Q1 2020 Sysmex Corp Earnings Call
Kobe Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Sysmex Corp earnings conference call or presentation Friday, August 2, 2019 at 6:30:00am GMT
TEXT version of Transcript
* Yukio Nakajima
Sysmex Corporation - Senior Exec. Officer, Senior MD, CFO & Member of the Managing Board
Thank you for waiting, and we appreciate your participating in the conference call for the first 3 months of fiscal year ending March 31, 2020, for Sysmex Corporation. Today's presenters and those who answer your questions will be senior Managing Director and CFO, Yukio Nakajima; and Senior Vice President of Corporate Business Administration, Tomoo Aramaki.
First, Nakajima will present the financial highlights for 15 minutes, followed by 30 minutes for Q&A session. This call will be recorded. We'll be starting shortly, and Nakajima will explain the financial highlights.
Yukio Nakajima, Sysmex Corporation - Senior Exec. Officer, Senior MD, CFO & Member of the Managing Board 
My name is Nakajima of Sysmex. I would like to go over the financial highlights for the first 3 months of fiscal year ending March 31, 2020. Please take a look at Page 1, financial highlights. Net sales, JPY 68.5 billion, growth rate is 3.9%. Operating profit is JPY 11.2 billion, 18.4% down. Profit attributable to owners of the parent, JPY 6.6 billion, 28.9% down. Net sales rose, centered on hematology in each region, despite the impact of yen appreciation. Operating profit was down due to the impact of yen appreciation, a worsening cost of sales ratio on instruments and services and expenses, including those related to our bio-diagnostics reagent base.
Please take a look at the lower-left table for foreign exchange. JPY 0.8 depreciation against U.S. dollars, JPY 6.6 appreciation against euro and JPY 1 appreciation against Chinese yuan. Exchange rate fluctuations reduced net sales JPY 2.41 billion and operating profit JPY 1.13 billion. Profit attributable to owners of the parent was down due to lower operating profit and the impact of an exchange rate loss. Tax rate is 31.5%, 4.9 points down compared with the previous fiscal year. That is mainly due to the refund of withholding tax following the division of Japan-Germany tax treaty.
Let's take a look at the next page, breakdown of net sales by region. As shown in the center of the slide, net sales year-on-year is decreased in China in yen terms due to the yen's appreciation, while it increased in local currency basis. Net sales increased in other regions passing yen terms in local currency basis. As stated earlier, FX impact is minus JPY 2.41 billion in total, and by region, JPY 30 million of positive impact in Americas; JPY 1.1 billion of negative impact in EMEA; JPY 1.14 billion of negative impact in China; and JPY 190 million of negative impact in AP.
Moving on to the next page, sales by business and product type. IVD business is mainly driven by hematology and hemostasis, which resulted in 7.4% year-on-year increase if previous year's rate is applied. Hematology sales increased driven by reagent sales. Hemostasis sales increased driven by instrument sales in China and Japan. Urinalysis sales increased driven by instrument and reagent sales in EMEA, despite the delay in FDA approval for urine qualitative analyzer. The immunochemistry sales slightly increased, driven by the reagent sales in China and Japan. Life Science business sales increased by 11.1% if previous year's rate is applied. The business grew in Japan and EMEA and resulted in sales increase. Further, NCC OncoPanel sales in Japan is not included because its order taking started in July.
Next page. Here is the breakdown of operating profit. Operating profit was down due to impact of yen appreciation, a worsening cost of sales ratio and increasing SG&A and R&D expenses. Cost of sales ratio worsened by 2.9%, excluding the FX impact of 0.4%. Out of 2.9% of deterioration, 1.4% is attributable to reclassification of SG&A expenses to cost of sales in China. Other attributable causes include impact of an increase in purchases of third-party instrument and other products in Japan, higher service commissions for Chinese distributors, increase in service cost to reinforce the U.S. service structure while improvements were made to the product mix. SG&A expenses increased due to higher labor costs in Americas and EMEA and temporary expenses, including bio-diagnostic reagent relocation expenses. R&D expenses increased to enhance bio-diagnostic reagent development capabilities.
Other income and expenses decreased due to Chinese government grant of JPY 0.51 billion received in Q1. We expect to receive the Chinese government grant for this fiscal year after second quarter. Negative impact of exchange rate fluctuations is minus JPY 1.13 billion.
Moving on to information by destination, starting with Americas. Sales was JPY 15.8 billion, grew by 5.8% year-on-year. Sales for this region rose, thanks to higher sales in the United States and Canada in the hematology field despite lower U.S. sales in the urinalysis and hemostasis fields and to distributors in Brazil. It grew by 5% in local currency basis. Sales in United States grew by 3.5% as the result of higher reagent and service sales stemming from an increase in the installed hematology instrument base, despite being affected in the urinalysis field by delays in the FDA approval of new products and lower sales in the hemostasis field reflecting deals to major commercial laboratories in the preceding fiscal year. Sales in Canada grew by 13.5% due to strong performance in hematology. Sales in Central and South America grew by 0.9%, slightly increased despite lower sales in Brazil. Sales were up in other regions. We have entered an agreement with Roche, which involves a change to our sales structure for the midrange to low-end hematology markets in Brazil. We plan to commence operations of a new sales structure to allow Sysmex direct marketing in Q3.
Moving on to the next page, EMEA. Sales was JPY 19.2 billion, grew by 5.5% year-on-year. In addition to higher sales of hematology reagents in the Middle East and other emerging countries, hematology system deals increased in Netherlands and direct sales in the urinalysis field started last October were favorable in the United Kingdom and France. Sales grew by 11.1% in local currency basis. Sales rose in 5 major countries by 2.3% due to higher direct sales in the urinalysis field in United Kingdom and France, despite sales decrease in Spain. In other parts of Europe, sales rose by 24.5% on an increase in hematology system deals in the Netherlands and Northern Europe. Sales were up in the Middle East by 28.8%, stemming from the start of direct sales and service in Egypt and the commencement of direct service in Saudi Arabia and Oman. In Eastern Europe and Russia, 6.2% increase, while sales decreased for Russia due to limited instrument sales, but due to acquisition of deals for commercial laboratories in Poland, it increased. We established a reagent factory in Russia, which is scheduled to start operations in Q2.
Moving on to the next page. Let's take a look at the next page, China. Sales in China was JPY 17.6 billion, down by 1.2%. Sales were down due to the impact of yen appreciation and a demand surge in Q4 of the preceding fiscal year. It grew by 5.4% in local currency basis. Instrument sales decreased, thanks to the growth in the hemostasis field. Reagent sales increased by 3.3%, thanks to the growth in the hematology, urinalysis and immunochemistry fields, excluding the impact of reclassification. The impact of declassification is approximately JPY 900 million. Hematology sales increased by 2.7%, thanks to the reagent and service sales. Because of quality issues, we saw a demand surge in Q4 of the preceding fiscal year, and the instrument sales were sluggish due to such impact. Quality issues are already solved. Hemostasis sales increased by 11.7%, despite decrease in the Asian sales, thanks to the strong sales of instrument utilizing a transportation system. Urinalysis sales increased by 9.0%, thanks to strong reagent sales.
Immunochemistry sales decreased by 4.5% due to the impact of a demand surge in Q4 of the preceding fiscal year caused by instrument quality issues. Quality issues are already solved.
Moving on to the next page, Asia Pacific. AP sales was JPY 5.7 billion, grew by 6.3%. Sales expanded due to increases in Southeast Asia centered on hematology and immunochemistry reagents as well as higher sales in India where we revised our sales structure. Sales of instruments were down, reflecting major hematology deals in the preceding fiscal year in Taiwan. Reagent sales increase spurred by higher sales in the hematology field in Indonesia, Thailand and the Philippines due to an outbreak of dengue fever and an increase in the installed base. Sales in the Southeast Asia increased by 15.8%, 15.8% increase, though our instrument sales dropped in Indonesia due to a decrease in instrument tenders affected by fiscal deficits in the national health insurance plan. Hematology reagent sales grew following the outbreak of dengue fever and the increase in blood test. Sales in the South Asia decreased by 3.9%, impacted by major deals in the preceding fiscal year in Bangladesh and Pakistan, but our strategy targeting in the midrange and high-end market in the hematology field is kicking off smoothly after revising our sales structure in India. Sales in Korea and Taiwan is down by 4.0%, impacted by major deals in the preceding fiscal year in Taiwan, while sales increased in Korea with growing reagent sales.
Let's take a look at the next page. Sales in Japan is JPY 10.1 billion, grew by 6.0%. Sales grew as a result of higher sales of instruments in the hematology, hemostasis and life science fields. Instrument sales increased by 49.6% due to an increase in deals involving the large scale replacement of hematology systems and favorable sales of new hemostasis instruments. Reagent sales were down by 0.7% due to a shift in delivery period on hematology reagents for quality control.
As mentioned earlier, we plan to begin full-fledged assay services in Q2 for NCC Oncopanel system for cancer genome profiling after confirming the readiness by cancer care hospitals.
Please take a look at the next page, it is consolidated earnings forecast. While we need to closely monitor the foreign exchange rates, consolidated earning focus has not been changed since our last disclosure in May, and we will continue efforts to achieve the target. This concludes my presentation.