Earnings Transcript for 4543.T - Q2 Fiscal Year 2022

Naoki Muto: I am the CAFO, Muto. I will now explain the Second Quarter Results for the fiscal year ending March 2022. First, the highlights from the quarter. Sales and profit were both our highest ever. In sales revenue, demand for Cardiac and Vascular Company products made a significant recovery from COVID-19 impact. Although that company was somewhat affected by a repeated wave of COVID due to the Delta variant, the other two companies covered that impact. In adjusted operating profit, a recovery in sales and product mix improvement both contributed. Expenses including SG&A which rose slowly in the first quarter, progressed as planned in the second quarter. There is no change in the guidance for the full fiscal year but we will raise the dividend to JPY32 from the previous JPY30. We anticipate a continued recovery of demand for procedures in the second half which will bring our results into a growth pattern. However, amid what is expected to become a more concerning situation of higher freight costs due to supply chain difficulties and rising materials costs for things, including oil and natural gas, we plan to carefully monitor conditions while controlling costs and striving to achieve our guidance. Next slide, please. Here are the P&L results for the second quarter. The numbers second from left, our year-to-date revenue, was JPY344.6 billion, a 22% increase year-on-year for the same period. Adjusted operating profit was JPY74.1 billion or a 45% increase. The numbers second from right are our second quarter stand-alone results. Revenue was JPY172.9 billion, a 14% year-on-year increase. Adjusted operating profit was JPY33.9 billion or a 15% increase. Expenses such as sales promotion activities and R&D progressed as planned in the second quarter. Next slide, please. This is the adjusted operating profit variance analysis compared to the previous year. Gross profit increment by sales increase was JPY27.6 billion. Increased revenue from the Cardiac and Vascular Company had a large effect but revenue growth from the other two companies also contributed. Price declines due to TIS product tenders in China and planned production adjustments were downward factors but they were absorbed primarily by improved product mix due to increased TIS product sales. SG&A were higher than the previous year when activities were affected by COVID-19 but those activities have normalized as planned and are reflected in these SG&A results. R&D costs and other expenses, including those associated with starting the source plasma business, are reflected as proceeding according to plan. FX impact was a positive JPY4.6 billion, primarily due to flows between the euro and Chinese yuan. The impact on stock is minor. Next slide, please. This is the adjusted operating profit variance analysis for second quarter stand-alone compared to the previous year. Gross profit increment by revenue increase was JPY9.2 billion and like the year-to-date result was due to contributions from revenue growth at each company. On the other hand, in addition to downward factors, including progress of the planned production adjustment to normalized inventory levels, rising wages and human resource fluidity have occurred throughout society in North America in the wake of the COVID-19 pandemic, leading to delays in securing resources at factories there. Reduced factory operations in Vietnam, where COVID-19 impacts continue to occur, were also a factor. With lockdowns eased in Vietnam, we are now seeing improvement. The impact of increased freight costs continued in the second quarter as well. Second quarter stand-alone FX impact was a positive JPY1.8 billion. Next slide, please. Next is revenue by region. In each region, the recovery of TIS products has driven Cardiac and Vascular Company growth for double-digit year-to-date growth compared to the previous year. In Japan, the Cardiac and Vascular Company was affected by COVID-19 for a slightly slower recovery but the General Hospital Company performed well, resulting in 10% year-on-year growth and 7% growth compared to FY 2019. Blood and Cell Technologies Company experienced a slight revenue decrease due to impact from the timing of revenue. In Europe, there was an overall recovery from COVID-19. TIS and neurovascular of the Cardiac and Vascular Company grew as did blood center solutions. In neurovascular, Aspiration catheters showed strong growth. In the Americas, North America was impacted by the COVID-19 Delta variant for a slight deceleration of growth in the second quarter compared to the first. On the other hand, Central and South America accelerated after a slower recovery driving the whole. Neurovascular was steady in North America as well. In China, results calmed following a temporary large purchase of TIS products by distributors in the first quarter but high growth continued there. In Neurovascular, there was a reduction due to distributor order timing in the previous year that made this year's year-on-year increase larger but even when this is excluded, rapid growth at the high 20s level continues. In other parts of Asia, some countries continue to experience COVID-19 impact, so the recovery pace remains slower. Next slide, please. I will now explain results by company, starting with Cardiac and Vascular. Year-to-date TIS revenue increased JPY27.4 billion year-on-year, the most growth of any of the company's businesses. COVID-19 Delta variant impact caused a temporary slowing of growth in North America but growth in Europe and China made contributions. In Neurovascular, the number of cerebral artery treatment procedures increased with Aspiration catheter in particular, growing well. The Neurovascular business made the second largest contribution in the company with a JPY10.2 billion increase in revenue year-on-year. CV experienced a recovery of elective surgical procedures as well as continued steady demand for instruments. Like the other businesses, Vascular received a boost from the recovery in number of procedures as well as further positive impact from enhanced product lineup and expansion of sales area, leading to continued growth above 30%. In profit, price erosion, production adjustment and the impact of human resource shortages at factories in North America were all negative factors which were balanced by product mix improvement through increased revenue. Adjusted operating profit on revenue was 26%. Next slide, please. Next, the General Hospital Company. In Japan which accounts for 70% of total revenue, demand in the medical device business for syringe pumps and infusion pumps, in particular, drove double-digit growth. While infection prevention product demand softened, high-added value products like infusion lines and disposables were drivers. Pharmaceuticals saw a slower recovery and growth in infusion drugs similarly to the recovery in health care demand. However, pain management and anti-adhesion grew in the double digits. DM and Healthcare saw steady growth with high demand for thermometers and blood pressure monitors in Healthcare, in particular, leading to mid-double-digit growth from the first to the second quarter. The Alliance business was also steady, maintaining growth at a high 20s percent level. In profit, the improved product mix due to increased revenue absorbed the negative impact of increased freight costs. Adjusted operating profit on revenue was 15%. Next slide, please. Next is Blood and Cell Technologies Company. The blood center business saw good results, especially in Europe and the Americas in both whole blood and blood component collection. There were concerns about the impact of decreased demand for convalescent plasma used to treat COVID-19 but product mix improvement continued to result in double-digit revenue growth of 12%. Apheresis also saw recovery and growth in number of cases which spurred instrument demand toward double-digit growth. Cell processing also saw growth in demand. In profit, the downward impact of reduced Vietnam factory operations was more than absorbed by the positive impact of improved product mix, resulting in profitability continuing at 20% from the first quarter. Next slide, please. As I mentioned in highlights at the beginning, we will not revise our guidance at this time. However, we plan to increase the dividend to JPY32 from the previous guidance of JPY30. Therefore, the interim dividend will be increased by JPY1 to JPY16 as announced today. Next slide, please. Lastly, the main topics for the second quarter. I will introduce one of our ESG efforts

Shinjiro Sato: Hello. This is the CEO, Sato. Today, I will speak about building capability and expanding our presence in the United States market, while also looking back at some of our history. The United States is the largest market in the world for medtech companies. It is the most innovative and most competitive market. It goes without saying that it is the most strategically important market as well. For Terumo in particular which has sales approaching JPY1 trillion, it is imperative that we raise our presence in the world's largest market, the U.S., to achieve continuous growth going forward. This is not an easy hurdle for a non-American company to overcome but doing so will be the biggest key for us to evolve into a world-class medtech company. For quite some time, Terumo has worked to expand its range of treatment areas in the aortic field. This began back in 2002 with Terumo's acquisition of Scottish firm Vascutek. At the time, this brought into the Terumo lineup the surgical graft used in open heart surgery. This product already has a strong presence in the U.S. market in the cardiovascular surgery field. Since the Vascutek acquisition, though, the homework has remained of entering the field of stent graft for endovascular treatment in the U.S. market. We previously got to the clinical trial phase with a product called Anaconda but abandoned it before entering the market. The new thoracic stent graft product, RelayPro made by Bolton Medical which we acquired in 2016, was approved for use in the U.S. in August and achieved market entry. Simultaneously, the abdominal product, TREO, has been sold in the U.S. since last September. But that's not all; the unique hybrid product, Thoraflex Hybrid that combines surgical graft and stent graft and has already seen success in Europe, is in the approval process and expected to enter the market next year. Generally referred to as an open stent graft, this product is garnering high expectations as the first of its kind to enter the U.S. market. With these products, Terumo will achieve a full aortic treatment lineup in the world's largest U.S. market. This is a turning point toward making a leap in our presence there. Our plan is to have U.S. market TA sales of JPY10 billion or more in five years. This slide shows U.S. Terumo revenue trend since 2000. As you can see, growth really ramped up from 2010. Revenue has grown from just over JPY20 billion in 2000 to nearly JPY200 billion in 2021. There was a time when JPY100 billion was seen as the minimum line to achieve recognition in the U.S. market. And along the way, somewhere, we passed that by quite a bit. It is clear that Cardiac and Vascular drove that strong growth. But because we have kept the door open for other businesses to also grow, we have further exciting opportunities as well. As is shown here, there is no doubt that our several acquisitions have been growth drivers. This slide shows the 20-year revenue growth trend of just the Cardiac and Vascular business. For Cardiac and Vascular and even bigger turning point than acquisitions was our move to direct sales of interventional products. This happened in 2006. Prior to that, the Terumo Interventional product sales were consigned in principle to Boston Scientific. The transition to directly selling on our own broadened our strategic freedom and greatly improved profitability. Some people thought that our sales might drop drastically in the beginning but actually the competitiveness of our platform interventional products led to good penetration and we suffered no share loss. That same year, Terumo acquired MicroVention, enabling us to enter the U.S. neurovascular market. This was not only the moment of entry into the U.S. interventional treatment market, acquiring a company with the development capability also enabled us to overcome the three barriers as intellectual property, regulatory and sales to market entry. The final moment was our 2016 purchase of Angio-Seal from Abbott. Acquiring a best-selling VCD product assured our number one position in the U.S. access market. The major U.S. players are strongest in the treatment field, balanced growth between platform and treatment products and solution development that leverages our unique approach of TRI and other platform products will be the keys to growing into the future. With lessons from our successes in neurovascular, we will proceed to the next stage. How much then has the Terumo position improved in the U.S. market? The left-hand side shows revenue rankings and in a list of comparable medtech companies, Terumo is ranked number 12. This is based on the two factors of overall difference in business scope and level of control in each home market. Nevertheless, a look at this graph reveals that there is still quite a large gap ahead of us. We can view this another way, too. The U.S. players, who have grown into leading positions in each segment, are limited for growth potential in their home markets, while Terumo has the strength of being able to grow while catching up. In other words, we have the potential to steadily increase our number of products or win share in each segment. In fact, Terumo has had a top class growth rate in the past 10 years. It has been the fastest grower in the U.S. market. Further, in certain market segments, we have already secured the top share, meaning we have succeeded in achieving recognition. We intend to grow further with these areas as footholds. This slide looks back at Terumo growth in the U.S. market from the structure of the business organization. The initial entry into the U.S. market was through organic growth centered in our General Hospital business. This was in the 1970s. At that time, Terumo created as its U.S. site, the company TMC, in New Jersey. The interventional business also grew on this base. From an acquisition perspective, our first U.S. growth began in earnest with the CV business around 2000. This was not a new entry but rather a strengthening of capability and scope expansion in the oxygenator business by taking over from 3M, what is now TCVS. This was followed by large acquisitions of Scotland company, Vascutek, in the aortic treatment field, MicroVention in neurovascular and BCT in blood management. As each of these functioned as a business headquarters, U.S. business growth gained even more momentum. Next, the three acquisitions made in FY 2016 resulted in more growth acceleration in the U.S. A point I particularly want to emphasize is that operationally, the integration of these acquisitions was centered primarily in the U.S. headquarters and businesses. The overseas subsidiaries and U.S. business headquarters grew in capability, showing that M&As could be executed and integrated without constant remote action from Japan. In a way, this was groundbreaking for a Japanese company. The biggest risk for M&As by Japanese companies had previously been cross-border integration. The successful addition of M&A as a practical option along with internal growth through U.S. subsidiaries has given Terumo strategic strength. This slide shows how Terumo has become more self-sufficient in management capability and value chain. In management capability, it used to be that outposts of Terumo as the parent company controlled the growth of U.S. businesses. Now setting aside TIS and General Hospital, BCT, TCVS, MicroVention and TA act as overseas headquarters which directly oversee U.S. businesses. Another important factor is that until recently, it was said that barriers to growth in the U.S. medical device market were high. This was because intellectual property, regulatory and sales hurdles prevented growth. These three were especially prohibitive when considering entry into treatment fields. This 20 years of history saw Terumo overcoming each hurdle one by one so that the biggest result of our growth is now the end-to-end value chain that we have established in the U.S. Of course, our capabilities still need to catch up to the U.S. competition in scale and quality. However, we are now poised to make that leap. I think one area of interest to you is how much growth we anticipate in the next mid- to long-term growth strategy. I hope you will look forward to when we release specific numbers at the December announcement. However, there are some things that I can share now. One is in Cardiac and Vascular. We expect to see growth in both platform and treatment areas. The driver in platform will continue to be TRI. Our plans for TRI are not only in coronary but to expand treatment throughout the body. In treatment, we will leverage this approach toward growth in the peripheral and interventional oncology areas. In Neurovascular, with WEB and FRED in the U.S. market, we are a full lineup neurovascular company. Our aim is that this will give momentum to our scope expansion and enable continued high growth. I already spoke regarding Terumo Aortic. A very promising centerpiece outside Cardiac and Vascular is the new business in BCT entry into the source plasma market. We will share more details at the announcement of GS26 and thereafter but as a business aimed to exceed JPY10 billion early on and in a rapidly growing market, expectations are that it will be a new growth driver. Whole blood automation refers to a solution using a product called Reveos, it will be deployed in the U.S. going forward. In the past, General Hospital was forced to discontinue a lot of products which was a strategic boost. Now unique technology solutions are being created that we want to try and leverage toward growth opportunities while controlling risk through methods, including B2B arrangements. For the final two slides, I will talk a little bit about our view of the future. The shift to solution-based businesses is an important basic strategy for Terumo going forward. It goes without saying that the U.S. market is expected to develop the most diversity of any. On this point, the value of Terumo raising its commitment to the U.S. market is very high. In particular, the reality is that rather than just sales of devices and instruments, integrated solutions that incorporate diverse data are needed. Meeting this challenge boldly will create for us a new strategic pillar in the U.S. market. In achieving this, we will surely need to use methods, including coordinated open innovation and investments and acquisitions. In addition, these digital solutions will often require technologies, human resources, customer bases and tools that span across businesses. That is why we want to strengthen our cross-business approach in this area as well. Lastly, I will summarize our overall strength. I think it is a fact that our 20-year journey has come about through focused strategic actions in each business. But to complete the basic business management structure to aim for the next level of growth, there are more areas we need to strengthen to compete with the large U.S. competitors. Those include overall strengths and the base of shared capabilities that support businesses. To achieve this foundation, the businesses and corporate need to integrate with unity or build from scratch. To this end, Terumo has begun proactive investment in the themes listed here

End of Q&A: