PHC Holdings Corporation (6523) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I am Deguchi, President Director and CEO. Today, we will provide an overview of the financial results of FY '24 Q3 and also the outlook for the full year. I will give the executive summary and our CFO, Yamaguchi, will provide an overview of the third quarter results as well as the full year outlook for this fiscal year. This is a year-to-date result for Q3. Revenue was JPY 266.9 billion. Although the impact of stagnant capital investment demand in the Diagnostics & Life Sciences area, particularly in Europe and U.S.A. has continued, the BGM business has shrunk more slowly than in the past. In addition, revenue increased by JPY 10.2 billion year-on-year due to higher CGM sales, the acquisition of demand of e-prescriptions in line with the domestic medical DX policy and positive impact of ForEx and the effects of M&A. Operating profit increased by JPY 22.2 billion year-on-year to JPY 17 billion. In the previous year, there were significant impairment losses at LSI Medience and others. We also had one-off costs such as restructuring. In the current year, in addition to a decrease in these costs, the Healthcare Solutions segment benefited from an increase in high-margin e-prescription-related sales and the effects of cost reductions. Financial expenses decreased due to lower interest expenses compared to the previous year and the lower ForEx losses. Profit attributable to owners of the parent increased by JPY 18.8 billion to JPY 7.6 billion. As the year-to-date results in the third quarter exceeded the internal plan, the full year forecast for operating profit has been revised upwards by JPY 2 billion. ForEx assumptions have also been changed to JPY 164 to the euro and JPY 153 to the U.S. dollar based on current circumstances. Although the positive impact of FX was factored in for the full year, we have decided to maintain a previous forecast for JPY 360 billion for revenues, taking into account the slower-than-expected market recovery in Europe and the U.S.A. Our CFO will explain the increase or decrease by segment later on. Operating profit has been revised upwards to JPY 21.1 billion, an increase of JPY 2 billion compared to the previous forecast. This reflects the strong performance of BGM and Healthcare Solutions, whose results up to the third quarter have exceeded the internal plan. But from the outset, we have been actively anticipating an increase in profits in the fourth quarter due to the launch of new products and an increase in demand as market conditions recover. So in light of the current situation, we have prudently factored in a certain degree of risk for the fourth quarter. Profit attributable to owners of the parent has been left unchanged at JPY 10.3 billion, assuming a conservative tax. For the time being, there is no change to the dividend, which is currently at JPY 21 for the interim and year-end and JPY 42 for the full year. In line with the dividend policy announced in November, which we hope to finalize based on how the current financial year is going, our plans for the next financial year and the state of the funds, we will be making the final decisions accordingly. Now next section is about quarterly balance of operating profit. Due to seasonality, the company's operating profit tends to be higher in the second half compared to the first half by a great margin. At the time of initial planning of the current financial year, the plan placed more emphasis on operating profit in the second half of the year than the previous years as the equipment market was expected to recover in the second half, particularly in the United States and several new products were expected to be launched. On the left-hand side of the page, you can see the initial plan of operating profit in blue and the actual results after the third quarter in white. As shown in this graph, operating profit after the third quarter have exceeded the original plan. And based on this, the full year forecast has been revised upwards by JPY 2 billion. As mentioned earlier, in the fourth quarter, we have carefully revised our scenario, which had previously incorporated factors such as market conditions and new product launches in an aggressive manner. In light of the current situation, we have made a careful revision. And the progress of our year-to-date results up to the third quarter against the revised full year forecast is 78% for operating profit. Main points of the fourth quarter in each business is listed on the right-hand side of the slide. For BGM, we have our trends in key markets such as North America and for CGM, user acquisition through increased sales of 365 day sensor. These will continue to be the key. For LSI Medience, we have demand for allergy testing and efforts to improve profitability. And for Wemex, we have capturing demand for e-prescription as subsidies expire at the end of this financial year. In the Diagnostics & Life Sciences area, for Epredia, we have equipment sales in anticipation for a recovery in capital investment demand in Europe and U.S. And for Biomedical, we have a promotion of sales in growth areas such as new LiCellMo. Next, I'd like to explain the progress made with regard to the LSI Medience in appropriate quality management. Since the liberation of the issue 2 years ago, we have taken the reports of the external Investigation Committee and the recommendations and guidance from the Tokyo Metropolitan Government and the public health center very seriously and have been working on corrective and recurrence prevention activities. We have reported on the progress of our efforts to improve the points noted by the Tokyo Metropolitan Government and the public health center from time to time and have recently announced that we reported to the public health center on 30 January that our measures to deal with the identified issues have been completed and that they had accepted our report. In addition, the application for the health care-related service mark, which was de-accredited in February last year was accepted as a result of corrective and remedial measures and was reaccredited from the 1st of February this year following the review. We and LSI Medience will continue to work to restore trust by ensuring that measures to prevent recurrence and corrective actions are implemented and by continuing quality improvement efforts. Next, I will explain the progress of the initiatives to achieve the midterm plan. On the left, regarding CGM. In the third quarter, a product that can be used 365 days a year ever since 365 was launched in the U.S. This brings the global user base to approximately 6,000 users in 2024, an increase of 56% over 2023. The number of new patient shipments in December was the highest ever at approximately 600. The number of prescribers, referrals from physicians and transfers from other companies are all showing steady growth, leading to an increase in CGM sales in the current fiscal year. In addition, on the 6th of February, we completed the CE Mark application for future expansion in Europe. We are progressing for further growth. On the right, in the Diagnostics & Life Science business, we are accelerating our efforts in the CGM area. A joint research agreement has been signed with the Center for Commercialization of Regenerative Medicine, CCRM, a global public-private partnership organization based on Canada. This is a joint research using LiCellGrow, an automated culture device, which is under development. By bringing together the technology and expertise of both companies, we aim to further improve the efficiency of the cell medicine production process and cell culture technology, thereby contributing to the early expansion of CGT. That's all from me. I now hand over to CFO, Yamaguchi.

Thank you, Deguchi san. I will explain an overview of the third quarter results for the year ending March 2025 and then explain the revised forecast for the full year. First, about an overview of the consolidated financial results of the third quarter. Continued from the second quarter, in this third quarter, revenue and profits increased year-on-year in all indicators. I will give you more details of the status of sales and operating profit in each business segment. But in terms of revenue, growth in the Healthcare IT Solutions and Pathology businesses contributed and operating profit recorded an increase in all segments. Profit before tax increased by JPY 26.3 billion year-on-year to JPY 12.5 billion, due to the increase in operating profit and a decrease of JPY 4.4 billion in finance costs as a result of lower interest expenses and foreign exchange losses. Profit attributable to owners of the parent increased by JPY 18.8 billion year-on-year to JPY 7.6 billion. EBITDA increased by JPY 6.8 billion year-on-year. The difference between the increase in operating profit of JPY 22.2 billion was mainly due to impairment losses totaling JPY 16.1 billion in the LSIM, Pathology and Diagnostics businesses in the same period last year. Adjusted EBITDA after adjusting one-off income and expenses increased by JPY 4.6 billion. I will explain changes in adjusted items later on. The exchange rate applied to Q3 year-to-date were JPY 165 to the euro and JPY 152 to the U.S. dollar. Both rates were significantly lower than in the same period last year. Page 12 shows the quarterly trends in sales and operating profit. As we have said in the past, due to the nature of our business, both sales and operating profit tend to grow in the second half of the year. Since the first quarter, revenue and operating profit have steadily increased compared to the previous quarter. Operating profit for the third quarter increased by 8.8% compared to the previous quarter due to the impact of increased revenues as well as the cost reductions. In addition, in each quarter of the current fiscal year, revenues and profit continue to increase year-on-year. Page 13 describes sales by segment and by business unit. Diabetes Management Q3 year-to-date revenues landed at the same level as in the same period last year, including the positive impact of foreign exchange rate. Excluding the currency impact, it was 5% decline. But this time, it has settled down to a 5% decline from minus 9.9% in the first quarter and minus 7.5% year-to-date in the second quarter this year. This is due to the slowing decline of BGM sales as well as the growth in CGM sales following the launch of the 365 days product. Healthcare Solutions increased by 9.9% year-on-year to JPY 94.2 billion. In Healthcare IT Solutions, due to the effect of the acquisition of the electronic medical record business from FUJIFILM in Q3 last year and strong demand for electronic prescriptions, which continued from the second year sales increased by 26.2% year-on-year. Diagnostics & Life Sciences sales increased by 1.4% year-on-year to JPY 96.1 billion, but decreased by 3.2%, excluding foreign exchange effect. The Pathology business performed well, but this was not enough to compensate for the decline in sales in the Biomedical and Diagnostics business. I will give an overview of each segment in more detail later. The bridge chart on Page 14 shows a breakdown of year-on-year changes in revenue and operating profit. The top chart shows revenue. Excluding a positive currency impact of JPY 8 billion, growth rate was 0.9%, slightly higher than the same period last year. The revenue increased due to demand for e-prescription in Healthcare IT Solution, M&A effect and strong performance of consumables in the Pathology business compensated for the decline in revenue in the BGM business and the impact of stagnant demand for equipment in Biomedical. The graph below shows the breakdown of changes in operating profit in Healthcare Solutions and Diagnostics & Life Sciences. Impairment losses of [ JPY 30.7 billion ] and JPY 3.4 billion were recorded, respectively, in the Q3 last year, respectively. In Diagnostics & Life Science, there was a gain on sales of an associated company, but even excluding these effects, operating profit increased compared to Q3 last year. I will describe further details for each segment on the following pages. The foreign exchange impact on operating profit was negative JPY 400 million. In our initial plan, we expected the depreciation of the yen to have a positive impact on operating profit for the full year, but the impact of the yen's depreciation on cost recorded overseas mainly in Diabetes Management and the Pathology businesses was larger than the positive impact on profits, resulting in a negative impact on operating profit of the third quarter. Now I will explain an overview of revenues and operating profit by segment. I'll start with Diabetes Management. Revenue was flat, while operating profit increased by 15.8% Y-o-Y. In BGM, impact of the termination of a sales cooperation in the U.S.A. and the shrinking market continued, but the extent of decline in revenue due to these factors has been reduced. CGM saw an increase in the number of users and Y-o-Y revenue growth as a result of launch of the 365 day product in the United States. Operating margin improved by 2% Y-o-Y to 14.2%. Operating profit increased despite lower profit margins due to change in the mix of sales channels and markets and higher costs due to foreign exchange, but due to a reduction in the negative impact of the shrinking BGM market as well as the impact of improved profitability in CGM and absence of JPY 2.7 billion in restructuring cost in the BGM business recorded in the same period of the previous year. Moving on to Healthcare Solutions. Revenue increased by 9.9% to JPY 94.2 billion. LSIM revenue increased mainly due to a decrease in COVID tests, but the impact of inappropriate case small was smaller than expected and an increase in general testing. Healthcare IT Solutions continued to see demand with prescriptions in the third quarter following the second quarter, compensating for the temporary drop in demand following the mandatory online visibility check system in the first half of the previous year. There was also M&A impact contributing to an increase in revenue of JPY 7.9 billion Y-o-Y. Segment's operating margin improved to 6.3%. In the previous year, LSIM recorded an impairment of JPY 12.7 billion, and there was one-off costs of JPY 0.8 billion for restructuring and others. But even excluding these effects, operating profit increased by JPY 3.9 billion. Improvement in LSIM profit margin was due to higher revenue and cost reductions as well as higher demand for high-margin e-prescriptions in Healthcare IT solutions. Finally, we have Diagnostics & Life Sciences. Revenue in this segment increased by 1.4%. Pathology business increased revenues, excluding the positive impact of exchange rates, mainly due to strong sales of consumables in Europe and the U.S.A., despite the impact of market conditions made in China. Biomedical revenue decreased year-on-year despite the positive impact of ForEx, mainly due to the continued impact of the stagnant capital investment demand in Japan, Europe and the United States. Diagnostics business recorded one-off revenue in the second half from the conclusion of a distributorship agreement, but revenue declined due to lower sales of motorized drug delivery device, which was strong in the previous year. Operating profit was affected by one-off income, changes in expenses and increased amortization/depreciation costs. First of all, in the same period last year, there was a gain on sale of an associated company of JPY 2.5 billion, while there were impairment losses of JPY 3.4 billion and restructuring cost of JPY 0.6 billion. This year, one-off gains of JPY 0.6 billion was recorded. Excluding impact of this one-off revenues and costs, operating profit increased by JPY 200 million, while adjusted EBITDA increased by JPY 1.2 billion after reversing the impact of the increased amortization costs and JPY 700 million net of foreign exchange. In the Pathology business, the impact of higher revenues and improved profits and cost-cutting measures such as lower transport costs more than compensated for the lower profits in Biomedical and Diagnostic business. Page 18 shows revenue by region. In Japan, revenue increased by 5.3% Y-o-Y, mainly as a result of lower sales in the Biomedical and Diagnostic business, offset by demand for e-prescriptions and M&A effects. In Europe, 1.6% year-on-year increase was due to the strong performance of Pathology business and positive impact of exchange rates, which more than compensated for the decline in BGM. In North America, the impact of termination of the BGM sales collaboration continued, but the extent of the decline is smaller. In addition, higher revenues from Diagnostic business, including pathology and one-off revenues offset the underperformance of Biomedical business and the favorable impact of FX rates resulted in a 6.8% Y-o-Y increase in revenues. In the rest of the world, the revenue fell slightly due to soft market conditions in Asia, particularly China. Page 19 shows the one-off income and expenses included in the operating profit and reconciliation items, operating profit and adjusted EBITDA. Last year, impairment losses amounted to JPY 12.7 billion in the LSIM and Healthcare Solutions and JPY 3.4 billion in the Pathology and Diagnostics business. But this year, we did not see anything big. Adjusted EBITDA -- from EBITDA to adjusted EBITDA. We see one-off costs related to structural reforms of JPY 2.7 billion in Diabetes Management and one-off costs of JPY 0.6 billion in each of the segments in the same period of previous year. In addition, onetime gains of JPY 2.5 billion were recorded in Diagnostics & Life Sciences from the sales of associated company. And in terms of one-off expenses, we had JPY 600 million in Diagnostics & Life Sciences. On a YTD basis, the impact of the adjusting items was basically negligible. Moving on to the consolidated balance sheet. At the end of the third quarter, there were no significant changes from the previous year. Brief description of assets and liabilities. Balance of goodwill was JPY 210.5 billion, increase of JPY 1.8 billion because of exchange rates. Total interest-bearing debt was repaid by JPY 20.7 billion, bringing the balance to JPY 263.6 billion. Adjusted EBITDA multiple to total interest-bearing debt decreased to 4.9x compared to the end of the previous year due to a decrease in total interest-bearing debt and increase in adjusted EBITDA. And the next cash flow page will explain the changes. In the third quarter, cash and cash equivalents decreased by JPY 10.5 billion compared to the end of the previous year. Operating cash flow was JPY 27.7 billion, whereas capital expenditure of JPY 8.3 billion, which is the same level as the previous year and financial cash flow, including repayment of debt and lease liabilities and dividend payment were negative JPY 30.7 billion. That's all about the actual results. I will now explain the forecast for the full year. As Deguchi mentioned earlier, we have made changes to our full year forecast. Revenue and profit attributable to the owners of the parent remain unchanged, but operating profit has been revised upward by JPY 2 billion. I will explain the changes in each segment on the following pages. The assumed exchange rates have been changed to JPY 164 to the euro and JPY 153 to the U.S. dollar, taking into account prevailing exchange rates. The dividend forecast remains unchanged at present. But in line with the dividend policy we announced in November, we will make a final decision after carefully assessing the results of the current fiscal year, our plans for the next year and beyond and our financial situation. The chart on Page 24 shows the segment-by-segment comparison of revenue and operating profit with the previous forecast. Firstly, revenue. We expect full year revenue to increase for Diabetes Management, reflecting the positive exchange rate impact and the strong performance of Healthcare Solutions up to the Q3, mainly due to the acquisition of demand for e-prescriptions, while for Diabetes Management, there was advance of sales in Q3. So we have factored in some risk for Q4. For Diagnostics & Life Sciences, reflecting the impact of stagnant demand for equipment in the results up to Q3, a certain level of risk has been factored in the market recovery and sales expansion of new products in Q4. Although there have been increases and decreases in each segment, the total revenue has been maintained. On the right-hand side, showing operating profit, although results up to the third quarter exceeded the plan in all segments, as with revenue, certain risks we conservatively factored in like for Q4, we anticipate working capital reduction to improve capital efficiency, in particular, inventory reduction and the partial deterioration in margins. At present, we don't expect any significant changes in the operating environment in each business, but we conservatively incorporate and risks and made an upward revision of JPY 2 billion. Page 25 describes the changes from the previous year and the previous forecast in relation to the revised forecast for the full year, most of which I have covered. So I will skip the repeated explanation. If you have any questions, I'll be happy to answer them during the Q&A session. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]