PHC Holdings Corp
TSE:6523
Earnings Call Analysis
Q3-2024 Analysis
PHC Holdings Corp
Company leadership provided an overview of financial performance, facing a 3.2% year-on-year dip in revenue to JPY 256.7 billion, in the first 9 months of the year. This contraction was attributed largely to sales declines in blood glucose monitoring (BGM), reduced PCR testing, and specialized demand for ultra-low temperature freezers waning post-pandemic.
Net losses amounted to JPY 5.1 billion, with cash-based profits standing at JPY 9.9 billion. The losses were driven by various factors: decreasing sales, additional investments in the continuous glucose monitoring (CGM) business, one-time costs associated with structural reforms, notably in diabetes management, and impairment losses in the Life Science and In-Vitro Diagnostics (LSIM) business area, accounting for around JPY 14 billion.
The full-year revenue projection has been adjusted downward by JPY 4 billion to JPY 351.5 billion, impacted by market contraction in BGM and other factors slowing growth. Operating profit expectations are set at JPY 2.6 billion, a significant decrease from previous figures. Expected cash-based profit is also reduced to JPY 15.3 billion. The year-end dividend, however, remains at the steady rate of JPY 36 per share.
The Diabetes Management segment witnessed a 4% revenue decrease, with Healthcare Solutions also down by 4%. Some segments showed resilience; for example, the Healthcare IT Solutions business within Healthcare Solutions noted an 11.2% revenue increase. However, other sectors like LSI Medience faced a 9.7% revenue decrease. Diagnostics and Life Sciences saw an overall revenue reduction by 1.3%, despite growth in Epredia by 8.4%.
Region-wise, revenue in Japan saw a modest decrease of 2.4%, with more significant declines in the EU and North America by 9.4% and 1.5% respectively. The 'Other Regions' category, however, recorded a rise of 5.1%, marked by strengths in Diabetes Management in emerging markets like China.
Cash generation from operations was reported at JPY 28.5 billion. The company reinvested JPY 17.1 billion back into the business and used JPY 31.1 billion for financing activities, involving debt repayment and dividend funding. Capital expenditures and acquisitions cost the company JPY 10.7 billion and JPY 11.4 billion, respectively, but some of this outflow was balanced by proceeds from the sale of an investment.
The yen's weakening improved foreign revenue by approximately JPY 8.2 billion, but this boon was counteracted by declines in several business divisions. Notably, operating profits were severely hit by both impairment losses and reduced revenues across various sectors. Given these factors, the company has decided to maintain its previous foreign exchange rate assumptions for the euro and U.S. dollar in its fiscal forecast.
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[Interpreted] [indiscernible] today at the PHC Holdings Corporation Third Quarter Fiscal Year Ending March 31, 2024 Earnings Call. My name is [ Makisi ] from IR and Public Relations Department. I will be your moderator today. I would like to explain a few points about how to participate in this meeting. Simultaneous Japanese English interpretation is provided for this briefing. For audio, click on the Earth symbol at the bottom of the screen to open the menu. Please select Japanese English or off. Off is the original video without interpreter. For the language of presentation, you can select either Japanese or English from the view options pull down menu on top of the window. Please note that our presenters have their personal microphones muted due to the audio equipment setting. Please note that the audio will come from a different account than the presentator.Let me introduce today's presenters. Mr. Shoji Miyazaki, President and CEO, Chief Executive Officer; and Mr. Frederick Reidenbach, CFO, Chief Financial Officer. After their presentations, we will have time for questions and answers.Mr. Miyazaki the floor is yours.
[Interpreted] Good afternoon. I'm Miyazaki, President and CEO. Today, with regard to the third quarter results of FY '23 and forecast, I myself and Fred Reidenbach our CFO, will provide explanation and this is the content today. For the first 9 months of the year, revenue decreased by 3.2% year-on-year to JPY 256.7 billion. Despite the positive impact of foreign exchange rates mainly due to lower sales of BGM, lower sales of PCR testing and lower special demand for ULT freezes.Operating profit wise, due to revenue decline, increased investment in the CGM business, increased one-off costs such as structural reforms in diabetes management and other areas and the business structure related costs, mainly in Japan and impairment losses recorded in the LSIM business in the third quarter. In addition to Epredia, in the second quarter, we recorded a net loss of JPY 5.1 billion. [ Book ] attributable to the owners of the parent on a cash basis was JPY 9.9 billion. In terms of the comparison between the results of the first 9 months and the plan, both sales and profits were down.Next, I'd like to explain about the impairment loss in the LSIM business recorded in the third quarter. Impairment losses totaling approximately JPY 14 billion were recorded in the cash generating units of clinical testing and there is some IVD. In clinical testing, the plan was based on the assumption that the number of tests would recover to pre-COVID level. However, the gap between the actual performance and the plan led to the conclusion that there were signs of impairment.We also took into account to a certain extent, the impact expected from the next financial year onwards of the impropriety at LSI Medience. In LSI IVD, we also saw indication of impairment, mainly due to the expected increase in the discount rate applied to the LSIM business as a result of discrepancy between the actual and the plan in the clinical testing cash-generating unit. Impairment tests were conducted, respectively, which resulted in impairment losses being recorded in goodwill and the intangible assets.Next, I would like to explain our full year forecast for this fiscal year. Although we have not changed our FX assumptions, we have taken into account the results of the first 9 months and respective risks and have lowered our full year forecast for this year. Revenue is forecast at JPY 351.5 billion. This is due to the impact of market contraction in the BGM business, risk of lower-than-expected growth in the CGM business, delay in the recovery of demand for clinical testing business and the delay in the introduction of electronic prescriptions in the Healthcare IT Solutions business as well as the impact of a deteriorating market environment, mainly in Europe and the U.S. in the IVD Life Sciences segment. The forecast has been revised, therefore, downward by JPY 4 billion from the previous forecast. Operating profit is expected to be JPY 2.6 billion. The forecast includes one-off gains and losses such as impairment losses after the third quarter. By quarter, profitability is expected to improve in the fourth quarter compared to -- with the third quarter due to the effects of structural reforms and cost reductions, but profits are expected to decline significantly for the full year.Cash-based profit attributable to the owners of the parent is expected to decrease by JPY 8.1 billion to JPY 15.3 billion, taking into account a future increase in the interest expenses of JPY 2.1 billion. With regard to the dividend forecast, we recognize the importance of a stable dividend. And we will for now plan the same year-end dividend of JPY 36 per share, which makes a total amount of dividend annually of JPY 72 per share. The details of the figures will be explained later by our CFO.This is a slide that I presented at the earnings call in May. I will explain the update of each policy. This slide shows the measure of BGM and CGM in diabetes management.First, let me talk about BGM. Revenue for the first 9 months of the year was minus 8% in Europe and minus 10% in Americas compared to the previous year, while revenue in emerging markets increased by 3.5%. In Europe, revenue declined in some countries due to inventory adjustments, the impact of new insurance reimbursement for CGM and a market shift to the low-cost bidding channel. While in Americas, revenue in Canada increased, but revenue in the United States declined due to the termination of sales collaboration. In the emerging markets, China and India drove growth and increased sales. The streamlining of the organization, which has been ongoing was temporarily completed in the third quarter.Next, let me talk about CGM. The number of CGM users increased more than 50% year-on-year in the United States, mainly due to the marketing campaign launched last October, but the number of users, both in and outside the U.S. remained below expectations. The number of leads has tripled as a result of the U.S. marketing campaign. And though the number of current users is higher than before, we recognize the urgent need to improve the conversion rate from leads in order to achieve further growth.This month, [ Tandem's ] former chief commercial officer, joined the company as the Global CGM Business Manager, and we will continue to further strengthen our sales and marketing efforts. Regarding the CGM product pipeline, Senseonics has announced that it has completed data analysis of the ENHANCE clinical trial and plans to file an FDA application by the end of March for a new product, the 365-day sensor, which will enable the use of product with weekly calibration.Next, I will explain the progress of Epredia's earnings improvement. Revenue for the first 9 months of the fiscal year was up 3% year-on-year on a U.S. dollar basis but was affected by restricted capital investment, particularly in the United States, resulting in a decline in the revenue in the third quarter. In addition to the streamlining of the organization implemented at the end of the second quarter, we are continuing to reduce costs through operational improvements. Regarding the risk of additional impairment losses at Epredia, although there were no signs of impairment in the third quarter, we expect the current restraint on capital expenditures continue for some time, and we will closely monitor the fourth quarter results and interest rate trends when testing for impairment for the full year.Next, I will explain the progress of major measures to achieve the goals of the midterm plan. First, in Healthcare Solutions, WEMEX launched Medicom-CK II, an electronic medical record system for small and medium-sized general and nursing care hospitals and PharnesX, a system for insurance pharmacies. We will continue to contribute to medical DX through sales of new products.In telemedicine, we are promoting initiatives using Teladoc Health in Yamaguchi Prefecture and Toba City in Mie Prefecture and we will continue to contribute to improving access to local medical care.Next, in Diagnostics and Life Sciences, we have launched a new slide printer in the United States of Epredia. This is a state-of-the-art slide printer that improves the efficiency of tissue sample retrieval and allows for the inclusion of more identifying information on slides.Next, Biomedical established and began operating a life science equipment sales company in Indonesia. This will enable us to strengthen our market-oriented marketing function and capture customer needs as well as new business opportunities in Indonesia.Next. In January, we issued the PHC Group's first integrated report. This is one of the important initiatives in our sustainability management following the materiality announced in August last year, and it introduces our value creation process and sustainability initiatives, along with new key graphics of the PHC Group. I hope you enjoy reading it.This concludes my presentation on executive summary. Fred. The floor is yours.
Thank you, Miyazaki-san. In the next few slides, I will cover the same key areas I normally review. First, I'll walk you through the keys to our performance with an emphasis on the year-to-date results and then I will review our forecast for this fiscal year, which we are updating from our latest Q2 forecast. First, on Slide 14. We have included on the left side, our year-to-date results through Q3 and on the right side, our results for the third quarter, both are compared to the same period of the prior year. Up until the end of Q3, our revenue was JPY 256.7 billion. This is a decrease of JPY 8.4 billion from the JPY 265.1 billion reported in the prior year. The year-to-date average exchange rates were about JPY 155 to the euro and JPY 143 to the U.S. dollar. This is up from JPY 141 to the euro and JPY 136 to the U.S. dollar in the same period of the prior year. The weakening of the yen resulted in a favorable foreign exchange revenue impact of about JPY 8.2 billion. However, this benefit was offset by revenue decreases seen in several key business units, which I will go over later in the presentation.Our operating profit decreased by JPY 26.6 billion to a loss of JPY 5.1 billion. The drop is mainly due to the impairment losses recorded in Epredia in Q2 and LSI -- I am sorry, f LSI Medience in Q3, which Miyazaki-san just spoke about. In addition to the impairment, our year-to-date operating profit was affected by lower revenues in BGM, increased investments into CGM and higher onetime costs mostly related to the organizational restructuring which took place in the first half in diabetes management.Our profit before tax and our profit attributable to owners of the parent company both came in negative at JPY 13.8 billion and JPY 11.2 billion, respectively. The gap between operating profit and profit before tax is due to 2 reasons: first, we reported in financing costs and a JPY 3.8 billion FX valuation loss mostly in intercompany loans. This was principally due to the strengthening of the euro against the yen, with most of the charge recorded in Q1. And secondly, we recorded interest expense of about JPY 5.1 billion. After adding back onetime charges, our adjusted EBITDA decreased by JPY 15.6 billion to JPY 33.7 billion. Lastly, our cash-based net profit came in at JPY 9.9 billion, a decrease of $5.8 billion relative to prior year.Slide 15 shows the quarterly trend of our revenue and operating profit. As I've explained in previous quarters, Q1 tends to be our slowest quarter, and the numbers tend to increase from the second quarter to the end of the year. Spending from the U.S. and European customers typically gains momentum starting in July, reaching its peak during the October to December quarter with Japan-based customer spending, accelerating from our third quarter with the most significant growth occurring in our fourth quarter. This trend from our global customers resulted in revenue rising in Q3 by 5.1% when compared to Q2. Unfortunately, we did not see a similar trend in operating profit this year, mainly due to margin drops in our Diabetes Management and Healthcare Solutions segment.Slide 16 shows our results by segment. Our Diabetes Management segment reported revenue down 4% year-on-year to JPY 80.3 billion. Our Healthcare Solutions segment reported a 4% year-on-year decrease in revenue to JPY 95.2 billion. Within the segment, our Healthcare IT Solutions business reported an 11.2% year-on-year increase in revenue to JPY 30 billion, but this was offset by a 9.7% decrease in LSI Medience's revenue to JPY 65.2 billion. A portion though of the change within the segment was due to the transfer of LSI Medience's health checkup support business to WEMEX.Lastly, our Diagnostics and Life Sciences segment's revenue decreased 1.3% year-on-year to JPY 79.4 billion. Within this segment, our Epredia business reported revenues up 8.4% year-on-year to JPY 39.6 billion, but this growth was offset by a 9.3% year-on-year decrease in our biomedical businesses revenue, which came in at JPY 39.8 billion. This drop was mainly due to lower COVID related ULTs this year relative to last year.I will go over each segment in more detail in a little later in my presentation. First, on Slide 17, we have provided bridge charts to explain the year-to-date change in our revenue and operating profit relative to prior year. In the top chart, you can see that our revenue, excluding a positive COVID headwind of JPY 6.9 billion was down 3.8% year-on-year. The underlying growth seen in our Healthcare IT Solutions business was not enough to offset the weakness that we saw in our other business units.In the bottom chart, you can see that our operating profit, excluding a net positive COVID impact of JPY 2.7 billion decreased from a profit of JPY 8.7 billion to a loss of JPY 5.1 billion. This result was due to a combination of factors. First, we did see savings of about JPY 5.1 billion in our headquarter costs. Most of which relates to the early retirement program offered in Japan, the downsizing of the U.S. during Q1 of the previous fiscal year.Secondly, our Diagnostics and Life Sciences segment's operating profit was mostly flat, but included in the results was a profit on the sale of an investment, but most of that profit was offset by impairment taken out of Epredia, both of these items occurred in the first half of the year. These items, though, were offset by an JPY 18 billion drop in our Healthcare Solutions segment, most of which is from the impact of the impairment loss recorded in Q3 on LSI Medience and an JPY 11.1 billion drop in our Diabetes Management segment, most of which is due to an acceleration of the decline we have been seeing in our BGM business in the U.S. and Europe. Plus planned investments into CGM and increases of onetime costs of about JPY 2.8 billion relative to prior year.From here, I will explain the breakdown of our Q3 year-to-date revenue and operating profit by segment. First, Diabetes Management. Revenues in our Diabetes Management segment came in at JPY 80.3 billion. This is a decrease of 4% year-on-year despite positive FX impacts of JPY 3.7 billion. On the BGM side, we continue to see declines in sales in developed markets in Europe and in the U.S. due to determination of the sales collaboration, which we have been reporting on during the current and previous fiscal year, and sales of CGM product continued to trail behind plan. These drops though were partially offset by our IVD business, which continued to report growth in sales of both POCT and motorized drug delivery devices.The 50.2% decline in operating profit year-on-year from JPY 19.7 billion in the prior year, to JPY 8.8 billion in the current year is what drove the segment's operating profit margin down to 11%. This drop continues to be due to the same 4 factors we reported on last quarter. First, investments continue to be made to reinforce the sales force and marketing of our CGM product. Second, the business continues to see a change in the BGM sensor channel mix from developed to developing markets. Thirdly, there continues to be a change in product mix as we continue to see increased sales of lower-margin IBD and CGM product and reduced sales of higher-margin BGM product. And lastly, onetime expenses of JPY 3 billion were incurred to further restructure and streamline the BGM business, almost all of which was recorded in the first half of this year.And for your reference, as you can see in the bottom of the slide, the segment's year-to-date adjusted EBITDA was JPY 17.3 billion. This is down from JPY 27.8 billion reported in the prior year.Our Healthcare Solutions segment's revenue decrease of 4% was driven by LSI Medience, which saw a drop of 9.7% year-on-year with most of the drop due to decreasing COVID test counts. LSI Medience did continue to see increases in revenue from COVID-19 antigen test kits and IVD related product. However, these revenue streams were not enough to cover revenue loss on COVID test volumes. Part of the shortfall in the LSI Medience's revenue drop was offset by growth seen in our Healthcare IT Solutions business, which grew year-on-year by 11.2%.Our Healthcare IT business did continue to benefit in the first half of this year from the continued pressure on the industry by the Japanese government to complete the rollout of the online eligibility check system. And in Q3, the business did begin to see demand resulting from the start of the prescription operations, but this was much weaker than what was planned. The business also reported in organic revenue growth from the Fujifilm Healthcare Systems, electronic medical records and medical REIT systems-related business, which was acquired in October of this fiscal year.The drop in the segment's operating profit from JPY 8.5 billion to a loss of JPY 11.6 billion was mostly due to the impairment loss of JPY 14 billion reported in Q3 at LSI Medience as well as from impacts due to decreases in the volume and profitability of PCR, general and esoteric testing in LSI Medience. Unlike in prior periods, these drops were not offset by growth in the Healthcare IT Solutions business as we continue to increase SG&A expense in this business to accelerate investments into new products such as cloud services. Again, for your reference, you can see at the bottom of the slide, the segment's year-to-date adjusted EBITDA was JPY 11.3 billion. This is down from JPY 17.4 billion reported in the prior year.Finally, our Diagnostics and Life Sciences segments reported revenue of JPY 79.4 billion. This decreased 1.3% year-on-year despite a positive FX benefit of JPY 4.3 billion. Excluding this benefit, the segment's revenue came in at JPY 75.1 billion. Within the segment, our biomedical business continued to see increasing sales for products unrelated to COVID from its life science research clients, and they continue to be successful in raising prices. However, these positives were not enough to offset lower demand for COVID-19 related ULT shipments relative to prior year or the impact of restrained capital investment and inventory adjustments made by the businesses' customers due to concerns over inflation and a potential global economic slowdown.Our Epredia business within this segment faced the same impacts from restrained capital investments and inventory adjustments on its capital equipment side. But this weakness was offset by continued growth in sales of consumable products. The business also saw a rebound from lost sales due to the factory lockdown in Shanghai in the previous year, benefits from positive FX impacts and price increases and inorganic revenue from M&A transactions. The segment's year-to-date operating profit came in at JPY 4.9 billion. This is down 21.3% from prior year.During the year, both the Biomedical and Epredia businesses continued to work to pass on increased costs to the product selling prices, but not all cost increases could be offset with higher prices. This increase in cost, coupled with lower COVID demand for higher-margin ULT freezers compared to prior year were the main factors driving down the segment's operating profit, excluding onetime profits and losses. We do again want to point out that included in the segment's year-to-date results is a net JPY 2.5 billion onetime profit recorded on the sale of an investment against which we recorded an impairment loss of JPY 2.1 billion on the Epredia business, both of which, again, were reported in the first half of the year.Again, finally, for your reference, you can see at the bottom of the slide, the segment's year-to-date adjusted EBITDA came in at JPY 11.3 billion. This is a decrease from the JPY 12.1 billion reported in the prior year.Slide 21 shows the revenue breakdown by region. Japan reported revenue of JPY 107.5 billion. This was down 2.4% versus prior year, with the shortfall mainly due to the decline in PCR testing in LSI Medience. The EU region reported revenue of JPY 62.3 billion, a year-on-year decrease of 9.4%. The drop in sales was mostly due to weaker sales in Diabetes Management's mature markets in the EU region and in our Biomedical business, which delivered fewer ULTs this year relative to prior year due to special demand.The North America region recorded revenue of JPY 55.7 billion, down 1.5% year-on-year. Like in the EU, the drop was mostly due to the same 2 factors. First, weaker diabetes management sales in the U.S. due to the termination -- I'm sorry, due to the termination of the collaboration agreement we have been reporting on. And secondly, from lower biomedical sales due to restrained CapEx spend by our customers.Lastly, sales in other regions, which included APAC, the Middle East and Africa rose to JPY 31.2 billion, an increase of 5.1% year-on-year. In this region, we saw strength in Diabetes Management in emerging markets such as China and a rebound in our Epredia business from lost sales due to the factory lockdown in Shanghai in the previous year.Slide 22 provides a reconciliation between operating profit and adjusted EBITDA and a conversion of IFRS-related profit attributable to owners of the parent to a cash basis. As shown on the top of this slide, the only material items between operating profit and EBITDA continue to be depreciation and impairment. Depreciation continues to decrease year-on-year as capitalized intangible assets in our Diabetes Management segment continued to become fully amortized. The JPY 16.1 billion impairment is made up of the JPY 2.1 billion impairment recorded in Q2 at Epredia and the JPY 14 billion impairment recorded in Q3 at LSI Medience, which Miyazaki-san discussed earlier.Between EBITDA and adjusted EBITDA, I would like to point out the 2 largest items. First, there was a JPY 3 billion charge related to restructuring in the Diabetes Management segment. And secondly, there was a net profit of JPY 2.5 billion recorded in the Diagnostics and Life Sciences segment on the sale of one of our investments. Other than these items, there were no other material onetime items to report on in our Q3 year-to-date results.On the bottom of the slide, we have disclosed the profit attributable to owners of the parent company on a cash basis. Adjustments from the IFRS presentation include the amortization expense of M&A-related intangible fixed assets of approximately JPY 8.1 billion and the JPY 16.1 billion impairment charge recorded on Epredia and LSI Medience. After adjusting for these 2 items and the related tax benefit, our year-to-date cash-based profit came in at approximately JPY 9.9 billion, lower than the JPY 15.7 billion reported in the same period of previous fiscal year. The lower cash-based profit is mainly due to increased FX losses and the lower operating result.Let's now move on to the balance sheet on Slide 23. On the asset side of the balance sheet, other than the JPY 17 billion decrease in cash to JPY 43.9 billion. There were no other material changes in our total current or noncurrent assets. I will go over a bridge explaining the decrease in cash when we get to Slide 24. Like on the asset side of the balance sheet, there was next to no changes in our total current or noncurrent liabilities other than the change seen in our total loans payable. The change in the long-term portions of loans payable from JPY 262.4 billion to JPY 252.4 billion was due to the refinancing of the U.S. dollar loan to yen in Q1 and repayments of borrowing. But these changes were partially offset by an increase in the carrying value of loans mainly due to currency translation.Lastly, you can see that the decrease in our trailing 12 months adjusted EBITDA versus prior year's results caused our net leverage ratio to rise from 3.6x at the end of March 2023 to 4.9x at the end of Q3, and our gross leverage ratio to rise from 4.5x to 5.8x.Slide 24 shows the bridge explaining the JPY 17 billion decrease in cash from JPY 60.9 billion to JPY 43.9 billion. In summary, our operations generated cash of about JPY 28.5 billion. Of this, about JPY 17.1 billion was reinvested in the business and JPY 31.1 billion was used in financing activities, of which JPY 15 billion was used to repay debt and JPY 8.8 billion to fund our fiscal '22 year-end and fiscal '23 interim dividends.In investing activities, CapEx and payments for acquisitions of subsidiaries came in at JPY 10.7 billion and JPY 11.4 billion, respectively. But these payments were partially offset investing activities by proceeds from the sale of an investment. From here, I'd like to explain the updated forecast for fiscal '23. As Miyazaki-san noted earlier, we are lowering all key metrics in our fiscal '23 forecast. Despite the take down, our full year dividend remains unchanged. We have also decided to hold our average FX assumptions to our forecast -- I'm sorry, in our forecast to JPY 155 to the euro and JPY 144 to the U.S. dollar, given that the year-to-date average actual rates are almost exactly equal to the forecast rates.On Slide 27 and 28, we have provided bridge charts to explain the breakdown of the movement in our revenue and operating profit between our November and our revised forecast. I will go over the operating profit change briefly in a few minutes. But on the revenue side, we are lowering the forecast by JPY 4 billion to JPY 361.5 billion. This takedown reflects the impact of the market decline we are seeing in the BGM business and slower growth in CGM relative to our prior forecast. In Healthcare Solutions, we have factored in delays in demand recovery of testing in the clinical testing business in LSI medians and delays in the installation of our electronic prescription system in WEMEX. Lastly, in Diagnostics and Life Sciences, we have factored in the market softness we are seeing in Europe and the U.S. related to CapEx spend.We are lowering our operating profit by JPY 24.5 billion to JPY 2.6 billion for the year. Compared to prior year, this is down JPY 17.4 billion. The JPY 24.5 billion take down is comprised of the JPY 14 billion impairment charge taken in LSI Medience and a JPY 10.5 billion revision in operating profit, principally due to additional weakness we are seeing in Diabetes Management and Healthcare Solutions.Profit before tax decreased by JPY 26.6 billion to JPY 9.8 billion. This takedown is made up of JPY 24.5 billion, operating profit takedown plus a JPY 2 billion increase in interest expense, all of which relates to the accelerated amortization of upfront costs as required under our loan covenants.We are taking out a profit attributable to owners of the parent by JPY 21.3 billion. This takedown is comprised of the above decrease in profit before tax of JPY 26.6 billion, offset by corresponding tax on these adjustments in the amount of JPY 5.3 billion. The effective tax rates on the adjustments is lower than our group average of approximately 30% as a large portion of the impairment is not deductible for tax purposes.Lastly, we are lowering our cash base profit by JPY 8.1 billion to JPY 15.3 billion to reflect the business operating profit takedown of JPY 10.5 billion and the interest adjustment of JPY 2.1 billion, net of tax, at the group's effective tax rate of approximately 30%. Despite the takedown in the cash-based net income, we have decided to keep our full year dividend forecast at JPY 72 per share.Slide 27 shows the bridge chart, which explains the change in revenue. In the interest of time, I will skip detailed explanations for this bridge, but I will be happy to answer questions later.On Slide 28, we have provided a bridge for operating profit on the left side and on the right side of bridge for profit attributable to owners of the parent. We are forecasting a JPY 24.5 billion drop in operating profit from JPY 27.1 billion to JPY 2.6 billion and a drop in profit attributable to owners of the parent from JPY 13.7 billion to a net loss of JPY 7.6 billion.Looking at the operating profit, you can see that in the Diabetes Management segment, operating profit is now forecast to be lower than our November forecast by JPY 6.3 billion. This takedown is due to an acceleration of the decline in our BGM business in mature European markets, plus lower profitability in our CGM business due to sales coming in lower than planned.The JPY 17.3 billion drop in operating profits we are forecasting in our Healthcare Solutions segment is mostly driven by the JPY 14 billion impairment charge we took in Q3 on LSI Medience, but a portion does relate to lower margins in this business unit as general and esoteric testing is now forecast to come in lower than previous planned. Plus, we have also assumed a slower-than-planned rollout of the electronic prescription system in WEMEX. I will skip detailed explanations for the right side of the bridge, but I will be happy to answer any questions during the Q&A session.On Slide 29, we have provided forecast by segments as this is similar to what was just explained on the previous slides, I will also skip this slide in the interest of time. Finally, on Slide 30, we have included a summary FX sensitivity guide. This remains unchanged since the May presentation. But like in the previous quarters, I do want to again point out that this analysis is based on the original budget, which has differed from actual results, especially as it relates to the U.S. operating profit movement.So I will end my presentation here and turn the mic back to Miyazaki-san for the next section. But I do look forward to answering any questions you may have when we get to the Q&A session. Thank you.
[Interpreted] Firstly, I would like to explain about the change of Representative Director of this company. Today, the Board resolved that as of 1st of April, Kyoko Deguchi will assume the position of CEO of PHC Holdings Ms. Deguchi is an Independent External Director of this company, and she has 20 years -- more than 20 years of experience in healthcare and chemicals industry. And he has served as a presenter of the Japanese company of Global Healthcare and also senior executive positions in finance as well as marketing and also has been serving as an external board director for many listed and unlisted companies. I will leave the position of CEO at the end of March. Looking back in November '22, we announced value [ inflation ] plan, a midterm plan, defining growth areas, and we have been working on the implementation of value-based healthcare and the diagnostics as well as drug development support, reorganization, electronic healthcare, medical accounting, we have made some acquisition and produced some results, but the performance has been underperforming the plan because of the change in the environment.And as we announced last December, we had a impropriety in terms of quality control at LSI Medience, which is one of our subsidiaries. External Investigation Committee is still continuing with the investigation in order to identify the facts and analyze the root cause to put place -- in place plans to stop this from happening again. But as a top of the healthcare company, I feel keenly the responsibility for what has happened because we should be responsible for health and life of people through our products and services.We still need time to achieve expected results for growth plan as well. And we believe that partial revision of the numerical targets for the '25 objective for the midterm plan will have to be revisited. And internally, we are discussing this. And after the new President assumes the position, we will explain the specifics through our earnings announcements. I will stay as a Director until March AGM -- sorry, June AGM. And meanwhile, I'll continue to support Ms. Deguchi fully in order to help for the growth and the expansion of PHC Group. Under the new management, starting from April, the group will continue to pursue sustainable growth. And we would like to ask for your continued support. That's all from me.
[Interpreted] We will now move on to Q&A session.Koichiro Sato, Executive Vice President and COO, Chief Operating Officer; and Kaiju Yamaguchi, CSO, Chief Strategy Officer, will join us as respondents. If you have a question, please click on the "raise your hand" button at the bottom of the screen. When I read your name on the screen, the microphone settling is changed. Once the microphone is turned on, please state your name and your affiliation before asking questions. Each person is limited to 1 or 2 questions. Please keep your questions as brief as possible. If you have a question, please raise your hand. I will call on the particular [ hands ] in the order in which I see them raise their hands.Mr. Shinnosuke Tokumoto, please mute and ask a question. Mr. Shinnosuke Tokumoto do you hear me?
[Interpreted] Yes, I can hear you. The first question, the Representative Director will be changed. That's what you just announced in the past 2 years. Thank you very much for your efforts. About the change? That's my question. Why this timing? Are there any meaning as to the timing of the change? And when we see the past track record, in 2020, John Marotta became CEO and in 2022 April, Mr. Miyazaki and 2 years later now, person will be changed. So every 2 years, it seems that the management is changed and [ VCP ] figures are being repeatedly reviewed. So what are the issues that the company is faced with? And what is the root cause problem of the company? The timing of the change? That's my first question as well as the frequent changes of the management in the past years.
[Interpreted] Thank you for the question. With regard to the past issues, I refrain from making comments. But regarding myself, of course, I am the Representative Director and the Director and every year, we make a contract. So every year, I thought that it was a challenge for me. However, in the past 2 years, continuously in terms of the numerical results, these were short of the budgets. And based on these results, we have to review the VCP or our Value Creation Plan. On top of that, personally speaking, as I have mentioned, we have the LSIM quality issue, and I believe that I have the responsibility myself. Amongst that backdrop, the timing of the change 2 years ago, I became the President and there was an unexpected thing happened. And at that time, I had to do the transition, but the smooth transition was a challenge. So this time, I did not want to repeat the mistake. So as for the timing, I wanted the new President to be able to begin from the new fiscal year. That is why in order for the smooth transition and the transfer at the end of November, we put that issue to the BOD and then that was put to the NCC committee and then the successor was determined and then today, the announcement was made. Did I answer your question?
[Interpreted] Yes, I understood it very well. One more question. About your performance, the management US Europe, I believe that the things worsening in Diabetes Management, particularly in PGM. In 2024, in Europe, you will focus on CGM and you will accelerate the CGM sales. But for that, the investment is needed. Is there going to be more investment in 2024? Or because in the past for the fourth quarter in a row, it is a low level sales, lower profit. So you refrain from the investment. What about in 2024, the [indiscernible] management, including the advanced investment, yes or no, included that. What is your strategy?
[Interpreted] Thank you for the question. With regard to CGM, we have the BGM drop, and we want to compensate that drop with CGM. That is why we are focusing on CGM. In 2024, the direction, just as you mentioned, we are making the business plan. Basically speaking, up until now, we have been focusing on the inside sales and the focus on marketing. This time, we have the Brian Hansen to be the CGM head. That is why we are determined and continue to make efforts in the CGM that continue to be our direction in 2024. On the other hand, the BGM profitability is down, that's for sure. So how to maximally and optimally make the investment to save the cost for better sales, that's a balance, and we will also focus on that.
[Interpreted] Next, Mr. Seiji Wakao, please meet yourself and ask your question. Mr. Wakao.
[Interpreted] Can you hear me?
[Interpreted] Yes, we can hear you.
[Interpreted] I have a question about Diabetes Management. Looking at the 3 months third quarter revenue is not that bad, but adjusted EBITDA is quite low. It looks like the margin is quite weak. I understand there is a shrinkage in Europe. Is this margin deterioration due to SG&A increase? And also in the fourth quarter, the margin will not improve because you want to add more SG&A. Is that the correct understanding? So revenue versus adjusted EBITDA, I don't understand the relationship between those 2, please explain.
I think it's -- the drop is really due to several factors. The first factor that we are seeing is the investment that we are making in CGM, we're not seeing the revenue pull-through that we initially had assumed in the forecast. So that is feeding directly into the margin line. Also in CGM, because we have to order upfront, there was some inventory scrapping that caused the GP margin to drop. The other area that we are seeing because of the weakness that was much greater than what we had assumed in the previous forecast in Europe. What we are seeing is that there's pressure on the GP margin due to the manufacturing costs that we have down in Matsuyama. That, coupled with the migration of the sales away from higher-margin markets into lower-margin markets, as Miyazaki-san pointed up front, in India and China, where the margins are much lower and to a lesser extent in Russia. As a result, all of that came together in Q3 and into Q4 and forecast. But because of that, you have a lower margin than what we had initially assumed. I hope that answers the question Wakao-san.
[Interpreted] And also SG&A is worse because of the FX impact. Yes, that's very clear.
[Interpreted] Mr. Kazuki Furuyama-san, please, unmute and ask your question.
[Interpreted] I have 2 questions to you. The first question, at the end of the presentation, you said that partially you need to overhaul the VCP or Value Creation Plan. When you issued the VCP, you presented [ things by BU ] and you had the target, numerical target. So specifically, which target and the numerical figures, you think that you need to revise as far as you can share with us, please explain.
[Interpreted] Yes, I will explain and answer your question. With regard to the numerical targets, just as we have explained regarding the progress of the business, that's below the plan with regard to the figures, I believe that we need to review all of these numerical targets. And at the same time, we need to renew the capital allocation and think anew.
[Interpreted] Could you augment our capital allocation, including the dividend, you have the shareholder return and that shareholder return will also be reviewed.
[Interpreted] We have the current business performance and next year's business plan. All of them will be considered to reconsider the capital allocation, including the return to the shareholders.
[Interpreted] I have the second question that's regarding LSIM, the quality issue. This time, LSI Medience, you experienced impairment and this irregularity is part of the reason. A part of what is in the impairment, what is the degree of the impact of this quality issue? And what will be regulators impact on the company's top sales and bottom sales as far as you can share with us the information?
[Interpreted] Yes. LSI Medience quality issue, just as Miyazaki mentioned, and the third-party investigation team is investigating. And the impact on the performance, that's still under investigation. In many areas those require bidding because of this irregularity and because of the relationships with the customers, we may be barred from joining the bid. So that's one impact. With regard to that, we need to have further investigation so that, that impact can be reflected in BP or business plan.
[Interpreted] Mr. Yotaro Hayashi, please mute yourself and ask your question.
[Interpreted] I have a question -- can you hear me?
[Interpreted] Yes, we can hear you.
[Interpreted] Adjusted EBITDA versus EBITDA and structural reform cost is in between those 2. And the performance until the third quarter is probably according to plan in terms of expenses for structural reform. But the fourth quarter and beyond, do we have to expect the same cost? Or what is the estimate of this structural reform cost for this fiscal year and next fiscal year? Do we still need to account for that for the next fiscal year? That's my question.
Thank you, Hayashi-san. Let me try to answer that. First, as it relates to this year, if you look through the forecast, you will see in the forecast that we're not planning any really large onetime expenses. Most of these expenses were in Q1 and Q2. So for the rest of this year, there really is nothing large that we're expecting to come through. However, as it relates to next year, we are in the process right now of building the business plan for next year. To the extent that we do see gaps between the targets that we're setting and the actual bill, there is the probability that there may have to be further restructuring with some of the business units. However it's hard for me at this point to call out a number. Wait until we announced the plan for next year probably in May time frame, we'll have a better idea again.
[Interpreted] The time is limited. So we will like to limit the person to answer those who are already raised hand. Akinori Ueda, please unmute and ask your question.
[Interpreted] Due to the interest of time, I would like to ask 2 questions at the same time. The first question, you said that you are revising the forecast and the sales down, but more take down in adjusted EBITDA, cost of goods sold, or SG&A? What were the reasons for the more takedown for adjusted EBITDA than the revenue? The second is your thinking on dividend. You said capital allocation policy will be reviewed up until now you presented to us the stable dividend and your policy. So does that mean that you changed your policy over stable dividend? That's question number 2.
I will take the first call, and then n I'll turn it over to [ Yungut-san ] who will take the dividend question. As it relates to the [indiscernible] to the operating profit question. We took the revenue down about JPY 4 billion, and the business operating profit was taken down by roughly JPY 10.5 billion. On the revenue, ordinarily, we would expect to see roughly a 40% flow-through, which would be about JPY 1.8 billion to JPY 1.9 billion takedown in the operating profit. The difference between the JPY 10.5 billion and the JPY 1.8 billion is really made up of 3 areas: first, in CGM. CGM we're taking it down by roughly JPY 2.6 billion. As I mentioned earlier, there was scrapping that we had to take into consideration in the forecast just because we ordered product that has a shelf life and the sales did not come in. So we're stuck with some scrapping. Plus because sales aren't coming in, the fixed cost was there. So it's probably about a JPY 2.6 billion hit related to CGM. In addition, on the BGM side, BGM, because of the migration of the business into more emerging markets and a weakness in the developed markets, there was a margin hit of about JPY 2.3 billion in the BGM side. The last area really where we saw a hit really was in the Healthcare Solutions. Healthcare Solutions really came from 2 areas. On the clinical, the clinical tests are coming in lower than what we had initially planned. Part of that is due to the compliance issue. But in addition to that, it really is the overall market in Japan. And I think our -- the other comps are having the same problem. The beds really are just not filling up in the hospital. So as a result, the test count is coming down, but our fixed costs, we can't bring the fixed cost down. So there's a hit on that. And the other area was e-prescription. E-prescription, the rollout of e-prescription had 100% flow through much higher margin. It's almost 100% margin on that product. That's coming in much lower. So the combination of those 2 in Healthcare Solutions was about JPY 3.2 billion. So again, of the JPY 10.5 billion, JPY 1.8 billion is the revenue flow-through. JPY 2.3 billion is really on the BGM side. CGM was about JPY 2.6 billion and then clinical testing and e-prescriptions were about JPY 3.2 billion. Let me turn the call over to Yungut-san, you can take the question on the dividend.
[Interpreted] I will have to answer about the dividend. As we have been mentioning, policy has been stable dividend, but we consider the current performance and the fourth quarter things will be coming, and we need to do the business plan for '24 and we need to review the VCP. So considering all of them, including the current performance, we will review things, including stable dividend payment.
[Interpreted] Thank you for all the questions. That concludes this earnings announcement. Thank you very much again for joining us despite your very busy schedule today.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]