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Edited Transcript of 6869.T earnings conference call or presentation 7-Nov-19 10:59am GMT

Q2 2020 Sysmex Corp Earnings Presentation

Kobe Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Sysmex Corp earnings conference call or presentation Thursday, November 7, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hisashi Ietsugu

Sysmex Corporation - Chairman of the Managing Board, CEO & President

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Presentation

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Hisashi Ietsugu, Sysmex Corporation - Chairman of the Managing Board, CEO & President [1]

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Good morning, ladies and gentlemen. This is Hisashi Ietsugu.

So let me go over the financial results for the first half of the year ending March 2020. As you can see on the screen, we had net sales of JPY 142.9 billion. It grew by 5% in yen. The operating income saw a slight decline by about 2.5%. And the net income had a drop by about a little less than 10%. So basically, the business was affected by the stronger yen. As you can see at the left bottom, the U.S. dollar, euro and Chinese RMB, they all showed the trend, the currency with a stronger yen, and which caused the impact, a negative impact of JPY 6.2 billion on net sales and JPY 2 billion negative impact on operating income. An exchange loss was JPY 1.67 billion. So all in all, the FX trended to a stronger yen. Especially RMB had a change by about JPY 1. So even though we had a steady growth in the net sales, but we were affected by the operating incomes and net incomes, so we saw some weakness in the profit numbers.

The breakdown of net sales by destinations. As you can see, the numbers in blue box is basically the numbers according to local currency basis. The net sales grew by 9.6%, very close to double-digit growth. The Americas grew by 6.1%. EMEA grew by 11.6%. China grew by 10.4%. Asia Pacific grew by 12%. So pretty much double-digit growth we're seeing in all these divisions.

So now we see a very strong growth seen in the business. Japan was slightly weak, but now we saw the growth by 8.4%.

Sales by businesses and product types. All in all, especially when we look at the results compared to the previous year's rate, based on many areas which grew by double digits, hemostasis grew only by 4.4%. And it's because we had a business with the U.S. commercial lab last year and now we see reactionary results this year. But overall, we were able to grow the top line numbers.

Going to the bottom of the page, the instruments and reagents business. Last year, we didn't see much growth in the instrument business. And so that caused a lower valuation on the business, but now we are seeing a steady growth in instruments.

The service business. Especially in China, we are trying to establish the service systems, then China will be the key market for us. And we are adding human resources and we are focusing, emphasizing on reinforcing this business now. So services grew by 11 -- sorry, 18.5%. So overall, it's not so bad for our sales figures.

Operating profit. So actually, profit increase, excluding the impact of FX. So gross profit by the increased sales, which has JPY 7.3 billion. But we had a worsening cost of sales ratio by 200 basis points, which were driven by the impact of higher third-party instrument purchases because for a larger system, we also utilized the third-party products and components within a system, and which caused a negative impact on our cost of sales ratio. So we were affected by that. And we saw the increased service costs in U.S. and China by adding human resources. Since we are seeing growing market share in those markets, the service will be quite important. So that's why we are taking a step ahead to reinforce the service system for those markets. And we saw the increased mix of reagents and which had a positive impact.

Regarding SG&A, in the U.S. and Central and South Americas, I will touch on later more in details, but especially in Brazilian market, we started to offer direct service -- direct sales to the low- and mid-end markets other than high-end markets. The R&D expenses, this is our lifeline, so we have to make sure to increase this amount for our business for the future. And we also built the bio reagent base, and some of you may have already visited this place, but we started the center this April, which increased our expenses. There, we were affected by FX, it was JPY 2 billion.

So substantially, we had a profit increase, excluding this FX impact. The breakdown of assets and liabilities and equity. So now we've applied IFRS 16. So the leased assets were not really recorded on the surface, but now we had to make a change to see the results -- the change in result in the numbers here. So we saw the huge increase in amount of noncurrent assets. Again, for the liabilities, we saw the increased amount in noncurrent liabilities, but there's no problem in essential condition of our assets and liabilities.

Cash flow. So you can see that there was a decrease in investing cash flow. As I mentioned, last year, we have invested into a bio diagnostic center. That was a huge investment. So all in all, we saw a slight increase in cash and cash equivalents. But I think our cash flow condition is in a healthy state.

Topics. First, with IVD Business. So we received a large order in hematology field from a prominent U.S. commercial lab. They actually are coming to timing for upgrading the equipment. So this will actually come this year and also in the following year. So they will not be replacing all the equipment at once. But this year and next year, probably we will see the increased amount of sales in instruments. And they've been using equipment for a very long time. Such commercial labs compared to regular hospitals, they tend to use equipment or instruments longer. And finally, they are upgrading from the old XE instruments to [XL].

India. From this April, we started to offer direct sales compared to the distributor usage which we had in the past. India, we consider this market is a very promising one. And there's been, of course, the Modicare being implemented in the Indian market and now Modi -- Prime Minister Modi is starting the -- his second term, so he will continue on this Modicare policy. So it's something like China in 1990s. So we are very excited to see the growth to come in India market.

Also, as I mentioned, this mid- and low-end market in Brazil will be addressed by ourselves directly. So of course, we will be using the distributors, but we will -- we are starting this new structure in Brazil.

In Life Science Business, so finally, cancer gene profiling received insurance coverage this June. It's taken some time to get fully started. That's why in the first half, we did not have any major impact of this business. So it's just -- this business just got started. In reality, the business started from August, so we can't really expect a lot from this business into the second half. Also in the liquid biopsy, the blood-based RAS gene mutation testing. So finally, we obtained first manufacturing and marketing approval. We still haven't got the insurance coverage, which should come sometime in next April. So we are making progresses in Life Science area, and cancer gene profiling is the area we expect a lot. Especially overall, the hospitals have not been moving forward the preparations, and so we are seeing kind of slow start at the hospitals due to their preparation.

The other area, now we have this bio diagnostic reagent base built, and we are working on various collaborations. And now that we are in this open innovation era, so of course, we're taking various collaborations.

So going by different destinations, first with Americas. As I mentioned, the net sales grew by 6.1% on local currency basis. Instruments saw a slight decline. But as I mentioned, there was this major commercial lab, and who obtained hemostasis equipment last year and we're not having this business this year. And there's been also delays seen in FDA application in urinalysis. But overall, reagent business are making steady progress. So things are not so bad overall in the Americas. At a major commercial lab, they started to upgrade their equipment.

EMEA had a very good start. On a local currency basis, it grew by 11.6%. Instruments grew by 9.2%, close to double-digit growth is achieved. So overall, strong business. There's been a growth driven by Middle East and the emerging markets. We started direct sales in Egypt.

In reagent business, it also grew by 13.1%. Also, for African countries, so now we have started to introduce hematology analyzer with an automatic measuring function for red blood cells infected by malaria. So we actually are starting the sales from Q3. It is time for us to introduce this equipment. But the other day, we also exhibited this equipment at [TCUT] held in Yokohama. And we got a good reception from the consumers.

In China, on a local currency basis, the business grew by 10.4%. So a relatively strong demand is seen in China. Also, the other thing is "Buy China" policy. The situation varies among different provinces in China, but this has been reinforced further more now throughout the whole country in China. The other thing here, hierarchical medical system. So now there's been a strong push to shift from the Tier 3 hospitals to the Tier 2, Tier 1 hospitals. But in reality, the patients at Tier 3 hospitals is -- are increasing right now. And also the number of Tier 3 hospitals are increasing. So overall, very strong demand, especially strength is seen with the Tier 2 -- Tier 3, sorry. And the Tier 2 and Tier 1 supported by "Buy China" policy. So we also have then launched a small equipment using the knockdown components. So even for the mid- and low-end products, we will try to introduce made in China products to address Tier 2 and Tier 1s. In order to participate in the bidding, we need to have the made in China business -- products.

Immunochemistry business has been going strong so far. So we also need to consider adding more items. But probably by the end of second half, I think we can achieve 1,000 installations for this market from us, so we are quite excited to see this.

Asia Pacific. As I mentioned, the India and hematology business in India, we were able to do good in this business. So we had a distributor who was addressing mid-end and low-end market. But pretty much no touch on the high-end market. So we started addressing high-end market, so maybe a couple institutions. We did introduce XN-9100 -- introduced. And so we are quite excited about this high-end market in India. We just started in April, and we are trying to establish the system in place. India is such a huge country, so we need to make sure that we are prepared well to address the market.

The Modicare is mainly for the low-end market. But including all the markets, we want to really emphasize more on India market. The other trend is the dengue fever in India, which increased the reagents for hematology's sales. So overall, we saw a very strong business in Asia Pacific.

So the business in Asia Pacific is quite promising for us. Of course, we see some strengths and weakness in different regions. Indonesia, their comprehensive national insurance -- health insurance is struggling right now because of the financial situation. But not just India, but also in Bangladesh and Pakistan, such Southern Asian countries where the populations are quite large. So we want to focus more on these countries to grow the business. So we believe in Asian region, we'll continue to grow. And we think Asia Pacific is a promising market for us.

Japan. Well, after many years, finally, we grew by 8.4%. Especially Tokyo, the university hospitals are investing to renew -- upgrade their facilities now towards the Tokyo Olympics. So we were possibly affected by such investment. The instruments grew by 36.6%, and that was mainly driven by the replacement of equipments and instruments, along with the renewal of those hospitals, and we were able to capture the opportunities. Also, we had new products for hemostasis called CN Series, which are accepted by a lot of users, and that's been driving the business furthermore.

Anyway, in Japan, which is our home ground, we are doing quite well. The other thing is the cancer gene profiling area. So we'll see how it's going to be growing furthermore. We heard that patients have been waiting for this. It seems like the hospitals have been taking some time to prepare themselves so far. The expert panels are not been fully operating or there are so many different elements. But in case of Japan, when things are starting, things will not get started right away, it takes time. But it seems like this business is going to start fully from the second half. And Caresphere has been also going on a steady basis.

So overall, Japan had been quite relatively slow. But now finally, it started to move forward. And since there has been a replacement cycle taking place. And if we can capture them, then we can result in these numbers.

So now talking about the earnings forecast for the year ending March 2020. So we had to revise down the forecast numbers because of the FX. So again, we're showing the sensitivity information on this page. So basically, we saw stronger yen conditions. Especially in CNY, JPY 1 change will have a major impact on the sales by JPY 5.2 billion and JPY 4 billion on OP.

Recently, it seems like CNY, RMB is getting a little stronger, but anyway, this is about the foreign exchange. So we now revised our forecast using JPY 15.5 to CNY 1. Compared to last year, especially, we also saw the stronger yen against euro. And the RMB, same thing, a stronger yen. So that's why we had to reduce the net sales by JPY 10 billion to be JPY 310 billion, and down from JPY 320 billion. And OP was reduced from JPY 64 billion down to JPY 60 billion. OP margin will be 19.4%. The net income will be JPY 38.5 billion. So we revised down this figure as well. So this is about exchange rates.

And we have been trying our best to be resistant to FX changes as much as possible. Now we see a much bigger portion of the business taking place outside of Japan, so we are -- have much bigger exposure to FX. So for us, the challenge is how we can be more resistant to FX in the future. Of course, there's nothing we can do. But still, there are things that we can do about the business management, maybe not on the FX control. But other than FX, the important thing is how we can grow the business to be more resistant to FX, and we need to come up with different ideas. So we revised the numbers for different regions. Especially China had a major impact, so we revised down the numbers.

So because of the trade wars, China is seeing the weaker RMB against the stronger yen, so we need to be closely watching this trend.

Also, South Korea, let me touch on that. So there is a trend of expulsion of Japanese products taking place in South Korea. But our business is mainly on B2B. So I hear a little impact is seen on our business.

And lastly, on dividends. So we intend to increase dividend for 18 years in a row. So initial forecast will be maintained with the interim dividend to be JPY 36. The year-end dividend, of course, will be finalized after the year-end, but this will be the number that we expect to see.

The first half, we saw some difficulty in achieving the net income number, but payout ratio to be at 39%. So we have been holding a target of 30% payout ratio anyway. But we try to make sure increasing dividend on a steady basis, that's our intention. And this is what we are trying to achieve this year.

And this concludes my presentation. Thank you very much for your attention.

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