PHC Holdings Corporation (6523) Earnings Call Transcript & Summary

Thank you for joining today's PHC Holdings Corporation financial results briefing for the first quarter of the fiscal year ending March 2026. I am Hirai from the IR and Public Relations, and I will be moderating today's session. I would like to explain how to participate in this meeting. Simultaneous interpretation in Japanese and English is available. You can select your preferred language for the presentation materials displayed on screen. [Operator Instructions] Now let me introduce today's presenters: Kyoko Deguchi, President and CEO; and Kaiju Yamaguchi, Director, Senior Managing Executive Officer and CFO. After their presentations, we will have a Q&A session. Deguchi-san, please begin.

Hello, everyone. I am Deguchi, Representative Director, President and CEO. Today, I will explain the first quarter of the fiscal year ended March 2027 financial results and the full year forecast. I will present the executive summary and CFO, Yamaguchi, will explain the Q1 earnings summary and the full year forecast. These are the financial highlights for the first quarter. Q1 actual results significantly exceeded our internal plans, marking a strong start to the second year of our value creation plan, which emphasizes strengthening our earnings base. Revenue was JPY 90.7 billion. BGM in the Diabetes Management maintained the strong performance seen since the previous fiscal year. Even amid continued market contraction in developed countries, revenue increased in both Europe and the Americas, offsetting the decline in revenue from the CGM business transfer. It was up 8.1% year-on-year. Even excluding the foreign exchange effects, revenue grew 1.3% year-on-year. BGM in particular, grew 24.5% year-on-year or 10.5% excluding foreign exchange effects. Operating profit was JPY 10.4 billion. This was a 171% year-on-year increase or JPY 6.6 billion increase. Excluding the positive impact of the foreign exchange, operating profit grew 152%. The main contributors were the strong revenue growth of BGM, particularly in developed countries as well as the CGM business transfer, pricing revisions and the company-wide cost reductions, all of which substantially improved profitability. Company-wide operating margin was 11.5%, an improvement of 6.9% year-on-year. Both revenue and operating profit reached record highs for the first quarter since our listing. Profit attributable to owners of the parent increased by JPY 8.7 billion compared to the previous year, which had been significantly affected by foreign exchange valuation losses. At this point, the full year forecast, including foreign exchange rate assumptions, remain unchanged from the initial forecast. We intend to make a determination after closely monitoring factors such as first half BGM performance, particularly the European environment, progress in medical DX, market conditions in Diagnostics & Life Sciences centered on North America and foreign exchange trends. The dividend forecast also remains unchanged at JPY 42 per share for the full year as previously announced. Next, here is an update on our business progress toward achieving our midterm management plan. Ascensia, which operates the Diabetes Management business, has launched the CONTOUR Comfort pen needle in Europe. This new product features a proprietary design that provides stability and superior control during daily insulin injections. Sales have gotten off to a strong start in Germany, Austria and Switzerland, where the product was launched in June, and we plan to roll it out to other countries going forward. In the Diabetes Management segment, in addition to the strong performance of BGM, this launch will expand our product portfolio and further enhance the cash-generating capacity of this core business. Wemex, our health care IT solutions provider, is capitalizing on the growing demand for digital transformation in the health care sector. Demand for electronic prescriptions is increasing, partly due to the revision of medical reimbursement rates in June. As of May, Wemex had installed over 25,000 systems, accounting for around 30% of all installations nationwide. Leveraging its strong market position and status as the industry leader, Wemex is contributing to the advancement of digital transformation in healthcare. Mediford, a company operating in the CRO sector, utilized the grant from the Ministry of Health, Labour and Welfare's Drug Discovery Cluster Campus Development Project last July to establish a new Biosafety Level-3 infectious disease facility at the Kumamoto site, which began operations in April. Biosafety Level-3 facilities are capable of handling high-risk pathogens such as Microbacterium tuberculosis and coronaviruses. As one of the few facilities in Japan equipped to support regulatory submissions, Mediford will continue to support academic institutions, start-ups and venture companies to develop vaccines and anti-infective drugs in the infectious disease, thereby contributing to the revitalization and acceleration of domestic drug discovery and development. In our focus area of Diagnostics & Life Sciences, we have launched several new products to strengthen our competitive position and drive growth. The E1000 Dx, a new product in the field of digital pathology, has received regulatory approval in Japan following approvals in Europe and the United States and we have begun sales for clinical use. This product is compatible with existing testing equipment and software and contributes to more efficient cancer diagnosis by streamlining laboratory workloads. Recognized for its advanced technology, including high-speed processing and high image quality, the E1000 Dx received the Best New Diagnostic Technology Solution award at MedTech Breakthrough 2026. In addition, the Pathology business has launched a new thermal slide printer called the SlideMate. Furthermore, the Life Sciences business had expanded its CO2 incubator product range by adding 6 new product models, including a comfort model with humidity control to drive further growth. This concludes my presentation. I hand over to CFO, Yamaguchi.

I will first explain the actual of the first quarter and then give you the full year forecast. First, an overview of the first quarter. Revenue was JPY 90.7 billion, up 8.1% year-on-year. And operating profit was JPY 10.4 billion, up 171% year-on-year, representing a substantial increase in profit. Against the JPY 6.8 billion increase in revenue, operating profit increased by JPY 6.6 billion. This was due to the impact of the CGM business transfer conducted in the previous fiscal year, which reduced revenue by JPY 800 million, but increased operating profit by JPY 2.1 billion as well as improved operating margins across all segments. There was also a positive foreign exchange impact, but all segments achieved both revenue and profit growth. And as in the previous year, we consider this a good start for the group as a whole Profit before tax increased by JPY 10.1 billion to JPY 8.1 billion, a substantial increase. The main factors were the increase in operating profit, together with a significant decrease in foreign exchange losses from JPY 4.1 billion recorded in the same period last year to JPY 600 million this year. Profit attributable to owners of the parent increased by JPY 8.7 billion to JPY 6.3 billion. EBITDA increased by JPY 6.6 billion year-on-year. Adjusted EBITDA, which adjusts for onetime revenues and expenses, increased by JPY 6.3 billion to JPY 17.3 billion. The foreign exchange rates applied to the P&L for the first quarter were JPY 185 to the euro and JPY 159 to the U.S. dollar, both significantly weaker when compared to the same period last year. This page shows the quarterly trends in revenue and operating profit. Our company's revenue tend to grow towards the second half of the fiscal year. So first quarter revenue is smaller relative to other quarters, and the progress rate against the full year outlook is often lower. This quarter, however, revenue increased across all segments, aided by favorable foreign exchange effect and the progress rate was strong. The main factors were that BGM market conditions continue to trend more positively than expected, as they had since the previous fiscal year, and there was solid demand centered in Europe and the U.S., although we also see some positive impact from the shift in timing carryover from the previous fiscal year. Operating profit increased due to substantial improvement in the profitability of Diabetes Management. This shows revenue by segment and by business unit. From this half year, within the Diagnostics & Life Sciences segment, we have integrated the former Biomedical and Diagnostic reagents into Life Sciences and have included the B2B businesses in Indonesia, previously included in headquarter and others, within Life Sciences. Prior year figures on the following pages have been restated accordingly. Diabetes Management's revenue increased 20.2% year-on-year or 6.7% even excluding foreign exchange effects. BGM continued to perform well in developed countries and also grew in emerging markets. Market contraction in developed countries is continuing, but revenue increased in the first quarter, continuing a stable trend from the previous year. Healthcare Solutions saw a rebound effect from the strong replacement demand for e-medical records and medical receipt systems in the same period last year, but achieved revenue growth due to strong performance in clinical testing and the CRO business. Diagnostics & Life Sciences achieved 5.4% revenue growth, driven by strong sales in pathology consumables and strong Life Sciences sales in Asia, but this was minus 3.1% excluding the positive foreign exchange impact from Europe and the U.S. This explains the breakdown of year-on-year changes. The graph above shows revenue. This quarter, the yen depreciated against both the euro and the dollar, contributing a positive impact of JPY 5.7 billion. Even excluding the foreign exchange effects, growth was 1.3%. Healthcare IT Solutions, Pathology and Life Sciences saw revenue decline, but these were offset by Diabetes Management, clinical testing and CRO. The graph below shows operating profit. Diabetes Management achieved a substantial increase in profit and every segment achieved profit growth even excluding foreign exchange effects. I will now explain each segment in turn. First, Diabetes Management. Both revenue and operating profit increased substantially and operating margin improved significantly to 33%, up 15.9% year-on-year. Even excluding the impact of the CGM business transfer, business operating profit -- BGM operating profit increased by JPY 3.2 billion. While the major trends of the market contraction in developed countries and the shift towards low-priced channels for BGM remain unchanged, revenue increased in developed countries due to higher sales volume in the U.S. and strong sales in Europe centered on Germany, Italy and Greece. And revenue also increased in emerging markets, supported by the recovery in the Middle East as well as the contribution from Algeria. The local production began in the previous fiscal year. With the added benefit of favorable foreign exchange, revenue increased substantially despite the decline caused by the CGM business transfer. Operating profit improved substantially due to the effect of revenue growth and improved sales mix from increased sales in developed countries, cost reductions from structural reforms combined with favorable foreign exchange effect and narrowing losses resulting from the CGM business transfer. Next is Healthcare Solutions. Revenue increased 1.6% year-on-year. Operating profit increased 27.6% and operating margin improved to 3.5% from 2.8% year-on-year. Clinical testing revenue increased due to growth in general testing as well as increased sales in the genetics field, an area of focus for growth and progress in sales price optimization initiatives. Healthcare IT Solutions saw increased demand for e-prescriptions, but this was offset by a rebound decline in EMR and medical-receipt systems revenue, which has seen strong replacement demand last year. CRO revenue increased due to higher order backlog at the start of the period, resulting from strengthened order taking activity at [ PSI ] meeting following ISO recertification and the completion of a large-scale safety study. Operating profit increased due to the effect of revenue growth and an increase in high-margin e-prescription sales and price optimization in clinical testing. Finally, Diagnostics & Life Sciences. Revenue increased by 5.4%. Operating income rose by 108.2% and operating margin was 5.7%. Although the Pathology business was affected by sluggish demand for equipment and the absence of a major digital pathology projects in the same period last year, revenue increased due to steady consumable sales, price revisions and favorable exchange rates. Revenue in Life Sciences business also increased partly due to favorable exchange rates. Sales of Life Sciences equipment and other products remained strong in Asia and Japan and orders increased in the Americas. However, revenue declined in Europe due to sluggish demand in France, Germany and other markets. Overall, revenue in the IVD segment increased due to strong sales in Europe and Asia despite the decline in the Americas. For a breakdown of Life Sciences revenue by traditional segment, please see Page 24. Operating income increased due to improved profitability driven by price adjustments, cost-cutting measures and the impact of U.S. tariff refunds. Here are the sales figures by region. Thanks to favorable exchange rates, revenue increased in all regions. Japan saw a slight increase in revenue due to higher sales of healthcare solutions. Europe posted revenue growth even with a positive impact of foreign exchange rates, driven by strong performance in Diabetes Management. North America posted revenue growth due to increased sales volume in the U.S. for Diabetes Management products. Revenue in other regions increased significantly by 19.2% due to growth in Diabetes Management in emerging markets and robust sales of Diagnostics & Life Sciences products in Asia. Page 16 provides details of adjustments made to operating income to calculate adjusted EBITDA. Depreciation and amortization totaled JPY 6.7 billion, which was roughly the same as in the previous year. In adjusting EBITDA to adjusted EBITDA, we recorded restructuring-related expenses of JPY 270 million last year and JPY 140 million this year. Next, I will explain the major assets and liabilities on the consolidated balance sheet. The balance of goodwill was JPY 223.4 billion. There was no change on a local currency basis, but it increased by JPY 1.9 billion due to effects of foreign exchange. Interest-bearing debt, we paid a net debt of JPY 6.0 billion, but the figure decreased by JPY 5.3 billion due to foreign exchange effects. The ROE increased from 0.3% to 6.0%, primarily due to rise in the profit attributable to owners of the parent company. The net leverage ratio decreased from 3.7x to 3.2x as a result of an increase of adjusted EBITDA and a decrease in net interest-bearing debt. Operating cash flow totaled JPY 14.3 billion, driven by strong business performance. Investing cash flow resulted in an outflow of JPY 3.3 billion, including JPY 2.7 billion in capital expenditure. Financing cash flow resulted in an outflow of JPY 10.0 billion, including JPY 6.0 billion in loan repayment and JPY 2.5 billion in dividend payment. We are beginning to see the results of our efforts to improve profitability and strengthen cash generation. We intend to continue making steady progress in these areas. Next, I will explain our full year earnings forecast for the fiscal year ending March 2027. For now, we are maintaining our full year forecast, including our assumptions about exchange rates. Although our internal targets for revenue and operating income were significantly exceeded in the first quarter, we anticipate potential future impacts such as the fact that the demand for equipment in Diagnostics & Life Sciences has not yet recovered as well as the risk of rising prices due to the situation in the Middle East and the increasing risk of price hikes and supply chain disruptions for semiconductor-related products such as servers and PCs. Additionally, current exchange rates show that the yen has appreciated due to currency interventions. Compared to the forecasted rate of JPY 165 and JPY 145, the yen is currently weaker. This has a positive impact on revenue and operating income. However, compared to the average exchange rate for the first quarter, the yen is currently stronger. If this level persists, a positive impact of exchange rates will diminish. In light of these circumstances, we have decided to closely monitor the business environment and foreign exchange trends and will maintain our full year forecast for the time being. In addition, I would like to provide some supplementary information on the foreign exchange gains and losses. In the first quarter, we recorded a foreign exchange loss of JPY 600 million, with a significant improvement on last year's loss of JPY 4.4 billion. Based on the exchange rates of JPY 183 and JPY 160 at the end of last fiscal year, JPY 1 appreciation would result in a positive impact of JPY 400 million for the euro and a negative impact of JPY 40 million for the dollar. Therefore, based on the sensitivity estimates, we expect to record financial income at the current exchange rate. The total amount and breakdown of our earnings forecast for the current fiscal year remain unchanged. However, we have revised the actual figures for the previous fiscal year to reflect the impact of the reorganization. This concludes my explanation.

Now we would like to switch to Q&A session. Joining us as responder is Senior Executive Vice President, COO/CSO, Shoichiro Sato. [Operator Instructions] The first, Mr. Seiji Wakao.

I'm Wakao, JPMorgan. My first question is regarding the full year forecast. As you explained, this time in the first quarter, you didn't make any revisions, and I understand the reasons very well. Then moving forward, when you have better visibility of variables, then the timing of potential revision, can we consider it will be in the second quarter? And Diagnostics & Life Sciences forecast in the U.S. or the costs are also one of the variable factors, we understand it. But looking at the progress of OP, I think currently the progress rate is at 40% in the full year forecast. Therefore, usually considering this situation, I think that on a net basis, there will be a revision upward. Can we consider that way?

Thank you. I'd like to answer to your questions. In May, we announced the full year forecast. And back then, BGM, if it outperforms the expectation, then we may potentially make upward revision. I think we discussed in that way. And the way of our thinking is that we'd like to closely monitor the situations in the first half, and I discussed the potential risk factors. So we'd like to look into the situations, verifying the situations, what's going on and we would like to make a decision. At this point in time, we cannot make any promises making upgrade revision. But in the first quarter, we had a strong performance. Therefore, in the second quarter and in the second half, I think the major point is how risk factors will show up. And we need to monitor and verify how the things will be moving on in the quarter 2 and beyond.

My second question is that Diabetes Management performed very well. I have a question. In the first quarter, the emerging markets performed very well. And if I look at my information in Excel, I also thought that the performance in Europe was also good. And I couldn't really understand the emerging markets strong performance. So could you give us more details about actual of the first quarter? And of course, the momentum in the first quarter, whether or not it will continuing in the second quarter, I think Diabetes Management is a big factor for you to look at overall performance. And if there is any risks, please also let us know.

Thank you for your question. Sato would like to answer to your question. The first quarter performance was strong, including Europe and the U.S. We could expand the market share. That's the first element. Regarding emerging markets, as Yamaguchi mentioned, in Algeria, once again, we made the entry into the market. And also in the Middle East, which showed some decline in the previous year. Now we see the recovery there. So these are the contributions from the emerging markets. And also India, Australia, compared to the last year, they are growing. Therefore, it's mixed situations. But mainly, we have been expanding market share in the Europe and the U.S. That's the main contributor. And what's our forecast from the second quarter and beyond, I believe that the first quarter momentum will be able to be maintained. And we don't expect any major changes.

Regarding the margin, as you progress your restructuring, I think situation is quite favorable. So from the second quarter and beyond, is there any risk factors showing any decline in the margin in the business management?

Yes. If you look at the year-on-year comparison of the first quarter results, about 70% is a volume improvement, but 30% is a profitability improvement. That's effective. And I believe that they will continue to contribute the profitability or margin.

If I supplement a little, in the first quarter, we had a strong results. The growth rates and numbers were big. But in the second quarter and the third quarter, in terms of the rates, it will be more gradual in our view. But rather than having any particular risk factors, I think overall, it's growing larger and there are some impact of the phasing. Therefore, the growth itself won't be continued, but it will be more gradual growth observed going forward. And this time, margin was 33%. It was very good as the first quarter. But in terms of the competition mix, relatively speaking, Europe and the U.S. performed very strong. And I don't expect any sudden decline in those businesses, but it will be probably becoming more gradual.

Talking about the phasing, what was the amount of the phasing?

Well, it is difficult to identify how much. But in the Q4, mainly in Western countries. In the U.S., last year, we could obtain the deals, and they are contributing the full year. And there were things that we didn't have the last year, but it produced results in the Q1. So last year, we obtained some deals successfully and that's producing results in this fiscal year. For Europe, there are some crossing the fiscal years. And also their inventories and our inventories, the adjustments or shipments, they are coordinated and impacting. Therefore, looking at the results of Q1, I believe that distributors' Q1 inventory level was not too high and the sales shipment was also strong. Therefore, how much it is difficult for us to say accurately, but that is the overall situation.

The next question, Tokyo Tokai Intelligence, Mr. Yoshida.

My name is Yoshida. I would like to pose my first question. You said BGM is booming and you explained the background. Could you please give me the explanation regarding the competitive situation that LifeScan issued Chapter 11 bankruptcy protection. And is there any change since then? What about the profit margin? Depending on quarters, when you present equipment, the profit margin tend to be lower. I'm talking about BGM. But this time, that was not the case. Was that part of the reason of the brisk BGM results?

Thank you for the question. Regarding the competition, LifeScan filed Chapter 11 bankruptcy protection. That's in the United States. As a result of that, commercial contracts are coming to us, and that's one favorable factor. Another thing is we have Roche, our regular competitor. They are selling CGM and they are shifting resources from BGM to CGM. That is why we had BGM with everything, but that resources, we do not have to spend anymore, and we're shifting that to BGM, thereby increasing the share, particularly in Germany and Italy. And as I have mentioned in the United States, we are getting the share from LifeScan, and that's the background. With regard to profit margin, meter introduction, we are continuing to do that. But meter introduction efficiency, we introduced into the market, and we see the reactions of the customers. So the profit margin does not change throughout the year.

If that is the case, internal situation, external situation, both are giving you the favorable impact. What about the external environment? Other than LifeScan, you mentioned about Roche, which is shifting resources from BGM to CGM. But what about the other competitors? What are they doing? Most of them are withdrawing from BGM. That's my assumption, but is that true?

With regard to competitive situation, there are only a limited number of players in BGM. Amongst that, LifeScan was BGM-only company, but it filed Chapter 11. Roche has both BGM, CGM, but their focus is shifting towards CGM. And we are BGM-only company. So we can focus our resources on that, and we are increasing our shares in our strong market. That's what we are seeing right now.

The second question I'd like to pose. With regard to Wemex, you said that e-prescription sales were up. This may not be a quarter-by-quarter issue, but electronic medical record compared to last year, this year was not that good. There may be a cloud impact, which may be small, but what about the situation there? And also cloud standardization is being progressed by the Japanese government. By this summer, the government is set to present some policies, but what about the latest situations?

Thank you. With regard to electronic medical records, we have the dispensing pharmacies and ethical market. With regard to dispensing pharmacies, our share is increasing, and there is smooth introduction of the system. With regard to medical ethical market, the government is continuing to offer subsidies However, clinics have high cost of introducing the system, which is more than they receive in the form of subsidies. And that is why the clinic, the introduction is slower than dispensing pharmacies. The trend will become weaker. That's not the case. But the introduction is gradually growing in clinics. That is why we are doing the promotion so that we can get more market with EMR. The second question regarding the cloud situation. Some have introduced the system, and we have just presented the system into the market, and we want to make sure that we get the market share. But compared to the budget, we are a little bit behind, but we are capturing new customers as well as the existing customers. So we would like to get our competitors' customers so that we can get more market share. The last question that you mentioned, [indiscernible] Japanese government the 17th growth policies included the medical DX and cloud native, which are relevant to us. This is government policies, which are determined by the government. We have medical policy team within the company. And of course, we are part of the discussion. But still, the government does not have the clear policy, and we don't have the clear measure. But as soon as the government is ready to put in the policies, we are ready to offer our measures.