Terumo's CEO Discusses F3Q2014 Results - Earnings Call Transcript

Feb. 5.14 | About: Terumo Corp. (TRUMF)

Terumo Corporation (OTCPK:TRUMF) F3Q2014 Earnings Conference Call February 5, 2014 8:00 AM ET

Executives

Analysts

Unidentified Company Representative

I would now like to explain our FY2013 third quarter highlights. First our overall company results. We achieved both increased sales and profit, partially due to favorable currency conversion with a weaker yen. However, progress on growing our operating income was slightly lower than the forecast of JPY70 billion. Quarter-by-quarter, our operating margin continued to improve.

Now by business: In Cardiac and Vascular, Interventional Systems maintained strong domestic growth from the first half, led by our peripheral stent, MISAGO. Our U.S. Interventional Systems also performed strongly, centered on TRI with 11% growth. Our growth in Europe had been in the double-digits, but slowed slightly this quarter due to distribution systems issues. We plan to get back to double digits.

In neurovascular intervention, the launch of new pipeline products contributed to steady growth. Our quality system improvement efforts that our U.S. subsidiary are progressing steadily and have reached the final stage.

Next, in Blood Management we were able to sustain steady performance despite a challenging market environment where blood transfusion usage in the United States and Europe is declining. However, we expect the market to grow even more difficult.

In General Hospital, our domestic sales slowed due to delays in new products sales and expansion, falling prices, and tougher competition.

Now I will explain the overall results. The yen has weakened compared to the previous year, with the average rate up to the third quarter at JPY99 to the dollar and JPY132 to the euro. This currency tailwind contributed to 17% growth in sales year-on-year for JPY JPY345.3 billion.

This revenue number includes JPY41.2 billion gained from currency exchange rates.

Compared to the same period of the previous year, in which productivity contributed greatly, gross margin rate fell 0.2 points due to such factors as less productivity, falling prices, and the U.S. Medical Device Tax.

Partially due to currency rates, SG&A expenses increased 18% from the previous period and R&D expenses grew 16% similarly. As a result, operating income was JPY48.3 billion or double-digit growth of 13% year-on-year. This operating income number includes JPY10.4 billion in currency gains.

Ordinary income grew 23% to JPY49.9 billion; thanks to the weak yen. Net income for the period grew 49% over the previous period, due to factors including corporate taxes, for a total of JPY36.9 billion.

Next slide. This chart shows sales and growth by business segment and region. The growth shown inside parentheses excludes foreign exchange impact and the home therapy business that was transferred in February 2013. Please look at the growth rate shown on the bottom right; growth was 4% overall.

As I explained on the previous slide, total sales grew 17% and excluding the factors of exchange and transferred businesses our growth was 4%. That breaks down to 2% domestically and 5% overseas, so markets outside Japan continue to drive our growth.

In General Hospital overall growth was 1%. Domestically, growth was unfortunately slightly negative near 0%. Overseas, growth was 4%. Domestically growth was zero, because platform devices and infusion related products slowed. In Europe and North America, impacts such as the phasing out of low-margin business contributed to an overall low level of growth for General Hospital.

In Cardiac & Vascular, we strongly expanded domestic sales due to factors including Misago, our stent in the peripheral area, which we have emphasized in our mid-term plan.

Overseas, our interventional business has been steady, with double-digit growth of 10%. The spread of TRI has expanded sales due to its related products, and interventional and

CV have combined for 6% growth in our Cardiac & Vascular business.

In our Blood Management business, European financial woes have led to reduced investment in blood centers, while the Affordable Care Act in the United States has accelerated the reduction in demand for blood transfusion and put pressure on prices. Nevertheless, the Blood Management business has performed steadily with 4% growth.

Next slide. Now I will explain SG&A expenses. This slide shows results without foreign exchange. General administrative expenses increased 2% over the same period of the previous year and R&D expenses increased 4%, for a total growth of 3%. We were thus able to control SG&A to keep it within our sales growth of 4%, excluding foreign exchange.

Next slide. Here is the operating income variance analysis. Foreign exchange accounted for an increase of JPY10.4 billion, and increased sales had a JPY5.6 billion positive impact on gross profit.

The increase in costs due to new product launches and the depreciation of new equipment were negative factors. As a result, our third-quarter operating income was JPY48.3 billion, compared to JPY42.6 billion from the previous year. We will strive to continue improving this by keeping costs within the rate of sales expansion and growth.

Next slide. This shows quarterly profit movement over the past year. We have made steady improvement since the fourth quarter of last year. The third quarter result is a slight improvement over the second quarter with JPY17.8 billion, though it shows a slower rate of growth.

Next slide please. I will now explain the progress of profit margin improvement, excluding foreign exchange. Gross margin improved steadily in the first and second quarters, but lost 0.5 points in the third with the impact of slowing domestic sales in General Hospital.

However, because we succeeded in controlling expenses to remain within sales growth, our third-quarter operating margin improved to 14.9%. The improvement rate was slightly less than forecast, but we’ll continue to strive for further improvement in the fourth quarter and the next fiscal year.

Next slide please. I will now speak about our progress compared to forecast. Sales are at 75% of forecast and therefore just about on schedule. Operating profit is slightly behind at 69%. In the fourth quarter however, Smart Pumps and other ME products in General Hospital will see an expansion in sales prior to the consumption tax increase, and interventional products in Cardiac & Vascular, including new releases, will also contribute. In addition, we will strive to control cost of goods and other expenses to increase profit.

Next slide please. Operating cash flow remains essentially as projected. There is no change in our policy of properly balancing growth investment, debt repayment and dividends.

I’ll now speak about company efforts. Next slide please. First, the progress of pipeline product launches from the mid-term plan.

In the third quarter, in Cardiac & Vascular, we launched the new PTCA balloon Hiryu Plus in Japan. In Blood Management, we also released the data management system TOMEs in Europe. Further in General Hospital, we performed a limited launch of the needleless system SurePlug AD in Japanese facilities, while launching the Smart Pump in Asia.

Launches scheduled for the fourth quarter include a below-the-knee peripheral balloon

catheter in Europe for Cardiac & Vascular, coil assist stent LVIS in China for

neurovascular and the TRI Glidesheath Slender in Japan for Access. In

Blood Management, we also plan to launch the plasma application on the Trima

system in Japan.

Next slide please. New drug-eluting stent Ultimaster received the CE mark in Europe. In Europe, Central and South America and Asia we will begin launching in June. Our goal for the product is JPY15 billion in sales globally in fiscal year 2016.

Ultimaster like Nobori employs a bioresorbable polymer and abluminal coating, which aims to reduce the incidence of very late stent thrombosis. With this platform’s cobalt chromium alloy and ingenious stent design, the product achieves flexibility to travel through tortuous blood vessels, in addition to being more conformable to be placed in vessel curvature. This improvement is intended to reduce stress on patient blood vessels and increase prognosis.

Next slide. New products in neurovascular intervention have led to greatly expanded sales. First, the Scepter occlusion balloon that was launched in the first half in Japan: It has accounted for $10 million globally as of the third quarter, and has expanded its world share to an estimated 30%.

The coil assist stent LVIS, which was launched last fiscal year, and flow diverting stent FRED, which was launched in the first half of this year, have each contributed $5 million in sales expansion through the third quarter. Trials to bring these to new markets are also progressing well, so there is more expansion to come. In the final year of this mid-term plan, 2016, the above three products are expected to represent JPY8 billion in sales.

Next slide please. Now for our results forecast for this period. We project average foreign exchange rates of JPY102 to the dollar and JPY139 to the euro in the fourth quarter. We will adjust our annual projected rate to JPY100 to the dollar, and JPY134 to the euro. However, there is no change to our projections of JPY460 billion in sales and JPY70 billion in operating income for this fiscal year. We believe that adjusting foreign exchange rate projections will in effect be a downward correction.

Next slide. Here is the final slide. At a meeting of our Board of Directors held February 4, it was decided to conduct a stock split. The purpose of this is to reduce the per-share price, thereby facilitating access to investors and improving stock liquidity. This will also fulfill the Tokyo Stock Exchange’s request that stocks sell in units of 500,000 yen or less. The stock split will be performed two-for-one for share of common stock. The record date will be March 31, 2014, and the effective date will be April 1, 2014.

This concludes my explanation of the March 2014 third-quarter results. Thank you for your kind attention.

Question-and-Answer Session

[No Q&A session for this event.]

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