First, the Cardiac and Vascular Company. Sales revenue grew 7% when excluding FX, as each business was steady globally. The U.S. in particular, was a strong driver for the whole.

Businesses, including TIS and Neurovascular saw global demand recovery, and the further addition of new products added to large growth. TA, the Vascular graft business also contributed with new products, approaching a growth rate of 30%. The stent grafts RelayPro and TREO, and the open stent graft Thoraflex Hybrid, all grew well globally. In profit, high-margin product sales expanded for a good trend as planned.

Next slide, please. TMCS is the Terumo Medical Care Solutions Company. In hospital care and Life Care, demand for infection prevention products and thermometer return to normal, resulting in overall flat year-on-year growth. However, the Pharmaceutical Solutions business grew in the double digits. New product launches made contributions while the CDMO business in Japan performed well and markets outside Japan also trended steadily. In profit, the inflation and the yen depreciation impact’s that continued throughout the year as well as the shipment timing shift in inventory adjustment in Q4 that I mentioned earlier, combined for a decrease in profit.

Next slide, please. Next is TBCT, Blood and Cell Technologies Company. Sales revenue trended positively in existing businesses, particularly the blood center business. However, profit decline as negative factors, including inflation impact, delays in the ramp-up of plasma innovation, and production transfer and other costs combined to downward pressure on profitability.

Next slide, please. Here is the FY '23 guidance. We expect sales revenue to grow 6% excluding FX as global demand stays strong into FY '23 as well. Cardiac and Vascular will continue to be the primary driver. Operating profit will grow in the double digits. We will grow the high-margin growth drivers of each company, while also strengthening and accelerating group-wide measures to achieve solid profitability improvement. Among the companies, TMCS will return its profitability to double digits.

Next slide, please. FY '22 was a harsh year in regards to achieving the overall goal of 20% or higher operating profitability within GS26. We take this result seriously and will undertake three main profitability improvement measures. First, improved business mix. By expanding the TIS, Neurovascular and TA businesses of the Cardiac and Vascular Company and the Pharmaceutical Solutions business of TMCS, we will raise our gross margin.

Second, we will be more assertive in raising prices in both the aspect of correcting Japan pricing of low-margin products, as well in expanding the businesses and regions in which we appropriately pass the burden of inflation on through pricing. Third, we will be sure to maximize the effects of the Costa Rica production transfer, the centerpiece of our global production optimization efforts. In addition, projects are already underway to realize another level of efficiency at Ashitaka factory, which sustains the bread and butter of the TIS business.

Finally, multiple onetime causes increased in Q4 of FY '22 to impact profit. However, those shipment delays in inventory adjustments, et cetera, will subside in FY '23 as the frequency of using airfreight also decreases, all to the effect of contributing to increased profit. The graph on the right shows the adjusted operating profitability trend by company. It also shows the pre-adjustment operating profitability for the Group as a whole. Our CEO, Sato, will talk later regarding further policies to improve profitability in FY '23 toward our GS26 goals.

Next slide, please. Here is the variance analysis for our profit guidance. Among the measures I explained on the last slide within this waterfall chart, the effect of business mix improvement and global production optimization and efficiency efforts is included in gross margin, while the effect of more assertive pricing is included in price. Regarding FX impact, we anticipate FX impact to remain flat in FY '23.

Next slide, please. This is the last slide. Our dividend proposal for the end of FY '22 is as we proposed in February, ¥21, this would combine with the interim dividend for an annual total of ¥40. Our FY '23 dividend proposal is to increase the amount ¥4 to ¥44 for the fiscal year as a whole. We aim to achieve our 50% total payout ratio goal, as we increase dividends in a stable manner annually and continue our 30% dividend payout ratio. This concludes my explanation of our earnings. Thank you.

This is the CEO, Sato. Regarding our FY '22 results, although sales revenue and profit increased, we experienced onetime costs in the fourth quarter that unfortunately resulted in a shortfall against our guidance revised in February. I want to speak in some detail while confirming whether we can achieve our GS26 goals in light of the FY '23 guidance, I used this same slide when announcing GS26 in December 2021, it summarizes the financial goals we need to achieve over the five-year GS26 period. The headline business, we judge that right now, Terumo was sufficiently able to achieve the GS26 goals, and we will not revise them.

Next slide, please. GS26 was substantively created in 2021. Looking back on the 1.5 years since then, I can say that, first, the demand fundamentals that for the business assumptions are sound and have not changed significantly. The growth prospects of the Cardiac and Vascular Company and the overall business are unchanged. On the supply side, though, inflation has emerged markedly. This is something that we did not anticipate when we announced GS26 and if it does not subside during the GS26 period, it will place 2% to 3% on our profitability.

FX fluctuations were also beyond the anticipated range, resulting in another downward factor on profitability, rising prices of imports into Japan. Therefore, the issue becomes how to overcome this pressure on profitability. Despite this adversity, our strategy, with the exception of the Rika full launch delay, was steadily carried out in the first year of GS26, and there is no major strategic revision.

Next slide, please. First, I will reconfirm our overall group growth prospects. In GS26, we commit to high single-digit sales revenue growth for its five-year duration. Looking at the FY '23 guidance we just shared, Terumo needs to achieve approximately 9% growth from FY '24 through to FY '26 in order to achieve that. There is no revision to the scenario of U.S. growth in Cardiac and Vascular therapeutic devices, continuation of strong growth in the CDMO business in medical care solutions and launch of the plasma innovation business in Blood and Cell Technologies.

Therefore, the growth of each company from FY '24 onward is Cardiac and Vascular, 9%; Medical Care Solutions, 5%; Blood and Cell Technologies, 11%. The weighted average of these is approximately 9%, which will achieve the goal of five-year average growth of high single digits at the end of GS26.

Next slide, please. In the Cardiac and Vascular Company, which is the main growth engine in GS26, the number of interventional procedures is recovering, which will contribute to the continuation of overall high growth. In particular, cardiovascular therapy products in the U.S. market, Neurovascular. and stent graft look likely to expand and become overall growth drivers as expected. The TRI approach is alive and well. In the primary competitive market of the United States, its adoption is spreading not only in coronary, but also neurovascular and abdominal more than previously expected.

New products in the cardiovascular field that were not anticipated when we announced GS26 include renal denervation, RDN in China, and the dual sensor system, DSS, that integrates [indiscernible] at the U.S. and OFDI. For RDN, clinical trials are complete and the regulatory application has been submitted, so the prospect of selling it in China, starting in FY '24 is growing increasingly certain. The regulatory application for DSS has been submitted and it is planned for deployment in Japan During GS26.

Another product with potential for even higher growth expectations than we had when we planned GS26 is the DES Nagomi. Nagomi has already launched in Japan. It has been received well and is expanding its share. It is expected to launch in Europe in parts of Asia this fiscal year, and we are looking at bringing it to the U.S. market in the future as well. We expect these to add extra growth to Cardiac and Vascular growth in FY '26.

Next slide, please. In February, I touched on our more assertive M&A stance and strengthening our capital policy. M&A is not baked into our GS26 plans, but making it happen is sure to accelerate growth even further. Strengthening our capital policy also supports our more assertive M&A stance. If we could gain support for a 50% equity ratio to align with the competitors outside Japan, we believe we could pursue M&A opportunities of up to JPY 600 billion. These policies also have a positive effect on improving capital efficiency as well as 1% to 2% of ROE. These corporate value improvement policies will lead to more certainty of achieving GS26.

There is pressure on profitability from supply side factors, so it will be increasingly important to accelerate profitability improvement measures as our third corporate value improvement policy. I will now specifically focus my comments on this path to improving profitability.

Next slide, please. The operating profit percentage in the most recent FY '22 was 14.3%. If inflation remains at its current high rates, we will need at least 5% to 6% of profitability improvement in the next four years to reach 20% OP in the final fiscal year of GS26. From a group perspective, there are three pillars. The one is business and product mix improvement and an increase in high profitability business. The second is appropriate shift of pricing in response to inflation. And the third is complete an accelerated cost reduction.

First, regarding business and product mix improvement. For example, we will bring the TBCT plasma innovation business into profitability following its FY '22 negative profit impact by completing the rollout into our customer centers throughout the United States by FY '26, this alone will lead to an approximately 1.5% profitability improvement compared to FY '22. Additionally, we will improve business mix and increased sales throughout the group and high-margin businesses in ways that include expanding the CDMO business in MCS. At the same time, we will move the rationalization of our product portfolio forward.

Second is appropriate pricing to overcome the impact of supply-side inflation, we will move to appropriately shift the burden of that inflation through pricing. This is something we will do throughout the group globally, regardless of business or region, and in a transparent manner through explanation to gain customers' understanding. We will do this at a level to reach approximately ¥ 15 billion on the current earnings basis to have at least 1.5% in positive profitability impact.

Third is cost reduction. The VC2 profitability improvement project that I explained when we announced GS26 continues to progress. We aim for 2% profitability improvement in the GS26 period, but with the change in cost structure due to inflation, we are accelerating project execution and will achieve more than 2% in the remaining four years.

Next slide, please. In the production side, in particular, we are accelerating the transfer of activities from U.S. sites to the Costa Rica and Vietnam factories. The physical transfer is already complete and positive impacts will begin in FY '23. This shows a brief history of the production transfer to Costa Rica.

Next slide, please. In addition to Costa Rica, unprecedented production transformation projects are happening at divisions, including TIS and TMCS for a total improvement of over ¥10 billion. There is also action to consolidate and integrate procurement, logistics, and indirect functions globally and regionally. Speaking to Global Business Services, GBS, the consolidation of financial functions in a virtual way has begun, and we will expand the scope of these efforts throughout the next four years. Next slide, please.

I will now give a bit more detail on the profitability improvement plan of the TMCS, which has experienced particularly intense inflation impact and urgently needs to improve earnings. In the TMCS, there is a special program already underway to restore profitability to 15% within the GS26 period. Here is an overview of the program.

First, business mix improvement. In the CDMO business, we are expanding the business with specific pharmaceutical companies inside and outside Japan. Further, the company will continue to rationalize and transform its product portfolio from a mid- to long-term perspective. In businesses or regions with continued low growth or low profitability, we stand prepared to shrink, pause or end activities as needed.

Second, in pricing, we expect to see a ¥3 billion improvement due to FY '23 reimbursement price revisions of some pharmaceutical products in Japan. We also plan to shift inflationary burden through pricing on a variety of product. Third, structural transformation. As we communicated in our press release last month in April, we will realign the domestic sales organization and consolidate sites to strengthen operations and raise efficiency. In production, we will utilize OEM to establish lean operations, revise the plan of production outside Japan and speed up the realignment of production in Japan.

At the same time, we will leverage the new Kofu factory building to realize growth opportunities, including the CDMO business expansion. Next slide, please.

In FY '22, TBCT experienced delays in the full launch of plasma innovation as well as supply chain pressure and disruption, these onetime costs and increased fixed cost burdens impacted profitability. Looking forward, the blood center business is performing as anticipated, and we anticipate profitable growth. It is unfortunate that the plasma innovation business did not see the Rika introduction on the planned timeline due to COVID impacts. However, this innovative product is receiving high praise from customers and partners.

It is an enormous leap forward that in just one or two years and during the COVID pandemic, we built a production capability and a business platform that it took the competition decades to build. By getting the product introduced and on track as soon as possible, we will raise TBCT profitability as originally envisioned. Next slide, please.

I have now explained the path by which we will achieve GS26. We want to again state that we are convinced that the Terumo Group as a whole will achieve our GS26 goals. Environmental changes, including inflation, have caused you concern, but we ask for your continued understanding and support. Finally, we will have our TBCT Company President, Antoinette Gawin, briefly share the latest news on the current state and outlook of the plasma innovation business for which we know you have great expectations. After that, we will move into the Q&A session.

[Antoinette Gawin, President & Chief Executive Officer]

Thank you. I'm Antoinette Gawin, the President and CEO of Terumo's Blood and Cell Technology division. Our innovations in processing blood, collecting cells, and treating diseases in therapeutic apheresis have fueled our return to growth. The investment we've made in that business reflects our long-term commitment to the markets that we serve. The supply chain crisis reinforced this value proposition with our customers, and we are beginning to see that with pricing and other dynamics.

It is this investment in innovation and commitment to build for the long term that we are also demonstrating with the launch of our plasma business.

You see this investment expressed in an infrastructure visualized in the left picture of a state-of-the-art automation facility that was inaugurated last summer, built from a greenfield site, it reflects a lean environment and an ability to shift with customers' demands. The picture on the right reflects an example of the deep manufacturing partnerships we've built. You see Rika devices on the final assembly line, and we are fully positioned to meet industry growth. Perhaps most importantly, the center photo illustrates our continuing limited market release with CSL Plasma, our inaugural customer. We are now operating at eight centers and we'll be placing Rika at CSLs, new facilities, and their growth markets.

The center highlighted here is next to CSL's fractionation facility in Kankakee, Illinois. CSL recently published data sharing an average 30% improvement in collection times with the initial introduction of the device, which validates our value proposition. So, we are poised to capture the value of this investment even as we continue innovating with a clinical trial beginning tomorrow. Next page, please.

Last June, we shared our vision of the ecosystem and how we are approaching the plasma industry. The FDA clearance of Rika was a foundational step within that. But the unique aspect of our launch is that we fully considered the software and digital needs to make sure that the launch of this product would be seamless and painless for customers. Our design for ability, for usability, serviceability, creates a potential for a step change in center operations and in the donor experience. So, I will expand on the next page on how we have delivered some of this ecosystem.

So, the first Kinari, at the top, is our device management platform. This allows real-time software distribution. So as our clinical trial completes, software is updated, we can get that out to customers painlessly within minutes. We have built predictive analytics that help us proact to perform maintenance, understand any pressure points in the system in this pretty tremendous strategies, both for the customer and for us.

On the left, you see training modules that are seamlessly integrated with the customer's learning management system. These range from YouTube-style 60-second clips in snippets to on-demand training, again, optimizing how and when people can access that repository. And then Myata, the third circle is a customer service portal that allows us to pre-populate data so that we can install devices quickly converts a test quickly.

It gives us the e-documentation that helps a customer manage their operations and electronically submit issues and anything that you need to interface, streamlining operations and having drive efficiency in the center. And around all of this is the impact it than has on a donor who has shorter time in the chair, lower ACVs, and encourages someone to come back to the system.

So, I will turn it back to Opesan for questions. Thank you.