Presentation

Tachibana: My name is Tachibana. Thank you for attending Q1 Financial Results Briefing.

First of all, before I start explaining today's financial summary materials, I would like to first give you an overall impression.

The global healthcare market, with the exception of a few countries, such as China, is entering a post-COVID-19 stage, moving toward recovery from the effects of the pandemic and toward further development of healthcare systems.

On the other hand, as you know, the world is moving in a big way in terms of the global economic environment and geopolitics, and while there are negative factors, there are also moves to mitigate the situation. Although the external environment is changing rapidly in the immediate future, the healthcare market is an area that will grow over the medium to long term, and we intend to strike a balance between working firmly toward the future and demonstrating the flexibility to respond appropriately to changes in the environment.

Our Q1 results in such an environment are affected by the particular factors that are happening in the world today. In particular, the impact of the lockdown in China and high global prices and labor costs are two major special factors that are temporary headwinds, but otherwise the situation is positive.

I will now explain in line with the materials. Please see the table of contents. I will explain in this order.

Please look at page five. This is a summary of Q1 results.

Sales were JPY86.02 billion, up 8.4% YoY, and operating profit was JPY11.05 billion, down 25.3% YoY. Quarterly profit was JPY8.03 billion, down 18.2%.

Although the lockdown in China had a significant negative impact on net sales, all other regions performed well, offsetting the China portion and resulting in higher sales.

Operating profit decreased compared with the same period last year due to two major factors: an increase in SG&A and R&D expenses and a higher cost-of-sales ratio.

The increase in SG&A and R&D expenses is due to numerous initiatives for the future, including enabling direct sales, new product development, activities to obtain regulatory approval, R&D for new value creation, and digitalization, all of which we are working to steadily advance.

Although the increase in SG&A expenses due to the recovery of activities curtailed by COVID-19 had been anticipated, soaring labor costs and higher prices in Europe and the U.S. were higher than expected and are working to push up SG&A expenses. Foreign exchange rates are also having an effect. Despite these factors, overall SG&A and R&D expenses were kept within plan.

The cost-of-sales ratio increased as a result of a temporary drop in demand due to the lockdown in China and other factors, which led to a decline in output and lower capacity utilization, and the inability to absorb the sharp rise in raw material prices. Also, operating profit declined due to factors including higher transportation and labor costs.

The exchange rates, shown in the lower right-hand corner, were a positive factor in terms of sales and profit, as the yen depreciated from the previous year against all currencies, but the positive impact in Q1 was smaller than the degree of responsiveness to exchange rates in the fiscal year plan. If the yen continues to weaken by the same degree in the future, the positive impact of foreign exchange rates will increase from Q2 onward, toward the end of the fiscal year.

Please see page six. This shows factors behind the increase & decrease in sales (by region and by product).

Only China shows a decrease in revenue, which will be explained on a later page.

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The Americas is doing well due to the partnership with Siemens Healthineers in the urinalysis field in North America last year. In Latin America, the effect of the change in the sales structure in Brazil last year was seen immediately after the start of the current fiscal year.

The growth rate in EMEA is low, but this is because last fiscal year was strong due to the acquisition of large projects. Although the growth rate appears low in comparison, it is strong except for this point.

In the Asia Pacific, reagent sales are increasing due to recovery in demand for testing, and in addition, sales in India continue to be strong, as in the previous fiscal year. Southeast Asia, including Indonesia and Thailand, and Australia also performed well, with the highest, double-digit growth of all regions.

In Japan, sales of COVID-19-related tests declined, but the blood coagulation and immunology fields are doing well, and with the addition of sales from the medical robotics business, sales increased 6% from the same period last year.

Next is page seven. This shows sales by business.

The China region was a major influence, with weak performance in the hematology and urinalysis fields. As for life sciences, the decrease in COVID-related tests, as noted in the lower left-hand corner, led to a decrease in profit. The medical robot business posted sales of JPY500 million. Three new hinotori units were installed in Q1, bringing the total number of hinotori units installed to 21.

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Please go to page eight. Let me explain the situation in China.

We continue to expect growth in China over the medium to long term, but it has slowed temporarily due to the COVID-19 lockdown and other factors.

The graph on the upper left shows Shanghai's hematology testing trends since January of this year.

Due to the lockdown that began at the end of March, the number of tests fell by up to about 80% in April, and then recovered in about two months. Since there seems to be a series of lockdowns, large and small, throughout China, similar to the one in Shanghai, we estimate that the overall number of hematology tests in China as a whole declined by about 20% for Q1 as a whole. As a result, we estimate that we lost about JPY3 billion in Q1 reagent sales. However, based on the recent trend in the number of tests, we expect a recovery from Q2 onward.

Please see the table on the lower left.

These are results from our own study of the status of the hematology market in 2021, which was carried out by a third-party research firm and reported to us last month. While annual instruments installations in 2021, including those of other companies, were down 6% to 7% YoY, at Tier 3, our cumulative installations at hospitals increased by about 3%. That therefore shows that our users are not being taken by other companies. The hematology market growth rate in 2021, shown in the bottom row, was about 16% YoY, partly due to increased reagent sales following the recovery from COVID. The market growth rate is expected to be about 3% to 4% from 2021 to 2023.

In addition to the budgetary constraints caused by the sluggish Chinese economy, the re-spread of COVID infections appears to have caused the government budget to be allocated to infection control on a priority basis, and we estimate the impact of this on our instruments sales in Q1 to be JPY1.5 billion. In addition, since we believe that the government procurement policy favoring local Chinese companies will continue for the time being, we are expanding the number of locally produced items. We have already obtained approval for the Automated Hematology Slide Preparation Unit SP-50, and in H2, we will also begin selling a large-scale system made in China that combines a transportation system and the SP-50 with the locally manufactured XN, which is already on the market.

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Please see page nine. Factors contributing to increase & decrease in operating profit.

The main reasons for the decrease in profit were a deterioration in the cost ratio and a decrease in gross profit due to lower sales. The cost ratio deteriorated by 2.5 percentage points due to lower output, higher raw material and transportation costs, and higher service costs due to higher prices and labor costs as a result of the China lockdown, despite an improvement due to an increase in the reagent composition ratio.

Selling, general and administrative expenses are expected to increase in line with the planned increase due to the resumption of activities after their restriction by COVID-19, and investments in digitalization and strengthening of the direct sales system are also on track. On the other hand, although there is an impact from the yen's depreciation, as well as from soaring labor costs in Europe and other regions, overall SG&A expenses have been kept within the original plan. R&D expenses increased due in part to continued investment in new products and increased expenses for global regulatory filing activities.

The following pages explain our initiatives for future growth.

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Sysmex Corporation published this content on 09 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 09 August 2022 03:25:05 UTC.