Q3 2020 Terumo Corp Earnings Call
Tokyo Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Terumo Corp earnings conference call or presentation Thursday, February 6, 2020 at 8:00:00am GMT
TEXT version of Transcript
* Naoki Muto
Terumo Corporation - Chief Accounting & Financial Officer and Executive Officer
Naoki Muto, Terumo Corporation - Chief Accounting & Financial Officer and Executive Officer 
I am the CFO, Muto. I will now explain the third quarter results for the fiscal year ending March 2020. First, the overall results. As you can see in the title, our year-to-date sales revenue and adjusted operating profit for the third quarter were our best ever results. Continuing from the first half, sales revenue grew positively for all 3 companies. Among these, the TIS and Neurovascular businesses of the Cardiac and Vascular Company achieved double-digit growth, driving the Terumo Group as a whole to 6% growth.
Thanks to maintaining strong sales across the group, adjusted operating profit grew in double digits when excluding FX impact, and operating profit grew in double digits even when including FX impact. Our profit variance analysis is a comparison to the previous fiscal year when we were seeing a strong recovery from the shipping delay. Therefore, although the profit growth is not as big as it was in the first half, we feel it was a strong result. Profit before taxes grew 14% year-on-year due to far less FX loss than the same period of the previous fiscal year. Excluding FX impact, sales grew 9% and operating profit grew 18% to keep a positive trend going.
Next is the adjusted operating profit variance analysis compared to the previous fiscal year. Gross profit increment by sales increase is getting less affected by the shipping delay. Compared to our annual guidance of JPY 33 billion, JPY 25 billion actually represented progress as planned. The JPY 6 billion of gross margin came in above our annual guidance of JPY 4.8 billion. There was no variation from the amount of the first half. But because it is a comparison with the abnormally high gross margin we saw coming out of the shipping delay, we consider this to be expected progress.
In addition to improvement to the Cardiac and Vascular Company business mix, our efforts to find better production costs was another factor that contributed to our results coming in above guidance. In price erosion, the reimbursement price revision had about the impact we expected. Other price erosion was better than we expected, which had a positive impact on profit.
Our guidance included expenses for preparing for the EU MDR transition at JPY 3.2 billion. So the result of JPY 1 billion may seem to indicate slow spending on that expense, but work is going as planned. A lot of system audits will be concentrated in the fourth quarter, so we expect the spending will increase as a result. We also expect the annual spending level will increase in the next fiscal year.
SG&A increase was JPY 7.3 billion, down from our annual guidance of JPY 12.5 billion. In the first half, recovery costs from the previous TIS shipping delay and costs for U.S. web introduction were not spent. In the second half, we will not spend recovery costs from the shipping delay as planned, but we will have expenses for U.S. web introduction and other SG&A as planned.
R&D expense was JPY 3.8 billion, progressing according to plan against the annual guidance of JPY 5.7 billion. The JPY 600 million called Others is primarily the amount of difference resulting from the Blood Management business receiving grants last fiscal year, but not this one. FX was a much higher JPY 6.4 billion, up from JPY 2.3 billion in the first half. I will explain why in the next slide. The JPY 2.3 billion FX impact from the first half grew to JPY 6.4 billion year-to-date in the third quarter, an increase of JPY 4.1 billion. I will explain what it includes. First, a JPY 2.3 billion impact occurred in the third quarter from flow, yen appreciation against the euro, yuan and emerging market currencies.
Next, from stock. Because the yen depreciated temporarily on the last day of December as FX rates moved, our inventory asset evaluation amount increased. This resulted in unrealized profit and negative impact on profit. Also because fluctuation happened in the opposite positive direction the same time the previous fiscal year, the year-on-year difference was even more pronounced, causing a JPY 1.8 billion impact in the third quarter. This flow and stock totaled to be a JPY 4.1 billion increase in FX impact.
Next is revenue by region. In the Cardiac and Vascular business in Japan, the rebound following the shipping delay in the previous fiscal year has largely passed, and growth is stable. General Hospital and Blood Management both maintained steady growth according to plan.
Outside Japan, there was a very strong rebound and recovery following the shipping delay in the third quarter of the previous fiscal year. That is why the year-to-date growth rate as of the third quarter seems to show a milder increase compared to the first half. However, we are still having high single or double-digit growth when excluding FX impact.
Next slide, please. Next is revenue by company. The TIS and Neurovascular businesses of Cardiac and Vascular maintained double-digit growth, driving that company as a whole. In addition, the CV business is building momentum going into the second half with good sales of oxygenators. General Hospital continued double-digit growth in the Alliance business, holding steady as a company according to plan. Blood center component collection systems drove the Blood Management company as a whole. I will give more detail by company in the next slides.
Here is Cardiac and Vascular Company. Sales revenue was high in the third quarter of the previous fiscal year due to the rebound after the shipping delay recovery. And yet, sales still grew in the double digits when excluding FX impact. TIS continued to drive double-digit growth outside Japan. The new WEB and other stroke-related products drove the Neurovascular business globally, continuing that business' double-digit growth. CV enjoyed easier business with the return of heart-lung machines, and oxygenators sales were strong, increasing momentum overall. The vascular business is seeing steady results as its transition to direct sales and realignment continue to progress. Growth of highly profitable TIS and neurovascular products contributed to profit overall. Also with good sales results and less spending on shipping delay recovery in TIS and less spending on the WEB launch in the United States, profit grew at double-digit 18% year-on-year.
Next slide, please. The General Hospital company saw progress according to plan in both sales and profit. In sales revenue after FX impact and a temporary drop in demand, the medical device business is now seeing signs of recovery, for which we have strong expectations. In pharmaceuticals, pain management and adhesion barrier products drove the overall business. Alliance business grew at double-digit growth as planned, despite some fluctuation in orders along the way. Coupled with profit, this result meant the company progressed as planned.
Next slide, please. Next is Blood Management Company. In sales revenue, the blood center business is seeing a sales increase through its introduction of new software for the component collection system, Trima as well as by improving component collection efficiency, leading to both machines and disposables increasing in sales. There was a slowdown in developed nations for therapeutic apheresis after the transition to a new model but emerging markets grew in the double digits. Profit was driven down greatly by FX impact, but when excluding FX impact, growth is steady and approximately according to plan.
Next slide, please. Now I will explain our second half outlook. To begin, first half sales revenue progressed approximately according to plan. However, there was a further rise in operating profit due to shipping delay recovery costs and U.S. WEB launching costs that we expected to spend, but didn't, bringing the increase to JPY 7 billion. This first half rise will trend out to JPY 5 billion across the full year.
I will now explain the gap between our initial plan and our outlook for the second half. First, sales in the second half, despite the harsh situation of the reimbursement price revision, are expected to steadily progress. In addition, natural price erosion will be less than expected, which is having the effect of pushing up gross profit. SG&A expenditure is expected to occur as planned in the second half. R&D shows the same trend it did in the first half, so the expectation is that it will be spent as planned. As for FX impact, there was a JPY 500 million negative impact in the first half, but we anticipate that the euro, yuan and emerging market currencies will trend further towards depreciating against the yen, which will result in a greater negative impact than anticipated in the second half plan. The results of these positive and negative impacts will be that the rise from the first half JPY 7 billion will end up at JPY 5 billion for the year.
Now I will address the Terumo situation amid the novel coronavirus outbreak that is occurring. First, we began sales operations at the Hong Kong and Taiwan locations at the end of January. The start of sales operation in Mainland China is scheduled for February 10 next Monday. In production, the Hangzhou factory has already begun operations on February 3, and we will watch to see if its progress happens as planned.
Regarding supply chain, including transportation company and customs operation levels, we expect that there will be some delays. In other words, we expect some negative impacts, but they won't be impactful enough to prevent a JPY 5 billion rise at the end of the fiscal year. In any case, we aren't yet able to quantify the impact, so we have decided to not revise our guidance.
Next, the major topics from the quarter. As a company, we received a Good Design Award for the 24th year in a row. On the business side, we want to improve our business expansion speed to seize the many opportunities we see to grow current business drivers and launch new products or acquire new technologies that will drive us further.
Next slide, please. Some products will be launched next fiscal year instead of this one, but overall, we see product launches are happening according to plan. This concludes my explanation. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]