Canon Medical Systems, Q3 2020, Sales Results

Image credit: screenshot of Canon Medical Systems at ECR 2019 video

On the 26th October, Canon published its financial results for Q3 2020. These show that Group sales revenue continued to contract during the quarter, although at a slower pace relative to Q2. The group sales revenue reached ¥758.9 billion, compared with ¥869.5 billion in Q3 2019, a decrease of approximately -13% year-on-year. This took cumulative 2020 sales to ¥2.21 trillion, compared with ¥2.64 trillion in 2019, a decrease of approximately -16% year-on-year. The third-quarter sales result was driven by lower sales from all business segments, led by Office (-¥90.2 bn), followed by Industry (-¥11.4 bn), Medical Systems (-¥8.6 bn) and Imaging Systems (-¥3.8 bn).

The Group reports on the performance of its medical systems business which encompasses the acquisition of Toshiba Medical during 2016. During the third quarter, sales revenue originating from medical systems reached, ¥105.4 bn, compared with ¥113.9 billion in Q3 2019, a decrease of -7.5% year-on-year. This took cumulative 2020 sales to ¥313.3 bn, compared with ¥328.5 bn in 2019, a decrease of -4.6% year-on-year.

Overall sales performance during the third quarter continued to be negatively impacted by the Coronavirus pandemic. The sales performance was categorised by continued strong demand for computed tomography (CT) and diagnostic x-ray systems used for the diagnosis and treatment of pneumonia. Higher sales of these systems were more than offset by lower demand across other areas of the portfolio. During the Q3 earnings call, Toshizo Tanaka, CFO & Executive Vice President, commented, “[Canon] saw some investment in other diagnostic imaging equipment being postponed as many medical institutions struggled from a funding perspective” and that “private medical institutions, in particular, were cautious, especially in purchasing premium equipment”. It is also worth noting that Q3 2019 is a tougher comparable due to higher sales ahead of the consumption tax rate increase in Japan. Although sales remained lower, equipment installations began to recover along with more normalised sales and marketing activities, which have been disrupted by the pandemic. The cancellation of trade shows and academic conferences globally during H1 2020 meant that there were fewer opportunities to engage customers in business development discussions which restrained new sales YTD.

From a geographical perspective, third-quarter sales growth was driven by higher sales from Europe, Asia and Oceania, offset by lower sales from Japan and America.

In Europe, sales grew explosively by almost +40%, a recovery from the contraction during the first half of the year, resulting in overall higher sales year-to-date. In Asia, the recovery trend continued following the economic shutdowns, particularly within China. In Japan, although the general economy showed signs of recovery sales contracted sharply by almost -30%. Lower sales were driven by customers exerting caution when spending on higher-priced systems. It is also worthwhile reiterating that the Q3 2019 sales figures are a tougher comparable due to higher sales ahead of the consumption tax rate increase during Oct-2019. In America, sales from customers based in the United States were lower due to continued lock-down restrictions and weaker economic activity.

Canon continues to pursue its international growth strategy, reducing its reliance on the Japanese market. The proportion of sales originating from exports continued to grow. The international expansion involves various new partnerships such as a joint venture with R-Pharm Holding. In the coming periods, Canon is due to consummate this venture which includes sales, distribution and maintenance operations as well as the localisation of manufacturing covering 9 CIS member states including Russia.

Management team changes at Canon Medical Systems Europe

Earlier in the year, Canon announced that Nobuyuki Hatakeyama has been appointed as President and Chief Executive Officer of Canon Medical Systems Europe. In addition, two senior leadership appointments were made to the company’s management team. Rene Degros was appointed as Vice President from his role as European Sales Director and Rob de Jong was appointed as Vice President, from his role as European Service Director.

Exposure to foreign exchange

Canon is exposed to exchange rate volatility, particularly involving the Japanese Yen and the currencies of other major economies such as the U.S. dollar, Euro and Chinese yuan. The Group remains a net exporter from Japan to the rest of the world, which means that in terms of absolute values a weaker Yen is generally favourable for its business and a stronger U.S. dollar and euro is in principle unfavourable. The average values of the yen during the third quarter and the first nine months of the year were ¥106.17 and ¥107.59 against the U.S. dollar, respectively, a year-on-year appreciation of approximately ¥1 and year-on-year appreciation of approximately ¥2, and ¥124.13 and ¥121.02 against the euro, respectively, a year-on-year depreciation of approximately ¥5 and year-on-year appreciation of approximately ¥2.

Outlook

During the Q3 earnings call, Toshizo commented “as for medical systems, we expect fourth-quarter sales to increase, thanks to the gradual resumption of medical equipment purchasing. However, we lowered our full-year projection and are now expecting sales and profit to decrease as it will be difficult to fully recover from the impact of delayed business negotiations and equipment installations” and “the virus has started to again spread in certain regions. In light of this, we feel it will take a little more time until the diagnostic imaging equipment market recovers as a whole“.

Q3 earnings call Q&A

Analyst Question: up until the third quarter, Medical System sales have been declining. Why do you
expect sales growth in the fourth quarter? Additionally, do you expect the profitability of this business to improve going forward?

Canon Answer: up until the third quarter, hospitals gave priority to dealing with COVID-19. As a result, equipment purchases tended to be pushed out. However, we see the possibility for sales growth as progress is being made in business negotiations and equipment installations since entering the fourth quarter. As for full-year profitability, although it is lower, partially due to the impact of changes in foreign exchange rates this year, we will implement measures so that we can firmly raise profitability going forward.

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