Mani, Inc. (7730) Earnings Call Transcript & Summary

Thank you all for attending our earnings presentation today despite your busy schedules at the start of the year. I would like to begin by explaining Mani's financial results for the first quarter of the fiscal year 2026. First of all, I would like to highlight 3 major topics from the first quarter. The first one is the sales recovery of Mani dia-burs in China. The second is an acquisition of a minority stake in iRIS EYE, our German distributor of ophthalmology. The third is the establishment of a new factory in China. First, allow me to start with the sales resumption of Mani dia-burs in China. As previously announced, we obtained regulatory approval from the Chinese authorities on October 29, 2025. Since then, we have been putting a lot of effort into recovering our market share for this product. While our initial plan targeted a recovery to 90% of pre-recall levels, which were annual sales of JPY 2.4 billion within 2 years, I am pleased to report that our activities in the first 4 months have enabled us to progress ahead of schedule. Specifically, cumulative sales from November through February, comprising actual results and our latest forecast totaled JPY 1.05 billion. Allow me to provide some context for these figures. Prior to the voluntary recall, annual sales of Mani dia-burs were approximately JPY 2.4 billion, which translates to roughly JPY 200 million on a monthly basis. Therefore, our sales forecast of JPY 1.05 billion includes monthly sales of JPY 200 million over 4 months, plus an additional JPY 250 million. This surplus is primarily due to inventory restocking by our distribution partners and LDs, and we anticipate that inventory levels will normalize by February or March. In terms of end user retention, our monitoring shows that approximately 70% of public hospitals have started using Mani dia-burs again with the rate for clinics at around 50%. We recognize that some of our clients remain price sensitive and we are committed to intensive sales efforts to win them back. About 90% of our distributors have returned, providing us with significant momentum. As it stands, we expect sales to recover to more than 80% of pre-recall levels in the latter half of fiscal year 2026. That is during the period between March and August. The second key topic is our share acquisition in iRIS EYE, our German ophthalmic distributor. In the Surgical segment, Japan, China and Europe represent 3 very large markets, especially for ophthalmic knives with Europe accounting for 30% of segment sales. Given that Germany is a dominant market within Europe, we are acquiring shares in iRIS EYE, a partner distributor with whom we have had a collaborative relationship going back over 20 years. Following the retirement of one of the founders, we are acquiring their interest, marking the transition of iRIS EYE into a Mani equity-method affiliate. As you can see in the chart on the right, Mani aims to deepen our partnership with iRIS EYE in order to unlock significant synergies and drive sales growth. Specifically, you can see the blue synergy layer added on top of the gray baseline. Operationally, this involves adapting to the ongoing multinational consolidation of ophthalmic chains across Europe by positioning this partnership as a central hub with Mani as the facilitator. On the supply chain front, by having either iRIS EYE or Mani operate supply chain warehouses, it will allow us to ensure a swifter response to market demands. Ultimately, we also intend to expand our contact points and engagement with KOL doctors to further amplify these synergies. Third, I would like to address the establishment of a new factory in China as detailed in a press release that was just announced today, January 14, 2026, at 15:30. This initiative is a strategic response to China's domestic preferential policy and GPO, group purchasing organization pricing pressures that have intensified following the State Council of the People's Republic of China's comprehensive push starting January. Localizing production allows us to significantly enhance our regional competitiveness. We intend to bring the automation production line developed at our smart factory, also known as the Hanaoka Factory to the new factory in China. This strategy will allow us to compress the launch time line into less than 2 years, while enabling us to effectively manage labor costs in China, which are already quite high through highly streamlined efficiency. As you can see here, we are building a factory in Foshan Guangdong Province, and the investment amount is JPY 1.2 billion. This facility serves several strategic purposes. First, it allows for domestic product registration within China. Specifically, since our ophthalmic knives are categorized as Class II medical devices, we can apply for approval directly through the Guangdong Provincial authorities, effectively having regulatory waiting times from 18 months down to approximately 9 months. Furthermore, we are shifting toward local procurement, sourcing materials such as packaging from local suppliers thus optimizing the supply chain we use in our Chinese operations. Based on this, how should we approach global production? So far, in addition to the mass production factory in Vietnam and the completion of the smart factory in Hanaoka, China is moving forward with production for the Chinese market. Our plan is to take the advanced manufacturing technologies developed at the smart factory and roll them out to both China and Vietnam in order to strengthen production in each region and to strengthen the total production system. This concludes my overview of Mani's operational highlights. I would now like to explain the financial results for the first quarter of fiscal year 2026. In the first quarter, we registered JPY 7.828 billion in net sales and JPY 2.255 billion in operating income, together with an operating income margin of 28.8%. We achieved growth in both sales and profit with our highest quarterly sales performance ever in the first quarter. Unfortunately, this is the second highest operating income, but the highest operating income for the first quarter. Looking at the numbers, net sales increased by 2.3% on a year-on-year basis. Performance across segments was somewhat varied with growth being primarily driven by the Dental segment, specifically resulting from the resumption of sales of diverse and strong sales of the Eyeless Needle segment. On the expense side, SG&A expenses were as planned, while both ordinary and net income outperformed our initial targets. Let's now look at the numbers below the operating income line. We are currently recording approximately JPY 120 million in annual depreciation expenses related to the Hanaoka factory. Since this factory is not yet operational, these costs are currently categorized as nonoperating expenses. But once mass production commences, these will later be reclassified as operating expenses. The waterfall chart on Page 10 details a year-on-year net sales comparison between the first quarter of fiscal years 2025 and 2026. Foreign exchange had a positive impact of JPY 173 million, particularly due to the weakness of the yen against the euro. The year-over-year comparison shows a decline for the category of dia-burs due to a high baseline recorded in September and October 2024, which were normal trading months prior to the recall issues. This made for challenging comparables. The Surgical segment saw a slight decline due to inventory adjustments in China, while the Eyeless Needle and Dental segments both posted gains. I will provide more detail on these shortly. Looking at the net sales status by region, we saw incremental year-on-year growth across all major regions, including Japan, the Americas, Europe and Asia, as shown in the waterfall chart here. On the operating income front, we saw a JPY 158 million improvement in gross profit. As shown in the net sales and cost of sales breakdown, foreign exchange provided a significant tailwind. Specifically, while cost of sales improvements contributed JPY 37 million, the remainder of the gross profit gain was driven by foreign exchange impact. Moving to SG&A expenses. In the first quarter, we benefited from the absence of a onetime issue last year, resulting from a posting issue related to performance-linked bonuses. That said, we also actively increased our sales investments in the U.S. and Asia, alongside improvements at our German subsidiary, MMG. I would now like to explain the financial results by segment, starting with the Surgical segment. First, you will notice that we have updated our reporting format starting this quarter. At the top of the chart, we now include historical data for the most recent 9 quarters in order to provide a clearer view of current performance trends. Since each quarter is somewhat bumpy, we reviewed it this way to make it easier for you to understand. In the first quarter, we achieved the highest quarterly sales, reaching JPY 2.446 billion in net sales. Like I just said, quarterly results can fluctuate, but broadly speaking, we are guiding for an annual growth target of 9%, and we are currently tracking in line with that target. Performance was particularly strong in Japan and Europe in the first quarter. The first quarter of fiscal year 2025 was an outlier at JPY 2.442 billion, driven by extraordinary factors, specifically timing differences in revenue recognition that had carried over from fiscal year 2024. We faced headwinds in the Chinese market, resulting from the number of cataract surgeries being suppressed due to the Chinese government's medical expenses policies resulting in high distribution inventory. That said, we have made significant progress in normalizing inventory levels, which have dropped from 8 months toward the end of fiscal year 2025 to approximately 5 months today. We anticipate that this destocking process will be fully resolved within the second quarter. Looking ahead, our future key measures include strengthening our capital and business alliance with iRIS EYE, promoting our alliance with MST and expanding our footprint in Southeast Asia through marketing with a particular focus on Indonesia, Malaysia and Thailand. In the Eyeless Needle segment, we achieved record-breaking results with JPY 3 billion in net sales and an operating income margin of 37%. Growth has been especially strong in China following our success in GPO contracts. Following Fujian, a customer in Liaoning secured a GPO contract, which increased product supply. Also, we have recently secured a new client in Thailand, resulting in major orders. As for future key measures, we will continue to develop products where we have an advantage and compete with players in emerging markets. We have also developed a new device, a resin tray used to automate the handling and winding of sutures when attaching them to our eyeless needles for shipment. We have already secured our first customer for this system, and the initial unit is now entering active operation, providing critical technical support to our clients' manufacturing process. In the Dental segment, we recorded JPY 2.375 billion in net sales with an operating income margin of 14%. As for sales for dia-burs, they are recovering faster than planned, and we expect the positive financial impact to fully materialize in our second quarter results. Looking at our German subsidiary, MMG, we are actively implementing a turnaround plan toward profitability. In the first quarter, MMG recorded JPY 510 million in sales, though the unit continues to operate at a loss as we work through this transition. Among these, MMG has received larger orders from a major customer, particularly in the U.S. We aim to improve MMG's profitability by increasing the number of standardized products, launching our own brand products and improving on-site production efficiency. While we didn't include GZI in today's discussion of our key measures, we sold approximately 90,000 units in the first quarter. Given that we moved approximately 400,000 units in fiscal year 2025, we are looking to accelerate this pace. Our sales efforts remain centered in Japan, India and Vietnam, and we are committed to driving further growth in these markets. Our new GZI 2 product lineup remains on track for a market launch in September 2026, and we intend to further enhance our efforts in this area. Within our balance sheet, cash and deposits have increased, primarily driven by JPY 4.4 billion in operating cash flow. This increase was partially offset by JPY 2.1 billion in dividend payments, and we recorded JPY 600 million in investment cash flow. Lastly, the decrease in other current assets is due to the negative impact of consumption tax refunds. This concludes today's financial results presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]