Terumo Corporation (OTCPK:TRUMF) Q4 2021 Earnings Conference Call May 13, 2022 7:00 AM ET

Naoki Muto - Chief Accounting and Financial Officer

Shinjiro Sato - President and CEO

I am the CFO, Muto. I will now explain the results for the fiscal year ending March 2022. First, here is the highlights of this financial statement.

In sales revenue, Japan saw factors including a return to normal of infection prevention product demand, resulting in a slight increase. However, regions outside Japan and FX rates drove the Q4 and year-to-date sales result to our highest ever.

In adjusted operating profit, although negative impacts anticipated at the beginning of the year combined with inflation and reduced factory utilization as downward factors, the contributions of strong overseas sales and FX rates resulted in an annual result of 16% year-on-year growth.

Our FY '22 guidance anticipates double-digit growth in both sales revenue and profit. In sales revenue, the number of procedures and other demand are expected to emerge from COVID impact, driving growth in each company. FX rates are also expected to have a positive impact.

Although inflation impact will occur throughout the year, we expect that impact to lessen toward the end of the year. For this reason, we expect to see an increase in gross profit as well.

Next slide please. Here are the FY '21 full year and Q4 standalone results. Sales revenue was the highest-ever, for both a Q4 and full year. COVID recovery continued into Q4 in the Cardiac and Vascular Company outside Japan, especially in the TIS business, and Neurovascular was also strong in Q4.

FX rates were also a positive factor. As a result, Q4 standalone sales revenue was JPY179.8 billion, and the full year JPY703.3 billion.

Adjusted operating profit experienced the negative impacts that we anticipated at the beginning of the year, including production adjustment for safety stock level and price reductions in China tenders, as well as inflation.

However, sales outside Japan were strong and FX rates had a positive impact, resulting in an adjusted operating profit amount of JPY134.4 billion and 16% growth year-on-year. And we saw the gross margin down in Q4 due to the negative impact for unrealized profit from inventory assets with FX rapid change and the ahead expenditure for global production optimization. However, both were the temporal.

Next slide please. This is the adjusted operating profit variance analysis for the full year. Gross profit increment by sales increase was positive for all companies, to total JPY35 billion, with the previous year comparable being COVID-impacted.

Gross profitability on sales was minus JPY1.8 billion, as inflation and other factors exceeded the positive effect of product mix improvement that resulted from increased sales at Cardiac and Vascular, with TIS as a driver.

Items like Price down and SG&A increment were as initially anticipated, with SG&A having a previous-year comparable impacted by activity restrictions. FX was a wash, as Chinese Yuan and euro appreciation caused big positive impacts, while rapid Japanese Yen depreciation in the year end caused negative impact on unrealized profit on inventory assets.

Next slide please. This is a standalone adjusted operating profit variance analysis for Q4. Gross profit increment was positive JPY4 billion, with Cardiac and Vascular Company the driver, as it continued to recover from COVID.

On the other hand, gross profitability on sales decreased JPY1.5 billion as the inflation outweighed positives. Production adjustment was positive as demand recovered. Production adjustment has been similar level of stock as of the year end of March 2019, before COVID. Therefore, we will control the appropriate stock level with monitoring the market trend from FY '22.

SG&A increased with a previous-year comparable in which activities were limited; however, it was lower percent than that of sales while a smaller amount increase, and expense controls due to concerns about the decline in profit enacted after Q3 were effective. FX was as I explained for the full year. The positive flow in Q4 completely absorbed the negative stock.

Next side please. Next is revenue by region. In Japan, Cardiac and Vascular Company saw TIS and Neurovascular recover slower than other regions, but the recovery trend nevertheless continued.

Medical Care Solutions saw growth in businesses including Pharmaceutical Solutions, for a steady 2% positive year-on-year growth. In the EU, TIS and the TA drove the Cardiac and Vascular Company, and all companies saw increased sales.

Compared to Q3, the Cardiac and Vascular Company slowed in the first half of Q4 due to reduced number of procedures amid Omicron Variant impact, however, the other two companies were steady.

In the Americas, TIS and Neurovascular drove the Cardiac and Vascular Company, and all companies saw increased sales. The slowing seen in Europe compared to Q3 did not happen in the Americas, instead, strong results continued. The Americas became the second market after Japan to reach sales volume of JPY200 million, showing that the US market strategy has entered a new stage.

China also saw TIS driving the Cardiac and Vascular Company, while each company grew. Year-to-date growth was 30%. However, results of the Neurovascular business were in comparison to a previous year in which the distributor network was reorganized in the first half, temporarily increasing demand in the second, this means that the FY '21 second-half result actually showed even faster growth than it appears. Excluding this impact, growth was approximately 20%.

Compared to Q3, seasonal factors including the Chinese New Year caused some slowing. In other Asian countries, recovery had continued up to Q3, but Q4 saw slowing.

Tender timing for Medical Care Solutions and Blood and Cell Technologies was concentrated in Q3, while Cardiac and Vascular was impacted by the Omicron Variant in the first half. Nevertheless, year-to-date growth was 18%.

Next slide please. I will now explain results by company. Starting with Cardiac and Vascular. Overall, sales revenue continued to grow in all businesses. Q4 growth was 14%, and year-to-date was 21%. Sales grew 2% from Q3 through Q4.

TIS grew outside Japan, especially in North America and Europe. Although there was some Omicron impact in the first half of Q4, Access products recovered rapidly thereafter. As a result, even compared to Q3, growth recovered to low single digits.

Amid overall decreased demand in Japan, Cardiology products grew with the release of the new Ultimaster Nagomi. In Neurovascular, aneurysm care demand grew especially in North America and Europe, while aspiration catheters used in stroke treatment also maintained high growth.

Compared to Q3, the Q4 results were affected by China distributor orders focusing in Q4, so that overall growth was in the double digits, however, when this impact is excluded, growth was approximately flat.

In Q4, there was also the news that the flow diverter FRED X for treating aneurysm was used in the United States for the first time. CV also saw a significant recovery in number of procedures in North America and Europe, and instrument sales were strong as hospitals resumed investment in such devices.

Compared to Q3, North America continued to grow in Q4, but Omicron Variant impact in the first part of Q4 brought the whole down to the mid-single digits. TA, like CV, saw a recovery of number of procedures in North America and Europe. And again, similarly, compared to Q3, North America continued to grow in Q4, but the first part of Q4 brought the whole down to the mid-single digits for TA as well.

In profit for the full year, price erosion of China tenders and production adjustment combined with inflation and the rest, which emerged during the period, to bring gross profit down, cancelling out increased sales and positive FX impact, for an adjusted operating profit result of 23%.

Next slide please. TMCS is Terumo Medical Care Solutions Company. Sales revenue grew 6% annually. Q4 standalone was similar to the previous year, and flat compared to Q3. High-demand pumps and infusion products such as anticancer drug-related devices grew along with HCS, which saw demand for vaccine syringes, resulting in the Hospital Care Solutions business driving the company as a whole.

In HCS, COVID demand for infection prevention products returned to normal after spiking, while pharmaceuticals such as adhesion barrier and pain management continued to grow. Pumps grew greatly compared to Q3, while Omicron Variant impact caused slowing in IV solutions as well as disposable products other than pumps.

LCS, Life Care Solutions saw high demand shift from thermometers to blood pressure monitors, driving the whole to finish the year at plus 2%. New diabetes products had some impact, but the whole increased only slightly. Compared standalone to Q3 as well, the whole grew only slightly.

Profit stayed down as demand in Japan did not recover fully. In addition, a return to usual levels of thermometer demand normalized product mix. This combined with inflation impact and Chinese Yuan appreciation to raise manufacturing cost, therefore, several negative factors coincided. Adjusted operating profitability was 13% of sales for the full year, down 8% year-on-year.

Next slide please. Next is blood and cell technologies company. Sales revenue grew 10% annually, and 7% in Q4 alone. Compared to Q3, Q4 was minus 5%. However, this was partly due to the concentration of tenders in China and other Asian in Q3. Overall, the company was strong, as whole blood collection demand recovered and apheresis grew.

In the Blood Center business, whole blood collection in the US and Europe, and component collection in China, were each strong. Comparing Q4 to Q3, the impact from the sales fluctuations in China and other Asian countries that I mentioned before led to Q4 coming out about 5% weaker.

In apheresis, US and European hospitals moved forward with investment in systems, leading to double-digit growth. Blood Center business trended similarly from Q3 to Q4. Cell Therapy Technologies emerged from its COVID slowdown to return to a growth trajectory.

Profit was affected not only by inflation and the rest, but also the coinciding of ultimately positive investments in plasma innovation preparation costs and ahead-of-schedule production transfer activities for the cost reduction.

Amid this situation, sales remained strong while FX rates were a positive impact, resulting in the company maintaining 17% adjusted operating profitability for the year. Further, in March during Q4, the Plasma Innovation solution Rika received FDA approval. This was very good news.

Next slide please. I will now explain the FY '22 guidance. Our market assumption is that overall, COVID impact will end and demand, including number of procedures, will recover. Although inflation impact will occur throughout the year, we expect that impact to lessen toward the end of the year.

With this assumption, and the growth drivers in each business, we will aim for double-digit growth and JPY775 billion in sales revenue. We also expect FX rates to remain a positive factor.

In adjusted operating margin, we will aim for double-digit growth to JPY151 billion, or 19.5% in adjusted operating profitability. And income will reach to JPY100 billion as our highest ever.

We stated sales and adjusted operating margin by company in the table below.

We will aim for ROIC over 10% as we stated in the announcement of GS26 in the five years.

Next slide please. Here is the profit variance analysis for our FY '22 guidance. First, all companies will see increased sales, led by Cardiac and Vascular, and we anticipate a JPY22.8 billion gross profit increment by sales increase.

Product mix improvement and recovery from reduced factory utilization will have a positive impact of JPY4.1 billion, to exceed inflation impact. The size of price down is expected to shrink year-on-year with the reimbursement price revision in Japan and other impacts.

SG&A will increase along with activity in support of expanded sales, as well as Plasma Innovation strategic investment costs, all this increase is positive and necessary for growth.

FX rate, we anticipate 125 yen per a dollar, 135 yen per a euro and 19.2 yen per a Chinese yuan with considering its truck record in April. FX impact is expected totally positive. Dollar will be neutral, euro and Chinese yuan will be favorable by the depreciation of yen, however, positive or negative varies depending on each company.

Next slide please. Regarding the Group-wide earnings improvement efforts outlined in GS26, FY '22 will include full ramp-up of activities in the four areas of production, procurement, logistics, and indirect.

In production, areas to be improved will be selected. In procurement, efforts will include direct material price optimization and supply stabilization. Logistics efforts will include specific themes such as consolidation of US distribution centers, office consolidation for better efficiency in indirect departments, comprehensive insurance contracts, and establishing shared services across businesses.

We will be able to see the effect onset by this activity in the latter part of GS26. Starting this fiscal year, we will also share the progress of these efforts at each earnings announcement.

During FY21, we proposed a JPY2 dividend increase. However, we will add further to that for a total JPY34 annual dividend. In FY '22 we plan to maintain this dividend-increase trend, to JPY36 for the year, while continuing to enact stable increases toward the mid to long-term goal of a 30% dividend payout ratio.

We also announced that our Board of Directors has resolved to provide JPY50 billion as the maximum total value for acquisition of treasury shares and to cancel the shares after acquisition.

Lastly, here are the new product pipeline status and our major topics. We also have high expectations for products launched in FY '21 to expand regionally and in application, toward further growth of our results in this year and beyond. Group-wide topics include our announcement of Carbon Neutrality by 2040.

This concludes my explanation of our earnings. Thank you.

This is the Terumo, President and CEO, Sato. Today, I will talk about the value of the Blood and Cell technologies business and the Terumo growth strategy. Terumo consist of several businesses contained in three companies.

Our group growth strategies from around 2000 up to 5 years ago, heavily dependent on the growth of the Cardiac and Vascular Company, especially the Interventional Systems business. However, with business environment changes, we have revised our strategy over the past few years.

In the GS26, 5 years growth strategy we recently announced, we aim for each of the three companies to grow in a balanced way. The Blood business was slow growth in past years. But in GS26, we intend for it to grow rapidly with its source plasma business as a major driver.

Last year, Terumo celebrated the 100th anniversary of its founding. However, historically speaking, its business expansion began in earnest in the 1960s, as Terumo entered the field of disposable medical devices to address health care safety, one such area was plastic blood bags, this was in 1969.

With that start, the Japan Red Cross hole blood bag business expanded eventually to include overseas export. Really, the blood business served as Terumo's gateway to globalization.

In 2011, Terumo acquired the U.S. firm Caridian BCT and integrated it with the existing blood business, resulting in an enhanced product portfolio, when we look at it this way, all three of our current companies share common roots in our plastic and disposable medical device manufacturing technology that developed in the 1960s. Although the customers and business models differ, the technology that led up to today is the same.

This slide shows that Terumo Blood and Cell Technologies sales growth trajectory over the past 20 years. As demand in Japan matured around 2000, markets outside of Japan also saw the emergence of local manufacturers, leading to harsher competition.

Terumo took actions at this time to revitalize and strengthen its business, totaling over JPY200 billion, the 2011 Caridian BCT acquisition was a large scale, innovative home run swing towards revitalizing the Terumo a blood business.

BCT was the industry leader with top global sharing component collection and technology-oriented. After acquisition, unanticipated levels of price erosion occurred in the largest market, the United States, temporarily casting a shadow on its growth story.

In our previous mid to long-term growth strategy, our return to growth was our biggest objective, leading to the launch in earnest of non-blood-center business expansion. This effort gave birth to the new plasma innovation system, which is a key element of the GS26 strategy that began this fiscal year.

Having cleared the JPY100 billion hurdle in the previous mid to long-term growth strategy, we aim at GS26 to achieve double-digit growth and further expand sales to the JPY150 billion level at an early date.

The Terumo business portfolio is built strategically and the Blood and Cell Technologies business portfolio also has several features. Its biggest feature is a unique competitive environment. None of the giant U.S. firms in the cardiac and vascular space are players in this segment.

Terumo BCT is the technology leader in the industry. It has the top U.S. market share and is positioned differently from many of our other businesses. In fact, since the BCT acquisition, the business has been headquartered in the United States.

This has been very advantageous in developing new U.S. business, especially B2B. The Blood and Cell Technologies Company had already begun to shift its course during the previous growth strategy. The company's situation is quite similar to that of the ambidextrous management recommended in the best seller lead and disrupt, how to solve the innovator's dilemma.

In other words, the business aims to deepen its therapeutic and automated solutions for blood centers and hospitals, while also looking to advance into the new fields of cell therapy and plasma innovation. This broadens the customer base beyond the limited demand traditional transfusion market, enabling expansion into vastly larger potential markets.

The important thing is that this is not accomplished with completely new technology. Rather, we leverage the core technologies cultivated by the blood business and new capability like software.

One such core technology is the apheresis system based on centrifugation. Many raw materials for plasma-derived products, of course, but also for cell and gene therapies, begin with blood collection. A single drop of blood really does lead to a variety of new therapies. As the global leader from blood collection to extracorporeal circulation platforms, TBCT is in a very advantageous strategic position.

The growth potential of the Terumo Blood business lies in the fields of plasma innovation and cell therapy for the near future. You probably know that many diseases, including immunological conditions and cancers are in need of new treatment methods. As this shows, the markets are not only attractive for their growth potential, but also for already having a certain level of size.

Another important point is that the systems developed by the Terumo Blood business show potential to function as platforms in these new treatments. The new plasma innovation business will need to perform apheresis faster, more accurately and in higher volume.

We have successfully improved the systems technology, reorganized and innovated in the instrument side of the product called Rika and the consumable circuit used in it as well, all incorporate the experiences and technologies of TremaOpdia [ph] which in turn, originated in COBE Spectra because the plasma innovation field SV2B and involves providing an integrated system to customers who have many blood centers, it is the Quintessential Solutions business.

Customers need a system customized for their needs that packages both products and services rather than a standard single product. In that sense, it is completely different from fields where a competitor can always provide a similar drug or treatment device.

With this kind of field, partnerships based on trust are the key. That is why a stable customer relationship is the most important KSF and why the presence and overall management capability of BCT in the United States are so powerful.

The TBCT business model is a combination of hardware instrumentation and consumable circuit, as well as the larger business model than called Razor and Blades. The plasma innovation business essentially follows this model, an area requiring further enhancement if the capability of software to manage the vast data produced by numerous instruments in a blood center, this will be an enormous competitive advantage.

The systemization capability BCT achieved in developing Trima and other products will be a big differentiator for customers with large centers. Put simply, the key is to provide capability in the three joint elements of hardware, consumables and services.

Terumo Group as a whole will support this while further advancing the business model. Lastly, I want to show you the growth outlook for blood and cell technologies and GS26. You can see what a contribution of this business is going to make within the Terumo Group growth strategy. I hope your understanding of the plasma innovation is the new TBCT business model in our growth story, not just a transient deal and that you will have high expectations for us going forward.