PHC Holdings Corporation (6523) Q2 2027 Earnings Call Transcript

Good afternoon, everyone. I'm Deguchi, the President and CEO. Today, I will present an overview of our financial results for the second quarter of the fiscal year ending in March 2027, as well as our full-year earnings forecast. This time, we have revised upward our full-year forecast. I will present the executive summary, and our CFO, Yamaguchi, will explain the second quarter financial results and the full-year earnings forecast. Here are the financial highlights for the first half of the fiscal year. Continuing from the first quarter, we significantly exceeded both our internal targets and last year's figures. Revenue was 180 billion yen, representing a year-on-year increase of 3.8 percent, or 6.6 billion yen. In diabetes management, BGM maintained a strong performance from the previous year despite market contraction in developed countries. This offset the revenue decline resulting from the CGM divestiture, achieving a 12.3% increase in revenue. In the healthcare IT solutions, revenue declined due to service supply shortages coming from the recent surge in demand for AI-related semiconductors. The life sciences segment saw revenue growth, primarily in U.S. and Asia, returning to year-on-year growth, even excluding the impact of foreign exchange rates. Operating income was 19.4 billion yen, an increase of 87.3 percent, or 9.1 billion yen year-on-year. This increase was driven by higher revenue from BGM, particularly in the highly profitable European market. The impact of U.S. tariff refunds and improvements resulting from the CGM divestiture offset the decline in profit from healthcare solutions. This led to a significant improvement in profit margins. The company-wide operating profit margin was 10.8%, improvement of 4.8 percentage points compared to the previous year. Both revenue and operating income reached record highs for the first half of the fiscal year. Net income attributable to owners of parent increased by 13.9 million yen. In addition to positive impact of higher operating income, this increase was driven by foreign exchange gains in the current period. The previous year's period was significantly impacted by foreign exchange losses. The interim dividend was set at 21 yen per share as previously forecasted. Next is a full year earnings forecast. Based on the results through the second quarter and current exchange rates, we are increasing our full-year earnings forecast by 6.3 billion yen for revenue and 6.0 billion yen for operating income. We have updated the exchange rates to 182 yen per euro and 159 yen per U.S. dollar. Revenue reflects strong first-half performance in diabetes management, including the positive impact of exchange rate revisions. We are revising the forecast upward to 11.4 billion yen. This will offset the revenue decline resulting from the CGM divestiture, and we expect revenue to increase year-on-year. In healthcare solutions, we expect a decline in revenue due to server supply shortages. However, in diagnostics and life sciences, we have revised our forecast upward, reflecting the strong first-half performance of the life sciences business and the positive impact of exchange rate changes. We need to continue to monitor the persistently soft demand for equipment in the pathology business during the second half. However, we expect the life sciences business, where a recovery in the U.S. is becoming apparent, to exceed expectations. Regarding operating profit, Healthcare Solutions has revised its focus downward to account for the impact of lower revenue. However, diabetes management has revised its focus upward by 8.1 billion yen with a full-year operating profit margin of 31%. This is based on positive revenue growth from blood glucose monitoring, or BGM, in highly profitable markets such as Europe and the U.S. in the first half. We also anticipate a 1.4 billion yen increase in profit for diagnostic licenses due to improved profitability driven by the impact of tariff refunds and price revisions in the first half. As a result, we project the company-wide operating profit of 33.0 billion yen with an operating profit margin of 9%. Regarding financial income and expenses, we have reflected foreign exchange gains recorded in the first half and increase in interest expenses resulting from recent interest rate hikes. Currently, consequently, profit attributable to owners of Perrin is projected at 18.0 billion yen, an upward revision of 2.6 billion yen. Regarding dividend, we will maintain the year-end dividend at 21 yen. The annual dividend plus share remains unchanged at 42 yen. Next, the progress of our businesses. Ascensia, which operates the diabetes management business, has entered into a business alliance with SAVA technologies. The purpose is to re-enter the growing CGM market by supporting the launch and sale of the CGM that adopts the microsensor technology developed by SAVA. The microsensor developed by server is expected to enable continuous glucose monitoring that is less invasive and lower in price compared with existing CGMs. Furthermore, it is designed to continuously monitor biomarkers and molecules other than glucose as well, and it is a product that is expected to be utilized in the future as a new method for monitoring health conditions and diseases more broadly. Under this agreement, Asensia, which boasts a high recognition in the diabetes care field and has a strong business base in Europe, will become the exclusive distribution partner first in Europe. We assume that we will be able to develop the business by utilizing the channels of BGM, our current core business, and existing insurance reimbursement systems, and this is a strategy aimed at the CGM rollout that makes better use of our strengths. The product is scheduled to be launched in Europe after SAVA obtains CE marking, and we expect sales to begin as early as the fourth quarter of FY2027. In the diagnostics and life sciences field, Epradia, which operates the pathology business, has formed a business alliance with Lees NHS, a large hospital group in the UK that is also one of Europe's leading digital pathology research centres. IPRADIA will utilize this technology to develop new pathology glass slides and promote the global rollout of this advanced technology. In addition, in terms of IR activities, we were featured in the Securities Analysts Association of Japan's Good Disclosure Practices. We received recognition for the initiatives we have continued to date, such as enhancing information disclosure and holding briefings to promote understanding of businesses. We will continue to strive to enhance our communication of information going forward. We published this fiscal year's edition of our integrated report last month with the theme visualizing our story. The report visualizes and explains in depth our strengths of precision technology through a systematic overview by our CTO, Chief Technology Officer, a feature on manufacturing at the Matsuyama plant, and introductions to the technologies of each businesses. We'd be grateful if you'd take the time to read it. This concludes my explanation. I will now hand over to Yamaguchi, our CFO.

First, I will explain the results for the second quarter. Then, I will explain the full year earnings forecast, which we have revised this time. First, here is an overview of our second quarter results. Cumulative revenue increased 3.8% year-on-year to 180 billion yen, while operating income rose 87.3% to 19.4 billion yen. This marks a significant increase in profit for the second consecutive quarter. Revenue increased by 6.6 billion yen and operating income rose by 9.1 billion yen. The impact of the CGM divestiture carried out in the previous fiscal year resulted in 1.9 billion yen decrease in revenue but 4.2 billion yen increase in operating profit. Additionally, the effect of U.S. tariff refunds improved operating profit margins across all business segments except healthcare IT solutions. Pre-tax profit also increased significantly by 16.1 billion yen to reach 17.0 billion yen. In addition to the increase in operating profit, the main factor was 6.8 billion yen exchange loss in the previous year turned into 1.0 billion yen exchange gain in the current year. Profit attributable to owners of parent increased by 13.9 billion yen to reach 13.3 billion yen. EBITDA increased by 8.9 billion yen year-on-year. Adjusted EBITDA, which excludes one-time gains and expenses, increased by 9.2 billion yen to reach 33.5 billion yen. Favorable exchange rates played a role, but as in the first quarter, all metrics exceeded both previous year figures and internal targets. The exchange rates applied for the second quarter war, 184 yen to euro and 159 yen to U.S. dollar, both of which represent significant yen depreciation from the previous year. This page shows quarterly trends in revenue and operating profit. Revenue declined slightly compared to last year and last quarter, primarily due to a decrease in healthcare IT solutions revenue. Although BGM revenue decreased compared to first quarter, which benefited from time difference, Demand remained strong, particularly in Europe. Additionally, the life sciences segment, which is recovering in the U.S., experienced revenue growth compared to the previous year and previous quarter. Operating income increased significantly year-on-year due to strong performance in BGM and life sciences, as well as the impact of CGM divestiture and U.S. tariff refunds. However, compared to first quarter, operating income decreased. I will explain the situation regarding healthcare IT solutions in more detail later. This shows revenue by segment and business. We have been implementing reorganization within diagnostics and life sciences, and previous fiscal year's figures have been restated. Please refer to page 31 of the appendix for details. Despite the revenue decline resulting from the divestiture of the CGM business, diabetes management revenue increased by 12.3% year-on-year and by 2.3%, even excluding the impact of exchange rates. Revenue in blood glucose monitoring increased due to continuous strong performance in Europe and emerging markets. Despite the ongoing market contraction in developed markets, the segment continued to perform well by gaining shares, including impact of timing difference. In the first quarter, BGM revenue alone increased by 6.4% year-on-year, excluding foreign exchange effects. In healthcare solutions, clinical testing and CLRO performed well, but were not able to offset the decline in healthcare IT solutions revenue, resulting in 5% overall decrease. The diagnostics and life sciences saw 6% increase in revenue. Demand for equipment remained stagnant, but sales of consumables were strong, and there was positive impact of currency. The life sciences segment performed particularly well in the U.S. and Asia, resulting in 2.3% growth even after excluding foreign exchange effects. Although the life sciences equipment segment has been affected by market stagnation in the U.S. since fiscal year 2023, we believe signs of recovery are finally emerging. I will now explain the breakdown of year-on-year changes. The graph above shows revenue. In this period, the yen weakened against both the euro and the dollar, resulting in a positive exchange impact of 9.3 billion yen, while diabetes management, clinical testing, CRO, life sciences saw revenue growth. Significant revenue decline in pathology and healthcare IT solutions led to a 1.5% decrease on an exchange-adjusted basis. The graph below shows operating income. Although healthcare solutions experienced a decline in operating income, diabetes management posted a substantial increase. Additionally, diagnostics and life sciences profits increased. This resulted in a 76.2% increase in operating income even without the effects of foreign exchange. Now I will explain the results by segment. First is diabetes management. Revenue increased by 12.3% year-on-year, and operating profit rose by a significant 99%. The operating profit margin remained high at 34%. While market construction in developed countries and the shift toward low price channels continue and CGM divestiture impacted revenue, sales in Europe remained strong, particularly in Germany, Italy, and Greece. Additionally, growth in emerging markets was driven by recovery in the Middle East and contributions from Algeria, where local production began last year. Combined with favorable foreign exchange effects, this resulted in double-digit revenue growth. Operating income increased significantly due to higher revenue, improved sales mix driven by revenue growth in developed countries, primarily in Europe, cost reductions resulting from structural reforms, reduced losses from the CGM divestiture, and favorable foreign exchange rates. Even excluding the impact of the CM-type vestiture and foreign exchange effects, operating income increased by 4.1 billion yen. Next is Healthcare Solutions. Revenue decreased by 5% year-on-year. Operating income fell by 84.5%, and operating margin deteriorated from 4.7% to 0.8% from the previous year. In clinical testing, revenue increased due to rise in general testing and higher sales in genetics field, which is the company focus area, as well as the progress in optimizing sales prices. CRO revenue increased due to rise in the order backlog and the completion of a large-scale safety trial. On the other hand, the healthcare IT solutions saw a 19% decline in revenue. Although sales of electronic prescriptions increased, sales of electronic medical records decreased. In selling on-premise electronic medical records, we deliver a package consisting of software and service for data storage and processing. A surge in demand for AI-related semiconductors has caused a server supply shortage, resulting in delays in selling electronic medical records to customers. Despite increase in electronic prescription sales, progress in optimizing clinical testing prices and improvements in the CRO segment, operating income declined significantly. This was largely due to the revenue decline in the healthcare IT solutions and one-time expenses related to retirement benefits resulting from last year's merger with Wemex and its subsidiaries. Finally, diagnostics and life sciences revenue increased by 6 percent, while operating profit rose significantly by 153.5 percent. The operating profit margin was 6.5 percent. In pathology business, sales of consumables remained steady across all regions, and price divisions had a positive effect. However, revenue declined without favorable impact of exchange rates due to stagnant demand for equipment and absence of a major digital pathology contract this year. Life science business experienced revenue growth driven by robust life science equipment sales and favorable for exchange rates. Sales of life science equipment was strong in the Americas, Asia, and Japan. Despite continued government budget constraints, sales to pharmaceutical, biotech, and hospital sectors were strong in the United States. IVD revenue declined due to lower sales in the Americas, despite strong performance in Europe and Asia. Please refer to page 27 for breakdown of life sciences revenue according to the previous classification. Operating income increased due to improved profitability driven by higher life sciences revenue, price versions, cost-cutting measures, and the impact of U.S. tariff refunds, the favorable exchange rate.

This is revenue by region, including FX impact. Revenue increased in all regions except Japan. Japan saw a decrease in revenue due to the impact of healthcare IT solutions. Europe saw an increase in revenue due to the strong performance of diabetes management. North America saw an increase in revenue due to solid sales of life science instruments and positive effects, and other regions saw an increase in revenue owing to the growth of diabetes management in emerging countries and expansion of solid sales of diagnostics and life sciences in Asia. This page shows the adjustments from operating profit to adjusted EBITDA. Depreciation and amortization was 13.3 billion yen, the same level as in the previous year. As for the adjustments from EBITDA to adjusted EBITDA, M&A-related expenses of 619 million yen were recorded in the current period, compared with 80 million yen in the previous year. The current period includes retirement benefit-related expenses arising from the merger. Structure-reform-related expenses were 450 million yen in the same period last year and 110 million in the current period. Next, I will explain the main assets and liabilities on the consolidated BS. Interest-bearing debts was repaid by a net of 11 billion yen and including FX impact, the balance decreased by 12.3 billion yen. The net leverage ratio declined from 3.7 times to 3 times due to the decrease in net interest-bearing debt and the increase in adjusted EBITDA. And RUE also improved significantly to 9.1% due to the increase in profit attributable to owners of the parent. The goodwill balance was 217.7 billion yen. Yen, there was no change on a local currency basis, but it decreased by 3.8 billion yen because the yen was stronger at the end of the second quarter than at the end of the previous fiscal year. Operating cash flow was 21.2 billion yen, reflecting strong business performance. Investing cash flow was an outflow of 5 billion yen, including capital expenditure of 4.6 billion yen. Financing cash flow was an outflow of 16.7 billion yen due to the repayment of lease, liabilities, and the payment of dividends, in addition to the repayment of the borrowings of 11 billion yen. Total cash flow was negative 600 million yen, and together with a decrease of 1.5 billion yen due to forex impact, cash and deposit decreased by 2 billion. Working capital increased somewhat in the first half, so we intend to keep this firmly under control in the second half. Next, I will explain the full-year earnings forecast, which we have revised this time. We have revised the revenue upward by 6.3 billion yen and operating profit upward by 6 billion yen. The changes in each segment will be explained on the next page. Taking actual rates into account, we have changed the assumed exchange rate to 1.82 yen to the euro and 1.59 yen to the U.S. dollar. We forecast the profit before tax of 26.7 million yen, an increase of 4.7 million yen. We have factored the effects of gain recorded in the second quarter results and increase in the interest expenses due to the rising interest rates into financial income and financial costs, respectively. Factoring in the increase in tax expenses associated with increase in profit before tax, we are revising profit attributable to owners of the parent upward by 2.6 billion yen to 18 billion yen. This page shows the comparison with the previous forecast by segment. As for revenue, diabetes management reflects the strong performance in Europe, the U.S., and Middle East in the first half. For diagnostics and life sciences, we expect the impact of stagnant instrument demand in the pathology business, but they have factored in the strong first-half performance of life sciences. We have revised both segments upward, also adding the effects of positive impact. On the other hand, for healthcare solutions, although the effect of increased testing released to sales, such as genetic testing and over-sales price optimization in the clinical testing, I expect to continue. We are revising the forecast downward to factor in the decrease in electronic medical record sales due to the server supply shortage in healthcare IT solutions. As for operating profit, diabetes management has been revised significantly upward by 8.1 billion yen. Factoring in the strong first-half results and the positive FX impact. For diagnostics and life sciences, we also expect an increase of 1.4 billion yen, reflecting first-half results, including the tariff refunds and FX. Healthcare solutions has been revised downward by 3.5 billion yen, factoring in the impact of the decrease in revenue. Now, I will explain the upside and downside for the second-half outlook. Diabetes management continues to perform well at present, and we believe there is upside if a strong performance in Europe and the U.S. continues into the second half. On the other hand, although the expansion of the insurance reimbursement of CGM is currently behind what was assumed, there is a possibility of reimbursement expansion in several European countries, among other factors, and so downside risk has begun to emerge. For this fiscal year, we have built our outlook on the assumption that the risk is not that large at this point. As for the life sciences businesses in the U.S., where market conditions had remained stagnant, sales of life science instruments such as ultra-low temperature freezers have been increasing, and market recoveries are coming into view. We believe there is upside if this trend continues into the second half. On the other hand, in the pathology business, although sales of consumables remain solid, Stagrant demand for instruments continue, and the business is still on a weak note, excluding forex. So we believe there is downside risk. In addition, base interest rates in the U.S. are rising, and we believe we need to carefully examine the risk of impairment as well, together with business performance. Both diabetes management and diagnostics and life sciences are affected by effects. So if rates fluctuate from the current assumed rates based on actual rates, Yen appreciation will be a negative factor, and yen depreciation a positive factor for revenue and operating profit. As for healthcare solutions, the forecast for clinical testing and CRO basically reflect the strong first half. As in previous years, CRO expects a large amount of revenue to be recorded in March, and we believe there is a certain degree of risk. Healthcare IT solutions, which is affected by the server supply shortage, will be explained on the next page. Healthcare IT solutions saw a decrease in revenue in the first half due to the impact of server supply shortage caused by increased AI bridge semiconductor demand. First, regarding the current status of server procurement, delivery delays and price negotiations have arisen even for servers already ordered, and negotiations are still ongoing. However, at this point, we have a rough view of securing the necessary quantities, and we believe the risk is decreasing as we work to mitigate the impact in the second half. The impact of this matter on first-half results was approximately 4 billion yen in revenue. For the second half, we believe we can contain the impact by securing a certain number of servers while negotiating prices in the third quarter and by implementing further countermeasures, such as securing alternative suppliers in Q4. In addition, we aim to restore business performance by accelerating sales of the cloud-based electronic medical record system launched last year, while reliably capturing special demand related to HealthcareDX, such as the electronic medical record, information sharing service, and electronic prescriptions. In connection with our initiatives to improve performance in the second half, I will explain Healthcare DX and the recently announced certification system for standard specifications of electronic medical records. Demand related to Healthcare DX is expected to continue. The Electronic Medical Record Information Sharing Service is scheduled to start in January 2027. Subsidies for electronic prescriptions have been partially extended, and demand related to online LGBT verification also continues. We participate in product working group for the standard electronic medical record, where we respond swiftly to policy and make recommendations from a frontline perspective, among other activities. Regarding the certification system for standard specifications of electronic medical records and its requirements, announced in October, our products already meet the main requirements, and we expect to meet the requirements of operation at 200 or more facilities within this fiscal year. As has already been announced, toward a 100% electronic medical record adoption rate in 2030, not only the spread of cloud-based systems, but also the use of on-premise systems, which are currently mainstream, has been factored in. Although on-premises systems are not covered by the certification system, most of our electronic medical record systems have specifications that can support HealthcareDX. For our part, while firmly capturing healthcare DX-related demand, we will expand sales of cloud-based electronic medical records and strengthen our cloud capabilities. In addition, we will continue to offer a full lineup of products, including on-premises and hybrid types, and maintain a structure that meets customer needs. Compressions of the revised forecast with the previous year and the previous forecast are shown, but I will omit a further explanation. That concludes my presentation. Thank you.