PHC Holdings Corporation (6523.T) Earnings Call Transcript & Summary

[Foreign Language] Please note that due to audio equipment settings, the microphones of our presenters are muted. Audio will be streamed from a separate account rather than from the presenters themselves. Now let me introduce today's presenters, Kyoko Deguchi, President and CEO; Kaiju Yamaguchi, Director, Senior Managing Executive Officer and CFO. After their presentations, we will hold a Q&A session. Mr. Deguchi, please begin.

Good morning, ladies and gentlemen. I'm Deputy President and CEO. Today, I will present the summary of the financial results for the second quarter of the fiscal year ending March 2026 and the full year forecast. The forecast has been revised this time. I will present the executive summary, and CFO Yamaguchi will explain the financial results PAUSE and full year forecasts. First, financial highlights for the second quarter to date. Revenue was JPY 173.4 billion. Although this was slightly lower than in the same period last year due to yen appreciation against the dollar, revenue increased. An impact of exchange rates was excluded. Overall, as in the first quarter, the BGM business performed well. Despite the ongoing market contraction, strong performance was maintained in Europe and the United States. Revenue from diabetes management increased from last year. [indiscernible] Solutions also saw an increase in revenue driven by sales of electronic medical records and medical receipt systems despite a decline in sales in electronic protection business. This offset the ongoing stagnation in equipment demand within the diagnostic and life sciences sector, which was affected by yen appreciation against the dollar and the U.S. market environment. Operating profit increased by JPY 1.2 billion year-on-year to reach JPY 10.4 billion, driven by revenue growth in high-margin developed markets and significant contributions from profit improvement measures. The [indiscernible] business exceeded internal targets. Meanwhile, due to the yen depreciating against the euro at the end of September, we recorded foreign exchange losses similar to towards in the first quarter. The cumulative valuation loss for the second quarter was JPY 6.8 billion, resulting in a net loss of JPY 600 million for the owners of the parent company. The interim dividend is decided at JPY 21 per share, in line with previous forecasts. Next are the full year forecasts. Considering the fact that results through the second quarter exceeded in internal plans and the impact of the CGM business transfer announced in September, we are revising our full year forecast upwards by JPY 2.6 billion in operating profit. The assumed exchange rates have been revised to JPY 171 per euro, JPY 146 per dollar, reflecting the current market conditions. Negotiations regarding the transfer of CGM are currently ongoing, primarily focusing on practical matters with the aim of concluding a business transfer agreement. Assuming to maintain the planned transfer date of January 2026, the anticipated impact has been reasonably factored in at this stage. Full year revenue is expected to remain at the same level. By segment, diabetes management incorporates the assumption that CGM business will be excluded from consolidation from the fourth quarter onwards. For BGM, we have revised our forecast upwards, taking into account strong performance throughout the second quarter and anticipating increased revenue, which includes favorable impact from exchange rates. The health care solutions was revised downwards to reflect the current order situation in the CRO business. The diagnostics and life sciences was revised downwards due to continued weak demand for equipment resulting from the stagnant U.S. market situation. Operating profit is revised downward for diagnostics and life sciences, reflecting lower revenue. For diabetes management, the forecast is revised upward due to the higher revenue of strong BGM, especially in highly profitable U.S. and European markets through Q2. As a result, overall operating profit forecast is revised upward to JPY 20 billion, up JPY 2.6 billion from the previous forecast. With JPY 6.8 billion unrealized FX losses due to the recent weaker yield against euro, full year profit attributable to owners of the parent forecast is JPY 4.4 billion. Since FX losses was unrealized, dividend forecast remains unchanged. JPY 21 for interim dividend and JPY 21 for year end. Total annual dividend forecast is JPY 42 per share, which is unchanged. Next is the progress of businesses. Due to strengthened profit base and profit portfolio management under the value creation plan, the other day, we announced the basic agreement about the CGM business transfer. As mentioned earlier, we are currently negotiating the business transfer contract. As soon as we sign the contract, we will report to you. And October 1, health care IT solution business, Wemex, merged with its subsidiary, Wemex Healthcare Systems. In October 2023, FujiFilm Healthcare Systems, EMR and medical receipt systems businesses were transferred to us. Since then, both companies promoted optimization through product integration, office consolidation and exchange of personnel. This integration aims for faster decision-making and improved operational efficiencies to accelerate synergy creation. It expands the customer base to over 55,000 accounts and establishes a structure to maximize management resources. We would ensure support for health care DX led by the government and will contribute to Japan's health care, extending beyond clinics to include pharmacies, hospitals, telemedicine and health management. On the right-hand side is an example of focus on D&LS, the third key initiatives of value creation plan, showing the latest new products and external evaluation. Major products of BioMedical and IP, incubator and [indiscernible] immunoanalyzer were newly launched after functional improvement and the improvement of ease of use. The products that we developed and manufactured received multiple awards in this quarter for their concepts, technological capabilities, design and quality. This exemplifies our steady progress towards sustainable growth, centered on diagnostic and life sciences. 2025 integrated report was published in October. With our new vision announced in VCP last year, the leader in precision technology that powers the future of health care, the report showcases the PHC Group's long-standing expertise precision technology and features specific experiences of employees in our value creation airports in 3 areas: monitoring, examination, diagnostic, treatment and R&D. We will be grateful if you take the time to read it. That concludes my presentation. Now I will hand it over to Yamaguchi, CFO.

First, I will explain the results for the second quarter and then the full year forecast, which were revised this time. First, an overview of our second quarter results today. Revenue for the first half of the fiscal year decreased slightly due to the yen appreciating against the dollar. However, when the impact of foreign exchange is excluded, revenue increased. Operating profit rose by 12.7% year-on-year, exceeding our initial internal plan for the second consecutive quarter. We will explain the details of sales and operating profit by segment later. The trends were generally similar to those in the first quarter. While there were variations across businesses, overall progress was strong. Financial expenses included JPY 2.7 billion in interest paid and JPY 6.8 billion in foreign exchange valuation losses, resulting in a pretax profit of [ JPY 7.9 billion ]. This loss was primarily due to the yen weakening against the euro, falling from JPY 161 to JPY 174. Please refer to Page 28 for details. Due to the foreign exchange loss, profit attributable to owners of the parent was JPY 600 million negative. EBITDA remained the same as last year. The JPY 1.2 billion difference from the increase in operating profit was decrease in depreciation and amortization. Adjusted EBITDA increased by JPY 1.0 billion. The difference from the increase in EBITDA was due to onetime income of JPY 600 million recorded last year. For the second quarter to date, the exchange rate applied were JPY 168 to the euro and JPY 146 to the dollar. Compared to last year, euro weakened but dollar strengthened, which had a negative impact on revenues. Page 11 shows the quarterly trend in sales and operating profit. Due to the nature of our business, sales tend to increase in the second half of the fiscal year. In the second quarter, sales increased in all segments compared to the first quarter. Operating profit decreased by 9.1% year-on-year due to reduced high-margin electronic prescriptions business and unfavorable market conditions affecting Diagnostics and Life Sciences segment. However, compared to the first quarter, driven by stronger sales in high-margin businesses, such as BGM and healthcare IT solutions, profit margin improved, resulting in a 70% increase in profit. Page 12 explains sales by segment and business. Diabetes management grew by 0.9% year-on-year despite the impact of yen appreciation against the dollar. This represents 2.0% increase when currency effects are excluded. Following the first year, BGM sales was strong in Europe and the United States, while CGM also grew year-on-year. Although market contraction in developed countries is having an impact, securing revenue growth despite this remains positive progress towards stabilizing BGM, which is a key focus of our midterm plan. Healthcare Solutions saw an increase of 1.9% in revenue. [ Other ] sales related to electronic prescriptions decreased driven by strong performance in electronic medical records and medical receipt systems, health care IT solutions grew 6.1% year-on-year. This offset the decline in revenue from CRO business. Diagnostics and Life Sciences revenue decreased by 5.5%. Excluding currency effects, the pathology business saw an increase in revenue. However, by medical was impacted by stagnant market conditions in the U.S. and IBD by onetime revenue effect, both saw a decrease in revenue. Page 13 shows the analysis of revenue and operating profit growth. Top half is revenue. As yen strengthened against that, there was JPY 1.7 billion negative FX impact. Excluding that, the growth was 0.7%. The revenue of diabetes management, LSIM, health care IT solution and also the other segment, there was a higher-than-expected revenue from production for third party, and the others revenue increased. Lower half is operating profit. The significantly higher profit of diabetes management, driven by high-margin BGM pushed up the profit. Year-on-year growth was 11.3% even excluding ForEx impact. As explained in the previous earnings call following the review of our corporate functions, some headquarter's roles were transferred to each business. As a result, some HQ and other expenses decreased and expenses of each business increased. Showing this graph is the positive JPY 700 million for HQ and others and negative JPY 600 million for diagnostic and life sciences. The details are shown on Page 27. Let me explain each segment, starting with diabetes management. Despite no major changes in the market environment, such as market contraction in developed countries and shift towards the low price channels, the Europe maintained steady sales. Revenue against the strong yen and including the foreign exchanges increased by 0.9%, and operating profit significantly grew by 46.6% margin, improved by 6 points year-on-year to 19.2%. Europe maintained steady sales and U.S. revenue increased due to the growth initiatives such as price, pricing initiatives, along with some front-loaded demand. These developed countries performed exceptionally well. The 365-day CGM product sales contributed to year-on-year revenue increase. With the effect of profitability improvement measures in U.S. and brisk sales in developed countries, overall profitability went up significantly. Also with the effect of the ongoing structural reforms and lower depreciation and amortization expenses, operating profit substantially grew. Next is Healthcare Solutions. Revenue grew by 1.9% year-on-year. Operating profit was down by JPY 600 million. The margin has improved from Q1 but stayed at 4.7%. In LSIM, the general examination demand was stable, and the impact of the precision control charge issue on the revenue was smaller than expected with higher revenue from genetic testing, which is 1 of our growth areas that we focus. LSIM revenue was up by 2%. Healthcare IT Solutions in the previous fiscal year in Q2, the prescription demand grew. At this time, it went down. EMR and medical receipt systems core business were strong, and the revenue went up by JPY 1.5 billion, offsetting the lower revenue of CRO. Now CRO last year, LSI Median ISO Certification was rebooked. The clinical trials, mainly the orders have been coming down. But as we reported previously, LSIM have applied for ISO recertification, which is under review. Higher revenue of LSIM, EMR and medical receipt systems could not offset the lower revenue of high-margin prescription and higher procurement costs, operating profit decreased by JPY 700 million. Finally, Diagnostics and Life Sciences. Sales decreased by 5.5%, including impact of stronger yen against the dollar. The pathology business performed steadily in Europe with large orders for digital pathology products in Q1 as well as robust demand for [ like ] glasses and consumables. Asia also performed well with expanded local production in Asia, offsetting stagnant instrument demand in the U.S. Excluding the effects of currency, sales were on par with the previous year. Biomedical saw a recovery in Europe and Europe and Japan but stagnant instrument demand persisted in the U.S. due to policy impacts. IVD revenue declined due to the absence of onetime gains in the previous year, reduced reagent sales to China and Russia and lower demand for digital injectors compared to the strong previous year. Operating profit decreased by JPY 2.2 billion, which includes JPY 1.9 billion in special factors, JPY 800 million from tariffs, JPY 630 million from onetime gains in the previous year and JPY 550 billion from reviews of the headquarter functions. Conversely, there was JPY 500 million in other income due to changes in the classification of affiliated companies. The pathology business saw improved profitability due to price revisions and cost reductions. However, this was not enough to offset the impact of revenue decline from biomedical and IVD businesses, partly due to the impact of tariffs. Page 17 shows sales by region. Japan experienced a modest rise with growth in LSIM and healthcare IT solutions offsetting declines in CRO and IDB businesses. Europe achieved a 4.7% increase in sales driven by strong performance in BGM and pathology as well as the recovery trend in biomedical. North America experienced a decrease in revenue due to the continued impact of exchange rates and stagnant equipment demand in diagnostics and life sciences despite growth in BGM. Other regions experienced a slight increase in revenue, driven by growth in Indonesia despite declines in BGM and diagnostics and life sciences. Page 18 provides details of the adjustments made to operating profit to calculated adjusted EBITDA. These adjustments include depreciation, amortization as well as onetime income expenses. Depreciation and amortization decreased by [ JPY 1.0 billion ] due to completion of amortization for certain intangible assets and impact of yen appreciation. Adjustments from EBITDA to adjusted EBITDA include restructuring costs of JPY 300 million in the previous year and JPY 500 million in the current year. Additionally, the previous year included JPY 600 million of onetime income. Next is consolidated balance sheet. Below is a brief explanation of the main assets and liabilities. Goodwill balance was JPY 212.1 billion, an increase of JPY 5.6 billion. This was due to the weakening yen against the euro. There was no change on a local currency basis. Interest-bearing debt decreased by JPY 7.6 billion to reach JPY 247.7 billion, despite repaying of JPY 11.9 billion due to foreign exchange effects. Furthermore, existing borrowings maturing in June 2026 were we classified as current liabilities. However, these are structured with refinancing as a prerequisite. Discussions with financial institutions will continue during this fiscal year. ROE calculated based on profits over the most recent 12 months was 4.2% for the quarter due to year-on-year decrease in profit attributable to owners of the parent. Cash and cash equivalents decreased by JPY 6.3 billion during the second quarter. Operating cash flow was JPY 12.1 billion, while capital expenditure was JPY 4.4 billion. Financial cash flow, including repayments of borrowings and lease liabilities, dividend payments and others resulted in an outflow of JPY 17.6 billion. This concludes the explanation of the results. Next, I will explain the revised full year forecast. The total revenue forecast is unchanged. Operating profit forecast is revised upward by JPY 2.6 billion. I would explain each segment changes on the following basis. As an assumption of the foreign exchange rate based on the recent trend is JPY 171 to the euro and JPY 146 to the dollar. In September, we announced the transfer of CGM business. And currently, we are in the final stage of the agreement and negotiation. As planned, we plan to close this in January 2026. So in this forecast, we included the impact amount reasonably expected at this time. In September, we communicated the signs of the possible impairment and potential need for the impairment. But this time, we have implemented the impairment test, and currently, we do not believe it is necessary to book the impairment loss, and this has already been audited by the auditor. Operating profit forecast is revised upwards by JPY 2.6 billion and JPY 6.8 billion. FX losses recorded through Q2 was factored in. And profit before tax, JPY 8 billion, is down JPY 4.2 billion. After adjusting the tax impact, the profit attributable to owners of parent is revised to JPY 4.4 billion, down JPY 3 billion. FX losses are unrealized and the valuation loss, so it does not impact the cash. So we will maintain the annual dividend forecast. Page 23 shows the comparison to your [indiscernible] forecast by segment. In diabetes management for CGM, we factored in its planned transfer and the consolidation in Q4 and onwards. For BGM, the strong results through Q2 and favorable foreign exchanges are included. Overall segment revenue revised upwards. Revenue of the health care solution is revised downward based on the CRO business results and the recent orders. Revenue of diagnostics and life sciences is reviewed -- revised downward based on the assumption that the sluggish equipment demand affected by the market stagnation due to the tariff and reduced government subsidy, mainly in U.S. will persist. In others, upward revision is made as negative risk on the revenue. We expect that was eliminated. With higher BGM revenue and planned the consolidation of the CGM, diabetes management operating profit is expected to increase by JPY 4.2 billion. For Healthcare Solutions, our assumption is to offset the lower revenue with cost reduction and others. Diagnostics and Life Sciences lower revenue will lead to lower utilization. Operating profit is revised down by JPY 2.6 billion. Revenue impact and onetime cost review included. The overall operating profit forecast is revised upward JPY 2.6 billion to JPY 20 billion. Page 24 shows newly revised forecast compared to the previous forecast as of August and November. Finally, updates on U.S. tariff impact. P&L impact year-to-date including additional tariff impact was about JPY 800 million. Progress of countermeasures to optimize supply chain, including review of the production is on track. Based on the effects of the already implemented price increases in Q3 onwards and cost reduction, full year forecast of JPY 1 billion to JPY 1.5 billion impact remains unchanged at this point. That concludes my presentation.

We will now move on to a Q&A session. Joining us as responder is Senior Executive Vice President and COO, CSO, Koichiro Sato. [Operator Instructions] I will call you in the order of your raising hands. Our first, Yamaguchi. Please unmute and ask questions.

Do you hear me?

Yes, we can hear you.

This is Citi, Yamaguchi. The first question is about Biomedical. You revised the 4Q. But Q1, Q2, there was no big impact. But including the situation in the United States, the business situation is clean. These impacts will appear stronger in the second half or already appearing in the first half or from 2026 fiscal year and beyond?

Biomedical, just as you mentioned, is being impacted by the U.S. situation where the companies are restrained in making capital investments. And that effect is already with us in the first half, and that will also be so in the second half. Probably in FY 2025, probably in this [indiscernible] equipment sales will continue. The market condition will continue to be not favorable, which is reflected in the forecast. That is why we are currently focusing on launching new recurring consumable businesses. And also at the same time, we are trying to implement measures to mitigate the tariffs just as Yamaguchi mentioned. We are transferring the production sites and making efficiency in production so that we can ensure margins. And these are the measures that we are doing in FY '25. What about FY 2026 ones? We will continue to monitor the market situation. But in Europe, some pharmaceutical companies are shifting their production sites in the United States and making capital investment in the United States. So probably within 2026, the North American market will recover.

I would like to comment, first of all, the market impact is already with us. What about in the second half? We do not think that the situation will be worse. According to our plans, compared to Q1, Q2, in the second half, because of the seasonality, sales will be up. So we have our plans and against the plan, probably there will be wider gap from the reality to our plan, and that is why we have revised downwards the forecast. What about FY 2026 and beyond? This year, the market situation will not improve. But in 2026 and beyond, we will make the plans, but [indiscernible] as Deguchi mentioned , major pharmaceutical companies are investing in the United States, and they have already made the announcement. Of course, we'll have to see whether these investments will be materialized. But from the second half this year to next year, if these things happen, then probably we will see the comeback of the U.S. market.

Another question regarding BGM and some CGM, your profit margin is good for BGM just as you mentioned in the second quarter, but you said that, that situation will continue throughout the year. But I believe that the BGM market per se is not favorable. So do you think that this higher profit margin for BGM will continue through FY 2026 and on?

Thank you for the question. Just as I explained in Q1, we are seeing the recovery in the profit margin. There are 4 factors behind that. The first is the cost improvement and SG&A improvement and then amortization, depreciation favorable. And also excluding CGM is the fourth factor. Cost improvement that is gross profit improvement. We succeeded in hiking prices in the United States, and that is offsetting the decrease in the volume. And also, with regard to COGS, we have been improving the operations. Particularly regarding inbound logistics, we are consolidating the procurement. And also lower meter restraint that I explained in Q1 but in Q2, we are making investments into meters, particularly in the U.S. market. On the other hand, in China, there are not profitable channels and also some markets in the Middle East. In these low-margin areas, we are restraining our investment into meters. And so we are investing in areas where there are profit gross margins, but otherwise, we will not. So we are putting priorities. And with regard to SG&A, we have been making efficiencies there, and we are reducing the professional fees and reducing the staff and also amortization, depreciation are, as I have already explained. GP improvement, 25% is GA improvement, 35% amortization, depreciation, 40%. These are some of the percentages contributing to the improvement. What about FY 2026 and beyond? This situation will continue. With regard to the market. The BGM market will be down by 10%, but we are the #1 position in the market. So we are gaining the market share from our competitors. So into the next fiscal year on, we'll continue these initiatives. That is why our forecast will not change markedly. This has been the answer. Let me augment in VCP or midyear plan, we said that BGM sales will be stabilized. And probably, CAGR will be minus 2.4%. That's in our VCP. The major factor is to stabilize the situation in the United States. The measures that I have explained are successful, and these are contributing to the sales profits. And CGM is also increasing the penetration, so probably, the CGM downsize is a little bit smaller. So I believe that we're -- priority is getting the market share of BGM in major markets. So we are making sure that we will be in tandem with what we mentioned in VCP.

Thank you. Next, Ryotaro Hayashi.

Yes. Hayashi from Morgan Stanley Securities. I hope you can hear me. Two questions. First of all, about the CGM, the transfer. Originally, 26 March, the CGM revenue and operating loss were factored in. I think that the numbers were not disclosed. So this time, now the effect of the deconsolidation is included in your guidance. So at this timing, the Q4 CGM revenue and also the deficit, what were the size of them that you assume? Maybe this time, we will be able to tell us. So I would like to know that. The reason I'm asking this is that next fiscal year CGM revenue, that would be gold. So to what extent should we deduct that from the guidance? So that's the reason I'm asking this question.

Yes. Thank you. The forecast and what we factored in, the contract negotiation has not yet gone over. So it has to do with the negotiations. I cannot really talk about the numbers. But the way I was thinking is that, at the time of the MOU, I think we explained that as of last year, JPY 9 billion operating loss is what we have. And for this fiscal year, this will be less that was included in our original plan. And Q4 only, so that means 1/4 of that number. In addition to the transactions incurred onetime cost, so we need to deduct that and so we reflected that in the revised it. In that sense, this plan itself, we believe, is rational, reasonable, and the CGM impact itself is not increasing so much.

I see. My second question is in September, CGM business transfer was explained. And at that time, Q2, the BGM -- mainly BGM, the diabetes management, the impairment -- potential impairment of the goodwill might happen. That's what you said. But you said, this time, you did test the impairment, but you think that it's not necessary. So in Q4, when you close fourth quarter, making the judgment again, is there any remaining risks and if the probability of having the impairment loss, is it the same? Or is it lower? If you can explain the nuance there.

In that sense, IFRS -- based on the IFRS, we do the impairment test at least once a year. And as of the 1st of January, when we closed the full year numbers, we would have another test. So in this case, by announcing the CGM transfer, there were signs and possibilities. So at the time of the quarter end, we implemented this impairment test. So when we close the full year, we would, of course, conduct another test. And if there are any signs of the impairment, we would also do the test. So that will be the rule process. As for the risk this time, impairment test was done and currently looking at the BGM performances and the progress we made the judgment. So from now on, for example, let's say that the interest rate going significantly or the BGM performance comes down significantly. Without those, the conclusion is not likely to change in [ 6 month ] time period. But if you ask me whether it's possible or not, I have to say yes, but the risk in comparison to the September time frame is lower, I believe.

Thank you. Next Tokai Tokyo, Mr. Yoshida, please.

This is Tokai Tokyo, Yoshida. Do you hear me?

Yes, we can hear you.