Mani Inc

TSE:7730

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[齊藤 雅彦, executive]

Thank you for taking the time off your busy schedules to participate in today's financial results presentation. I am Masahiko Saito, President and Representative Executive Officer of Mani, Inc. I would like to begin explaining our financial results for the second quarter of fiscal year 2024.

Shown here is today's agenda. First, I will start with the financial results for the second quarter of fiscal year 2024. Second are the financial forecasts for fiscal year 2024 and followed by initiatives to enhance corporate value. And lastly, we will present a number of noteworthy topics.

I believe all of you in attendance here today are familiar with this information, but for the sake of new stakeholders joining us for the first time, allow me to briefly go over Mani's product segments. Mani's operations are divided into three segments: the Surgical segment, the Eyeless Needle segment and the Dental segment.

First is the Surgical segment, which covers our mainstay product category of ophthalmic instruments, such as ophthalmic knives and surgical instruments such as skin staplers shown here on Page 3.

Next is the Eyeless Needle segment. In this segment, the finalized products are needles with a threat attached. These needles are sterilized and ultimately used as suture needles in surgical procedures. The images are the needle portions. We primarily produce these needle portions on an OEM basis.

Last is the Dental segment, which consists of products used in dental treatment. This includes reamers and files used in root canal treatment, dia-burs which are dental, rotary and cutting instruments used in the removal of dental cavities and composite resins for dental restoration.

In terms of the breakdown, the Surgical segment accounts for 27% of total sales. The Eyeless Needle segment accounts for 36% and the Dental segment accounts for 37%. Most of our products are directly held and used by doctors who prefer to use our products for its precision, ease of use and good quality. This underscores our philosophy of manufacturing with a heavy focus on quality.

I would now like to explain the financial results for the second quarter of fiscal year 2024. I would like to start with the consolidated financial summary. We recorded a strong overall consolidated business performance. Product demand overseas continued to expand, allowing us to deliver a year-on-year increase in sales and profits.

Additionally, foreign exchange gains resulting from a weaker Yen also contributed to this increase in sales and profits. As of the end of the second quarter of fiscal year 2024 on a year-on-year basis, net sales increased by 15.7%. Operating income increased by 21.5% and ordinary income increased by 29.6%. Also, the progress rate against the full year plan is approximately over 50% and is performing well according to plan.

I would now like to go over each line item in order, starting with net sales. Net sales grew mainly in Asia, North America and Europe. All three segments of surgical Eyeless Needle and Dental delivered growth. As of the end of the second quarter, net sales stood at JPY 13.908 billion, which corresponds to a year-on-year increase of JPY 1.882 billion, a 15.7% increase.

Next is the cost of sales. Although a weaker Yen and negatively impacted the cost of sales, this was offset by the effects of productivity improvement at our manufacturing headquarters, and allowed us to bring down the cost of sales percentage from 40.3% to 37.5%. This represents an improvement of 2.8 percentage points.

SG&A expenses increased by JPY 768 million due to an increase in personnel expenses resulting from aggressive R&D and sales activities and the strengthening of the organization. This is a year-on-year increase of 20.6%.

Operating income increased from JPY 3.453 billion in the second quarter of fiscal year 2023 to JPY 4.197 billion in fiscal year 2024, growing by JPY 743 million or 21.5%. As for the operating income margin, it improved to 30.2% from 28.7% in the previous year.

Ordinary income was JPY 4.551 billion, a year-on-year increase of 29.6%. And lastly, net income was JPY 3.191 billion, a year-on-year increase of 24.5%.

Next is the sales status by segment. The section colored green shows the foreign exchange impact. As you can see, a weaker yen boosted sales by JPY 564 million. The other items to the right colored navy blue represent the sales results for each segment, excluding foreign exchange impacts. Sales grew across all segments with an especially strong performance from the Eyeless Needle segment. In the Surgical segment, demand for ophthalmic knives grew in Asia, especially in China as well as in Europe, with this segment's sales increased by JPY 430 million.

In the Eyeless Needle segment, sales increased in Asia, especially in China as well as in North America and Europe, growing by JPY 642 million overall. In the Dental segment, sales of Mani's lineup of dental products like diapers and reamers and files increased in Asia mostly in China and India.

Additionally, while our German subsidiary, MMG, experienced production delays due to the relocation of its head office factory, this delay has been resolved and production has recovered to normal sales levels. Sales increased by JPY 245 million in the Dental segment.

Next is the sales status by region. Sales increased, thanks to strong product demand, mainly in Asia, mostly in China and India as well as in Europe and North America. For further details in the breakdown by segment, please refer to Page 33 in the appendix.

Next is the operating income status. First, the impact of foreign exchange rate fluctuations made a positive year-on-year contribution of JPY 184 million. In terms of the gross profit impact, higher demand led to a sales volume increase and an operating income contribution of JPY 786 million. Additionally, improvements to the cost of sales ratio had a positive impact of JPY 446 million.

As for SG&A expenses impact, increase in promotion expenses due to marketing activities and administrative expenses such as personnel expenses at our head office factory led to an overall negative impact of JPY 674 million. Ultimately, operating income stood at JPY 4.197 billion. This is a year-on-year increase of JPY 743 million or 21.5%.

Next are the financial results by segment. All three segments recorded net sales growth. In terms of operating income in the Surgical segment last fiscal year, production was constrained due to difficulties in the procurement of packaging materials. This had led to a worsening in operating income margin, but this procurement issue was resolved in the second half, after which we were able to significantly grow sales this fiscal year.

The operating income margin also improved to 32.9%. Sales were strong in the Eyeless Needle segment. In fiscal year 2023, we were unable to ramp up production in time, and this led to delays in deliveries. We have now successfully ramped up production, and we are also seeing improvements in operating income margin.

Lastly, in the Dental segment, sales grew but operating income was negative compared to the previous year. This decrease resulted from a worsening of the sales mix due to sales expansion of MMG products, as well as from an increase in sales expenses deriving from aggressive marketing activities and upfront investment in the Dental segment.

For year-on-year operating income analysis, please refer to Page 31 in the appendix where we show recalculated SG&A expenses for each segment using the new segment calculation method. From fiscal year 2024, we adopted this new calculation method for segment income to reflect the results for each segment more accurately.

Under the new method, operating income increased in the Eyeless Needle segment and decreased in the Dental segment. The impact of these changes are reflected in the results. Therefore, operating income margin increased significantly in the Eyeless Needle segment and decreased in the Dental segment.

Next is the results analysis for each segment, starting with the surgical segment. In terms of environment recognition, demand for ophthalmic knives, our mainstay product, continues to expand mainly in Europe and Asia. Ophthalmic knives are used in cataract surgery and the number of cataract patients is expected to increase worldwide in the future.

In terms of next targets to achieve these are: expand our market share in Europe and North America, consider how to deal with low-priced products emanating from India into other regions and expand into vitreous surgery within the ophthalmic surgery field. We believe achieving these targets will allow us to deliver further growth in the Surgical segment.

Our competitive advantage is the superior sharpness of our ophthalmic knives and our proprietary microfabrication technology that responds to the miniaturization and precision of surgery. This will lead to shorter operation times, less burden on the human body and prevention of postoperative complications. Our global market share for ophthalmic knives is currently 30%, and we intend to further increase this share. Lastly, regarding the results analysis, demand for ophthalmic knives continues to increase in Asia, mostly in China and in Europe. Thanks to this demand, we have been able to grow both sales and operating income.

Next is the results analysis for the Eyeless Needle segment. Starting with environment recognition. Since the end of COVID-19, the number of surgeries is recovering and gradually increasing. Additionally, demand for eyeless needles from customers in North America and China has increased. In China, we have benefited from preferential policies for products manufactured domestically in the country and we have been able to expand the range of our OEM customers.

Furthermore, suture needles are used in new fields, such as robotic surgery, so we have hopes in terms of the possibility of applying needle processing technology to these fields. In terms of targets, we will work to improve accuracy and forecasting future demands. Since the Eyeless Needle segment operates in B2B, demand is influenced by sales growth of our customers. Therefore, we will communicate with customers to assess the level of growth going forward, allowing us to secure sales into the future.

In terms of competitive advantages in the Eyeless Needle segment, we have the accumulation of our microfabrication technology and our development of original materials. Our Eyeless Needles have a good reputation as quality products, thanks to their high penetrability and resistance to breakage. And furthermore, another thing that sets Mani apart is how we boast a diverse lineup of needles to meet customer needs. More specifically, we currently have a diverse lineup of 10,000 types of needles.

Lastly, regarding the results analysis and increasing demand for our products has translated into continued growing demand for our Eyeless Needle products in Asia, particularly in China, North America and Europe. This, in turn, has translated into an increase in sales and operating income. The Eyeless Needle segment is the most profitable among all three segments.

Next is a results analysis for the Dental segment. Starting with environmental recognition, there has been an increase in demand for dental treatment in Asia and demand for dental restorations that improve the functionality and aesthetics of teeth in Europe and North America. In terms of targets, we will be strengthening competitiveness in the root canal treatment field including our key product, JIZAI, the nickel titanium rotary file and expanding our market share in Europe, North America and Asian countries other than China, most prominently India and Southeast Asia.

In terms of competitive advantages, Mani's dental endodontic instruments boast excellent durability and centering ability toward root canals. Other advantages include our dental restorative materials that do not contain environmental hormones and are easy for dentists to use as well as our dia-burs, reamers and files, which have a high market share and in fact, the top market share in Asia.

Lastly, regarding the results analysis, sales of dia-burs and reamers and files were strong, mainly, in Asia and sales of MMG products, mainly dental restorative materials, have recovered from the second quarter. Operating income in the Dental segment decreased due to higher selling expenses resulting from marketing activities in India and Southeast Asia.

Next is the balance sheet status, first, starting with assets. Total assets increased by JPY 1.2 billion from August 31, 2023 and amounted to JPY 56.177 billion. This was due to an increase in noncurrent assets of JPY 3.072 billion mainly due to a JPY 2.827 billion increase for investments related to the Smart Factory.

Next, our liabilities and net assets. Liabilities decreased by JPY 566 million due to a decrease in current liabilities such as accounts payable and provisions for bonuses. Lastly, net assets increased by JPY 1.766 billion due to an increase in retained earnings and foreign currency translation adjustments and amounted to JPY 51.593 billion.

Next is the cash flow status. Operating cash flow was positive JPY 2.625 billion year-on-year, thanks to strong operating cash inflows. Investing cash flow was negative JPY 3.088 billion due to an increase in expenditures related to capital investments for the Smart Factory. Financing cash flow was negative JPY 2.097 billion due to an increase in dividend payments. Free cash flow, therefore, amounted to positive JPY 537 million.

I would now like to explain the financial forecast for fiscal year 2024. As of the end of the second quarter, actual results exceeded the sales and income forecasts. Excluding the impact of foreign exchange rates, results are mostly in line with our forecasts for fiscal year 2024. The full year forecast remains unchanged from the initial plan. We assume results will exceed our forecasts if the impact of Yen's depreciation continues.

Next are the capital investment and R&D investment forecasts. Out of JPY 3.91 billion in capital investment, investments for the Smart Factory account for JPY 2.8 billion. On a cash-out basis, we are planning approximately JPY 8.93 billion in capital investment in fiscal year 2024. In terms of R&D, shown on the right, investment is progressing according to plan, and we expect a ratio to consolidated sales of around 9%.

Next, our forecast for dividends. As initially announced, we have decided on an interim dividend of JPY 16 per share and expect to pay a year-end dividend of JPY 23 per share. This corresponds to a dividend payout ratio of 65.1%.

Mani has continuously grown its dividend payout since fiscal year 2013.

From here, I would like to explain our initiatives to enhance corporate value. First, within initiatives to enhance corporate value, I will be explaining the direction of the Board of Directors. The following three themes have been decided as the Board of Directors' major roles: improve our corporate value over the medium to long term, strengthen corporate governance and strengthen the management.

Regarding improving our corporate value over the medium to long term, the Strategy Committee will mainly discuss this theme. Additionally, the Board of Directors and each committee will mainly discuss the themes of strengthening corporate governance and management.

In discussions aimed at improving corporate value over the medium to long term, the Board of Directors and the Strategy Committee have identified the following eight key issues for consideration. These are: enhancement of organizational capabilities and corporate culture reform, implementation of the current medium-term management plan, direction of the next medium-term management plan, capital management and capital allocation, strengthen the decision-making process and the governance structure, management of business risks, DX and business process reform and lastly, developing the next generation of leaders.

The first three shown here within a navy blue text box are particularly important themes under discussion by the Strategy Committee. Furthermore, we have moved toward execution based on the results of these discussions. As part of this effort, we have appointed three new executive officers with the objective of expanding our executive team in R&D, sales and corporate functions.

These three new appointments have allowed us to put in place the four core pillars corresponding to the areas of: number one, oversight of research and development, quality vigilance and safety functions; number two, oversight of business and sales functions; number three, oversight of corporate planning and administrative functions; and number four, oversight of production functions. Through these, Mani will aim to achieve an even more robust overall corporate structure.

I would now like to explain the topics. The first topic is the progress of the Hanaoka Factory, also known as the Smart Factory. As shown in the image, foundation work is currently in progress. The Smart Factory's purpose is to establish mass production and automation technologies. And once these are in place, we then intend to roll out these technologies at our factory in Vietnam. The purpose also includes environmental considerations, strengthening local cooperation and the expansion of human capital.

As for the most recent situation, we are making preparations for mass production testing of JIZAI, our nickel titanium rotary file and ophthalmic knives, as well as improving accuracy of digital inspection technology and preparing for establishment of a mass production system. Additionally, we are planning to introduce a PPA scheme for solar power generation in cooperation with local companies.

Next is topic number two, progress of key development products. Starting with our nickel titanium rotary file, JIZAI, our Smart Factory development team is working toward an automated mass production line, allowing us to achieve cost reductions. In terms of sales, we have narrowed down the countries to prioritize and are working to build up distribution networks.

Next is Mani EG Composite, our dental restoration material we have plans to sell this as our own branded product in Vietnam, India, China and Japan. And to this end, are currently in the process of strengthening our organizational structure for regulatory affairs and QMS. Concurrently, we are also developing a sales network for this product.

Last is the vitreous forceps in the Surgical segment. We will be further enhancing the R&D process so that we can better incorporate and address future requirements and feedback from our customers. Following the release of a 27-gauge version of this product, we will be launching a 25-gauge vitreous forceps, pursuing the demands of doctors more deeply and making improvements.

Next is topic #3, a new field for the Eyeless Needle segment. With the objective of responding to medical trends in robotics and minimally invasive treatment, Mani teamed up with KOL doctors and our OEM customer to develop a future needle suitable for use by surgical robots. Our original material, Mani hard fiber stainless steel, guarantees the strength and safety of this future needle. And additionally, Mani's unique coating technology allows the needle to maintain sharpness even during continuous puncture.

This suture needle features a design that lends itself well to use by surgical robots and is also available in black to minimize reflected light. These factors put together make for a needle design facilitating intra-abdominal surgical manipulation. The image at the top shows this needle in black side by side with the needle following the regular stainless steel silver color design. One issue during surgery is that stainless steel needles reflect light, and this hinders the process. So we offer this suture needle in black as a way to bypass this problem. The bottom picture was taken during a practice surgery using a surgical robot.

Next is topic #four, regional-oriented sales marketing. We continue to run booths at exhibitions and hold seminars with KOL doctors, particularly with a focus on the Dental segment. In terms of our next targets, we will be strengthening branding activities and promote the therapeutic effects of Mani products to a greater number of doctors.

Within these efforts, it is important that we communicate the value of our products so as to instill brand loyalty on the part of doctors. Toward this end, we believe there is a need for us to develop and further strengthen partnerships with key opinion leader doctors in Asia, Europe, North America, et cetera. Lastly, we need to strengthen and restructure our distribution networks and expand overseas sales bases. So we are carrying out efforts to this end.

Last is topic #5, IR and PR activities. The Integrated Report 2023 is now available. We have uploaded it to our corporate website and hope you will take a look at it. Additionally, we also posted a corporate video for Mani as well as a corporate video for our German subsidiary, MMG. Please take a look at them as well. We also invite you to view this content at your convenience when you have the time.

This concludes our financial results presentation covering the second quarter of fiscal year 2024. Thank you very much for your kind attention.

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