Tsumura & Co

TSE:4540

Earnings Call Transcript 2019-Q2

[Terukazu Kato, executive]

Good afternoon, ladies and gentlemen. Thank you for coming to this business results briefing for the second quarter of fiscal year 2018 despite your busy schedule. I would also like to take this opportunity to express my sincere appreciation for your continued support for our group and Kampo. Before I go into the results, I would like to note that investment of RMB 112 million was made by Tsumura China to Ping An Tsumura in July, making Ping An a part of the scope of the consolidation beginning this quarter. Now I would like to begin my presentation. First, let us confirm the road map to realizing the long-term vision. The theme of the Medium-term Management Plan is creating new value through innovation in Kampo. The 3 strategic challenges, as shown bottom of the page. Today, we will also give you an update on the progress of the third strategic challenge, that is, taking on the challenge of new businesses in China. We have always been committed to implementation of management based on philosophy. Vision for 2021 is set as a long-term management vision spanning 10 years based on the management philosophy and corporate mission with a medium-term management plan plus milestones to be achieved. The theme of the long-term business vision is to aim to be a value-creation company that contributes to people's health through its Kampo business, making efforts to realizing the 3 Tsumuras seen here: the Kampo company, people company and the global niche company.

The Kampo company aims for stable growth of the domestic business, the global niche business will work on starting new businesses overseas and the People company aims to evolve into a corporate group that will pave the way forward in such businesses. Now I would like to give you an overview of the business results for the second quarter of fiscal year 2018. It is highlighted in orange. Net sales came to JPY 58,268,000,000. Operating profit was JPY 8,950,000,000. Operating profit margin, 15.4%. Ordinary profit JPY 9,566,000,000. Profit attributable to owners of parent was JPY 7,082,000,000.

The achievement rate against our plan was: for net sales, 98.9%; operating profit, 98.4%; ordinary profit, 105.1%; and profit attributable to owners of parent, 104.2%. Compared to the same period of the previous year, prescription Kampo products showed a slow start, showing a modest growth of JPY 14 million. And although the amount was small, withdrew from Kampo extract granules export business to South Korea, which was unplanned. And we also saw reduction in the OEM supply products of OTC Kampo. Net sales was down slightly, resulting in slight reduction of the operating profit. However, ordinary profit and profit attributable to owners of parent were both up slightly. Interim dividends are JPY 32 per share as planned. I would like to highlight the key points of the performance. Prescription drug market showed a negative 2% growth in the first half, and prescription Kampo products likewise showed a slow start. However, sales trend in October is showing a strong trend, sales exceeding our plan. The cost of sales ratio exceeded the plan by a 0.3 points because of increased unrealized profit as group trade composition ratio of raw material crude drugs increased, but substantially, it is in line with the plan. The cost of sales ratio was down 1.5 points year-on-year due in part to a decline in crude drug prices and increased productivity. SG&A ratio was lower by 0.3 points against the plan but up 1.5 points year-on-year at 44.2%.

Ordinary profit increased JPY 200 million, mainly from ForEx translation gain in tandem with loans to overseas subsidiaries. Extraordinary income was posted, reflecting a gain on sale of investment securities of approximately JPY 300 million. Moving on to analysis of the factors for increase/decrease in the operating profit. As you can see, operating profit was down slightly by JPY 35 million year-on-year. Cost of sales margin decreased 1.5 points to 40.4%, with impacts of 0.7 points from NHI price revision, negative 1.4 points from crude drug relative costs and negative 0.3 points from decrease in processing costs.

Increased sales promotion expenses and gratitude payments are related to changes in part of a sales system for both prescription Kampo products and OTC medicines. Please refer to the balance sheet and the cash flow position. Current liabilities include repayment of long-term loans payable in a year of JPY 15 billion, including outstanding facility-related costs from facility inspection of JPY 4 billion.

As for inventories, merchandise and finished goods increased JPY 1.4 billion in anticipation of stopping operation during works for adoption of pigs at Ibaraki Plant. Raw material increased JPY 490 million from volume impact of plus JPY 1.6 billion, unit cost impact of negative JPY 900 million and ForEx and others of negative JPY 200 million.

As for cash flow, the balance of cash and cash equivalents decreased JPY 18.3 billion compared to the beginning of the period. As I mentioned earlier, repayment of long-term loans of JPY 15 billion was conducted in June of this year.

With the repayment of loans, equity ratio was up at 71.1%. Next, I would like to explain the initiatives and progress of the 3 strategic challenges. Total of 129 prescription Kampo products came to JPY 55,799,000,000, a slow start and almost flat due to NHI price revision, up JPY 14 million year-on-year. This year, we saw announcement of guidelines for the improvement of commercial transaction practices of ethical drugs. And as a result of very tough price negotiations, some dispensing pharmacies are forced to reduce stock. August and September were difficult months for the pharmaceutical market as a whole. This year, there is a difference between shipment and actual sales, with shipment showing 0 growth at 0%, but actual sales grew by 0.8%. In October, with rebound from September, we are seeing good growth.

Sales of 5 drug-fostering formulations were down 1.7% at JPY 15,110,000,000. Sales of growing formulations up 0.5% to JPY 12,691,000,000. As a Kampo company, we will aim to contribute to creating a health care environment where all patients can receive treatment that includes Kampo medicine, where appropriate, in any health care institution or medical specialty in Japan. This is in line with our basic sales strategy of establishing Kampo medicine. We have consistently maintained implementation of this basic strategy. Based on this strategy, we are continuing supporting university and medical departments and medical colleges, providing lectures introducing Kampo, clinical training, workshop on professor and lecture training and study groups. In February 2017, we established Japan Kampo Medicine Education Foundation. In order to increase the number of doctors to prescribe Kampo early in their careers at designated clinical training hospitals, we are continuing to provide Kampo study sessions for physicians in training. We would like to increase the numbers of physicians prescribing 10 or more Kampo formulations to 1-in-2, that is 50%, so that patients in Japan can receive Kampo therapy as necessary, taking us close to our vision.

For clinicians, we provide seminars starting from beginners, to follow-up, to step-up seminars, to realize further accumulation of Kampo knowledge. There are 2 major approaches to increasing physicians prescribing 10 or more Kampo formulations. One is evidence-based Western medicine approach, mainly targeting hospitals and specialists; and the other is Kampo medicine approach, prescribing Kampo dependent on diseases and symptoms, targeting mainly GPs or general physicians. Both approaches will be instrumental in increasing physicians prescribing 10 or more Kampo formulations to realize establishment of Kampo medicine. There is a tendency among physicians prescribing 10 or more Kampo formulations to show interest in furthering their education of Kampo. This graph is compiled by Tsumura based on MHLW Third NDB Open Data, showing annual sales of top 100 prescription Kampo products for all markets on NHI price basis by gender and age. As you can see, ratio of prescription is particularly high among seniors and women. It is estimated that the elderly population of people 65 years of age and over will peak in 2042, and we will continue to see prescription Kampo demand increase. As was apparent from the previous data, therapeutic areas related to the elderly and women with high prescription ratio are challenges the Japanese society is facing. So we have chosen the 3 therapeutic areas as 3 important domains of focus, specifically: dementia and related fields; geriatric field, including frailty; cancer domain involving supportive care such as reduction of adverse events from chemotherapy; and gynecology field involving women-specific diseases and symptoms like sensitivity to cold or constipation. Therapeutic area related to all 3 domains is gastroenterology, and we aim to increase our presence in this area with Rikkunshito as a priority formulation.

Rikkunshito underperformed due to delay of about a month in the timing of introduction of new DREAM Study promotion materials, leading to delay in start of education or training, but is showing good progress from second quarter onwards. We have started approaching specialists in this area, gradually expanding approach to GPs. As you can see on this slide, plan achievement ratio on actual sales basis is steadily on the rise since June, achieving our target in the second quarter. In October, preliminary figures showed that we have achieved an even higher achievement rate against our plan. We hope to stay on track with Rikkunshito to achieve even higher targets and expand our efforts from GI to other fields, including drug-fostering formulations. We will specifically expand our targets to include GPs to raise adoption rate, and this approach will be shared by the company as a whole to raise the closing precision. It is a competitive field competing with a new drug, but we will continue to make efforts to establish our position as first-line treatment to treat upper GI tract diseases. Daikenchuto has high adoption rate at hospitals, but our analysis show that we need to adapt appropriately to changing environment, such as change in the operative measures from laparotomy to laparoscopic surgery, shorter hospital stays due to revision of medical treatment fees and increased prescription of lower dosage, less than the normal dosage of 15 grams per day for adults. In the second half, we will thoroughly enhance the information to be provided to hospitals, including university hospitals and clinical training-designated hospitals and 45 ongoing prescribing of Daikenchuto at partner GPs as hospital-clinic collaboration system is enhanced. It is a different therapeutic area, but Daikenchuto was listed in the chronic constipation treatment guideline 2017 for indication of distention associated with constipation. 10 formulations, including Siningan (sic) [ Masiningan ] and Jun Chow Tow, were also listed in the GL, so we will focus on network prescription selecting appropriate prescription by types of constipation. For dementia BPSD network with the promotion of prescription of Kampo, namely Yokukansan, Kamikihito, Ninjinyoueito and Yokukansankachinpihange, according to disease symptoms by stages at key facilities, including university hospitals, clinical research centers and dementia-related disease medical centers already prescribing Yokukansan, and we are seeing improvements in different symptoms. We will continue with this effort in the second half. And as dementia and MCI, mild cognitive impairment, is on the rise, as a next phase, we will target dementia support doctors to increase new adoption facilities of Yokukansan.

The third focus area is gynecology. As data showed, not only among the elderly, but prescription Kampo products are prescribed in high proportions in this field. With growing number of outpatient clinics specializing in women's health for more than 10 years, we have been providing seminars for physicians. Incidentally, the proportion of female doctors is high among women's health doctors. We have also been co-sponsoring gynecology Kampo research groups, and the number of participants is increasing. We welcomed 311 physicians at the group meeting held in Utsunomiya City this August, with 56 wide-ranging presentations being provided. We will strengthen our efforts to providing information on the top 3 Kampo formulations for women, namely Tokishakuyakusan, 23, Kamishoyosan, 24 and Keishibukuryogan, 25, at such events. These are the key sales and marketing measures for the second half. Centered on the 3 important domains explained earlier, we will adapt to the changing environment of clinic-hospital collaborations, focusing on Rikkunshito, which is an effective Kampo formulation in GI, and Daikenchuto and Hangeshashinto, our growing formulations. As for Goshajinkigan, we will focus on GPs for symptoms such as dysuria and frequent urination often seen in the elderly. As for growing formulations, we will provide information to the additions leveraging the doctor-to-doctor connection at, for example, luncheon seminars of TNT during Japanese Society for Parenteral and Enteral Nutrition Conference for Hochuekkito and Kampo research meetings for different therapeutic areas for Goreisan. We were aiming -- targeting 50% expansion of cultivated land under own management by the end of fiscal year 2021. But we have put our plan forward and achieved 50% already in fiscal year 2017. Crude drugs cultivated using land under own management, a cultivated process based on GACP, making it possible to expand the area of cultivation systematically in perspective of quality, volume and price, contributing to stable supply of raw material crude drugs. Crude drugs cultivated based on GACP adhere to satisfy safety and quality standards of Tsumura and according to specification to the supply to Japan as raw materials for Kampo formulations and raw materials for new businesses in China. Variety of crude drugs for China businesses are cultivating in process based on GACP, gradually increasing as raw materials for crude drug pieces for Chinese medicine and for herbal products. Allow me to explain the progress in China business, specifically on Ping An Tsumura that was established June 8 of this year.

We acquired permits for food production and food distribution, launching test marketing of raw ginseng and raw materials for Yakushoku Dogen.

We have started with raw ginseng and 16 herbal products that use crude drugs as raw materials. Yakushoku Dogen means that medicine used to cure illnesses and food which we eat daily are both indispensable for nurturing life and maintaining health. They both stem from the same origins. With health industry expanding with China health plan 2030, the growth rate of this year is high, and we believe that needs for high-quality herbal products will be high going forward.

We have also started possibilities of sales collaboration with company outside of Ping An Insurance Group. Leveraging on the benefits of merger with Ping An Insurance, which has IoT and AI technologies, we are considering sales activities utilizing smartphones, which boast high penetration rate in China. We are building a business model in which customers can place an order on their smartphones and raw ginseng will be sent directly to the customer from a contracted cultivated land under own management. We are also contemplating the need of sales promotion material for 1.38 million insurance salespersons of Ping An Life Insurance and sales to those insurance policyholders who are highly health conscious. By applying the AI technology of Ping An, we have started automated selection process of crude drugs. In the future, we hope to reduce costs by automating the selection process, which requires high volume of manual labor today. As a next stage, we hope to acquire permits for pharmaceutical management, and quality and management standard called Good Supply Practice, GSP, to prepare ourselves for sales of crude drug pieces and traditional Chinese medicine. This is an image photograph of Ping An Tsumura Analytical Research Center. This is a tentative name. There is still a possibility that the design may be changed. We want the design to have a taste of Japan, so a Japanese construction company will design and build this building. We are aiming for start-up construction in June 2019 and completion in June 2020. As a state-of-the-art analytical research center, we hope to position this building as a source to send out information to embody Tsumura's quality and management and analytical technology, proactively welcoming visitors. It will be a built on land across the road and opposite SHENZHEN TSUMURA at Zone B, transferring the quality management and analytical functions of SHENZHEN TSUMURA. Not only crude drugs extract powders, but we will also accept crude drugs of our business partners. For example, China Medico Corporation. In the future, we will contract agricultural analysis of products, also -- and crude drugs, for example, teas, so as to grow this center from cost center to a profit center.

Next, I will take up the ESG activities of Tsumura. As a domestic crude drug cultivation measure, we have formed a capital and business alliance with MYFARM in April of this year. MYFARM business involves revitalizing abandoned farmland and generating revenues from agricultural businesses, training farmers through Agri-innovation schools and agricultural management schools. By including crude drug cultivation into primary industry, we believe we can make contributions, for example, in areas of stable income for farmers. Currently, we are cultivating Angelica acutiloba at a large scale and securing producers, and we are told that it is going very well. We hope to expand cultivation to a large scale as well as promoting automation of cultivation here in Japan.

Since fiscal year 2018, we have started publishing integrated reports instead of annual report and corporate reports, which integrates financial and nonfinancial information, clearly outlining our initiatives for pursuing sustainability and corporate value from a mid- to long-term perspective. Our initiatives include research on cultivation for the protection of wild crude resources and environmental protection measures; contribution to poor communities through crude drug cultivation contracts; meeting sustainable 0 emission targets with an aim of realizing recycling society; nature protection and forest making at Tsumura Toyota-no-mori, which we have been working on since 2008; community exchange programs with educational classes delivered to communities; and 100 years of proactive agriculture and forestry of Yubari, a corporate version of Furusato Nozei, a tax reduction given to taxpayers who donate to local municipalities. We are working as a group to contribute to the priority issues facing the planet, as outlined in [ SDTs ], and we'll continue to provide true-to-life

information. Next, I will talk about the full year performance forecast for fiscal year 2018. The values highlighted are the projected forecast. There are no changes. We have had a slow start in the first half, but we will be able to catch up after October. Net sales of JPY 120,500,000,000. Operating profit of JPY 17,500,000,000. Operating profit margin of 14.5%. Ordinary profit of JPY 18 billion and profit attributable to owners of parent of JPY 12,800,000,000. Dividends per share of JPY 64, EPS of JPY 167 and ROE of 6.4%.

Next, I want to talk about the return of profits to shareholders. The 3 policies remain unchanged, as shown here. The policy is to improving corporate values through capital investments in order to realize the continuous development and growth of Kampo, to consider medium- to long-term profit levels and cash flows as well as carry out a stable dividend. We aim to return profit to shareholders based on a consideration and review to ensure an optimal capital structure while flexibly implementing a share buyback program by comprehensively taking into account market trends and other factors. The dividend payout ratio is expected to be 38.2% based on our performance. Thank you.