Mani Inc

TSE:7730

Earnings Call Transcript 2023-Q2

[齊藤 雅彦, executive]

I am Masahiko Saito, President and Representative Executive Officer, CEO and COO of Mani, Inc. Thank you for taking the time off your busy schedules to participate in today's financial results presentation.

I would like to begin explaining our financial results for the second quarter of fiscal year 2023. Shown here is today's agenda, first, starting with the financial results for the second quarter of fiscal year 2023. Second, are the fiscal year financial forecasts for fiscal year 2023. Third, are noteworthy topics. Here, I will be explaining the progress of key products and the progress in global production and sales.

To begin, let me briefly explain our 3 product segments. First is the Surgical segment, which includes our mainstay product category of ophthalmic instruments, such as ophthalmic knives and surgical instruments centered around skin staplers. Second is the Eyeless Needle segment. In this segment, the finalized products are needles with a thread attached. These needles are sterilized and ultimately used as suture needles and we primarily produce the needle portion of this product on an OEM basis. Additionally, we also sell eyeless needles with a thread attached as finalized products under the Mani brand. These consist of surgical sutures and dental sutures.

Third is the Dental/GDF segment. This segment consists of products used in the treatment of dental cavities such as root canal treatment instruments like reamer files and rotary and cutting instruments such as dia-burs. We also develop, manufacture and sell dental restoration materials at GDF, our German subsidiary and these are categorized as part of the Dental segment. As for the volume of sales of each segment, the Surgical segment accounts for 26% of the total. The Eyeless Needle segment accounts for 35%. And lastly, the Dental/GDF segment accounts for 39%. The overseas sales ratio stands at 81.1% and we sell our products in over 120 countries worldwide.

I will now explain the financial results for the second quarter of fiscal year 2023. First are the consolidated financial results. From the far left is the first half of fiscal year 2022 and the blue portion shows the first half of fiscal year 2023. In the first half of fiscal year 2023, product demand grew mainly in Asia and Europe. In particular, there was a significant increase in demand in the Eyeless Needle segment, which resulted in higher sales and income.

I will now be going over each line item in order, starting with sales at the top. Sales increased from JPY 9.651 billion in the first half of fiscal year 2022 to JPY 12.025 billion in the first half of fiscal year 2023. This is a year-on-year increase of JPY 2.374 billion or 24.6%. Next is the cost of sales ratio, which increased from 38.2% in the previous fiscal year to 40.3%, worsening by 2.1 points. This is mainly due to the weaker yen and higher cost of sales for our subsidiary in Vietnam, which is paid in U.S. dollars. SG&A expenses increased by JPY 843 million, resulting from the strengthening of the personnel structure. This is a year-on-year increase of 29.3%. Though the cost of sales and SG&A expenses rose as a result of an increase in sales, operating income increased from JPY 3.079 billion to JPY 3.453 billion, rising by JPY 374 million year-on-year or 12.1%. Ordinary income increased from JPY 3.39 billion to JPY 3.512 billion, rising by JPY 121 million year-on-year or 3.6%. Lastly, net income increased by JPY 2.333 billion to JPY 2.563 billion, rising by JPY 230 million year-on-year or 9.9%.

Next, I would now like to present the sales status by product segments. First, regarding the impact of foreign exchange, the Japanese yen depreciated significantly against the U.S. dollar from JPY 113.57 last fiscal year to JPY 138.50 this fiscal year, against the euro from JPY 130.10 last fiscal year to JPY 142.94 this fiscal year and against the Chinese yuan from JPY 17.77 last fiscal year to JPY 19.77 this fiscal year. The effect of exchange rates on net sales is shown in green. The increase was JPY 879 million. The segments, excluding the impact of foreign exchange rates, increased together, eyeless needles in particular, continued to perform well since the first quarter.

In the Surgical segment, there was a year-on-year increase of JPY 215 million due to increased demand for ophthalmic knives, which are used in cataract surgery, mainly in Asia and other regions. In the Eyeless Needle segment, sales increased by JPY 974 million, resulting from higher sales in Asia, primarily China and Europe. In the Dental/GDF segment, sales increased by JPY 304 million due to increased sales in Asia, especially in China and India and increased sales of dental restorative materials in Europe.

Next is the sales status by region. Sales in Asia, especially China and India, increased by JPY 1.484 billion year-on-year. Europe, North America, other regions and Japan are also growing, respectively. We invite you to read a detailed description of the sales status by region and segment on Page 32 in the supplementary materials.

Next is the operating income status. The sections colored blue in the waterfall chart show factors contributing to a year-on-year increase in operating income, while the sections colored gray show the opposite. First, the impact of foreign exchange rate fluctuations made a positive year-on-year contribution of JPY 190 million. Next, the impact of increased sales had a positive year-on-year impact of JPY 856 million. There was also an increase of JPY 220 million resulting from temporary factors, namely the fact that while we disposed of JPY 220 million in inventory last year. This disposal was absent in fiscal year 2023. A worsening in the cost of sales had a negative impact of JPY 233 million, while GDF gross profit positively affected results by JPY 29 million. Taking all of these factors into account, gross profit had a net positive impact of JPY 872 million on operating income.

Next, as for the impact of SG&A expenses, R&D, sales and G&A costs increased. This is due to the recovery in business activities, such as business travels or participations in exhibitions and also due to the strengthening in personnel. These results were, for the most part, according to plan. Ultimately, operating income, which stood at JPY 3.079 billion in the previous year, increased by JPY 374 million year-on-year to JPY 3.453 billion. This is an increase of 12.1%.

Next are the financial results by segment. Net sales in the Surgical segment increased by 14.5% year-on-year, while operating income, on the other hand, decreased by 5.8% due to an increase in SG&A expenses and a decrease in inventories caused by production adjustments resulting from delays with shipments of sterilization packaging materials. In the Eyeless Needle segment, net sales continued growing in Asia, North America and Europe, resulting in a significant overall sales increase of 45.4% year-on-year. Operating income increased by 63.8% year-on-year, as profits were lower in the previous year due to inventory disposal. Lastly, in the Dental/GDF segment, net sales grew by 16.8% year-on-year. However, operating income decreased by 5.2% due to an increase in SG&A expenses resulting from expenses associated with exhibitions and seminars.

Next is the balance sheet status. First, in assets, cash and deposits increased due to a year-on-year increase in sales and profit. Total assets increased from JPY 50.1 billion to JPY 50.7 billion due to an increase in construction-in-progress for our new factory at GDF, a subsidiary in Germany. Under liabilities and net assets, liabilities decreased due to decreases in income taxes payable and net assets were JPY 46.1 billion due to an increase in retained earnings.

Next is the cash flow status. The bars colored navy represent operating cash flow, which increased to JPY 3.838 billion year-on-year as a result of steady operating revenue. Next, investing cash flow was negative JPY 2.643 billion as a result of CapEx. Additionally, financing cash flow was negative JPY 1.826 billion due to an increase in dividends payments. Expenditures have therefore increased. The yellow line represents free cash flow.

Next, I will explain the full year forecast for fiscal year 2023. Shown here is the progress in the plan. The results for the first half of the fiscal year were generally in line with the plan with both sales and profits increasing as planned. Furthermore, the full year forecasts for this fiscal year remains unchanged from the original plan, which was disclosed on October 11, 2022.

Next is capital and R&D investments. Capital investment is progressing according to plan and we plan to use approximately JPY 2 billion in total for investments related to the new GDF factory this fiscal year. Additionally, in the second half and beyond, we are planning investments related to the smart factory. R&D investments too, is progressing according to plan.

Next is dividends. We have decided to pay an interim dividend of JPY 14 per share for the fiscal year 2023 as originally planned. The year-end dividend is planned to be JPY 19 per share, resulting in an annual dividend of JPY 33 per share. We plan to increase dividends for 10 consecutive fiscal years since the fiscal year 2013.

I would now like to explain a few topics. I will explain the progress of key products within the medium-term management plan. First, we have JIZAI, our nickel titanium rotary file in the Dental segment. JIZAI is used in the removal of dental pulp damaged by caries and in root canal shaping and expansion. Starting from this fiscal year, we have been actively promoting this product in Japan, Vietnam, India and Europe. The mass production plan, which has been a challenge, is progressing as planned and the development of smart factory mass production and automated production is also underway.

We have included feedback from key opinion leader dentists, KOL dentists who have actually used JIZAI. They felt that JIZAI's flexibility and canal-centering ability were high. JIZAI's smooth cutting performance gave them a sense of security and JIZAI's fatigue resistance was excellent. Comments from our developers are also included. First, to ensure that dentists can use our products safely and securely, we focused on reducing the product's breakage risks when in use. Second, we are also promoting a project together with doctors to accumulate and to develop clinical data based on evidence from the perspective of doctors and patients.

Next is the assessment of JIZAI in academic studies. JIZAI's high canal-centering ability and fatigue resistance have also been recognized in academic papers by world-class KOL dentists. We welcome you to review the academic studies sourced here.

I will now explain progress in global sales promotion activities for JIZAI. In Japan, currently, we are offering web seminars and other activities with domestic KOL dentists. At web seminars in December and February, we conducted activities to attract customers nationwide and more than 1,000 dentists participated. Additionally, we will strengthen study sessions for distributors and follow-ups for dentists in the future. The top picture was taken at a seminar conducted in India, where we conducted sales marketing campaigns, hands-on seminars and marketing activities with KOL dentists. Currently, we are considering the use of digital marketing.

Furthermore, we held large-scale workshops at public and private universities in Saudi Arabia. The picture at the bottom was taken at one such workshop. In North America, we are exploring for distributors and KOL dentists who will cooperate with us. And additionally, we will strengthen sample distribution of JIZAI and advertising activities. In South America, more specifically, in Chile and Colombia, we are actively developing sales promotion activities such as holding seminars and workshops. The top picture shows Mani and GDF's booth at the International Dental Show, IDS, held in Germany in March. The picture below shows a hands-on seminar we held with KOL dentists to promote JIZAI widely in Europe. As you can see, we are carrying out activities worldwide to promote the use of JIZAI in root canal therapy as a safe and efficient instrument built on the principle of simplicity.

Our second key product is Mani EG Composite. The material is used to repair partially missing tooth with an artificial resin filling. Development of this product, which has now been completed, was carried out at our German subsidiary, GDF. We will first start by selling this product as a GDF OEM product to GDF's customers in Europe. After expanding sales in Europe, we plan to market the product under the Mani brand in China, India and other Asian countries.

These are feedbacks we have received from our KOL dentists who have used Mani EG Composite. They stated that the material does not drip and the handling is good. The material is a bit hard but is smooth, so it is easy to form and the material is suitable for a wide range of tooth colors. The developers' comments are also included. First, we were able to develop a well-balanced composite resin with easy color matching referred to as chameleon effect, which combines good moldability and handling. Second, this product focuses on patients' safety and does not contain any environmental endocrine disruptors, such as Bis-GMA.

At IDS 2023, which was held in Germany in March, this product was announced as a GDF OEM product. After sales expansion activities in Europe, we aim to develop our sales distribution in emerging countries, including China and India, after we obtain regulatory approval. I believe we have been able to successfully develop a good product that is both safe and easy to use.

Our third key product is Mani Micro Forceps. This instrument is used to grab and manipulate intraocular tissue during retinal and vitreous surgeries. A 27-gauge version of this product was released in February 2023 in Japan and we have further plans to release 23-gauge and 25-gauge sizes in fiscal year 2024. We will start sales promotion activities, mainly in Japan and will start sales to overseas markets sequentially as soon as we obtain the necessary permits and approvals.

These are feedbacks from KOL doctors who have tried the forceps. They stated that the tissue grabbed by the forceps' tip does not shred easily. The visibility of the tip of the device is good when looking through a microscope and the forceps facilitates incisions when removing membranes. These are the developers' comments. First, although the challenge was to enter a new field of medical equipment that requires precision drive, we were able to develop a product that has both delicateness and precision. Second, microfabrication technology, which is one of Mani's strengths was maximally utilized in this product. Please experience the accuracy of being able to grab a thin retina that is only a few micrometers thick.

We have prepared a video of a thin membrane being peeled with Mani Micro Forceps in a clinical setting. This is a video of a preretinal membrane being peeled with Mani Micro Forceps during a clinical trial. As shown here, this instrument allows doctors to firmly grab and peel very thin membranes without tearing them.

Next, I would like to report on the progress of our global production and sales. In Japan, we are currently preparing for the construction of our smart factory. Our future goal is to aggressively expand sales of JIZAI and Mani Micro Forceps to obtain an overwhelming market share. In Europe and North America, GDF's new factory will operate from September 2023. Future goals include expanding sales of Mani products in the European market, identifying new demands for treatment in developed countries and strengthening marketing in the North American market. In Vietnam, we are improving productivity at our factory and accelerating automation. Our future goals are to expand the production capacity of our Vietnam factory and to make improvements to shorten lead time.

Lastly, is a progress report on our activities in China, India and other regions. In the Chinese market, we are expanding surgical sales, mainly, ophthalmic knives. In the Indian market, we are expanding our dental sales distribution network. Our future goals are to continue to promote awareness of the advantages of our products and to expand our market share through regional-oriented sales.

Lastly, we released our Integrated Report 2022 on February 28, 2023. This time, we have also enhanced the nonfinancial information, such as Mani's approach to manufacturing, sustainability and corporate governance. We, therefore, welcome you to download from Mani's website and review at your convenience, our Integrated Report 2022. The English version of the Integrated Report 2022 will be released during April 2023.

This concludes Mani Inc.'s financial results presentation covering the second quarter of fiscal year 2023. Thank you for your time.