On November 9th, Shimadzu Corporation published its financial results for Q3 2020. Due to the companies reporting cycle, this is its second fiscal quarter. The results show that sales originating from the medical systems business contracted sharply during the quarter. Quarterly sales reached ¥17.5 billion, compared with ¥21.5 bn in Q3 2019, a decrease of approximately -19% year-on-year. This took cumulative 2020 sales to ¥50.5 bn, compared with ¥54.9 billion in 2019, a decrease of -8% year-on-year.
The medical systems business has two reportable segments, ‘x-ray systems’ and ‘other’. The sales contraction during the quarter was driven by lower sales from both segments. Sales from the ‘other’ segment declined by -¥2.7bn (-39%) and sales from the ‘x-ray systems’ segment declined by -¥1.3bn (-9%), relative to Q3 2019. Despite lower quarterly sales from ‘x-ray systems’, cumulative 2020 sales for the segment remain marginally higher (+0.2%), thanks to growth during the first half of 2020. The Q3 2019 sales figure is also a tougher comparable as there was some heightened demand within Japan ahead of the consumption tax increase during Oct-19. The Q3 2020 sales from ‘x-ray systems’ were approximately +4% higher relative to Q3 2018. The company reported that during the quarter, higher sales of mobile x-ray systems associated with the Coronavirus pandemic continued, although these were not sufficient to offset lower sales from elsewhere in the portfolio. The company reported that capital investment decisions continued to be postponed and disrupted as hospitals prioritised spending associated with the pandemic.
Aftermarket sales versus new equipment sales
One of the pillars of Shimadzu’s growth strategy is to achieve continued growth and profitability from its aftermarket business. Aftermarket sales have been trending higher as a proportion (%) of overall sales from the medical systems business and continue to have a “stabilising” effect when new equipment demand drops off due to economic shocks.
Sales results by geography
The sales contraction during the third quarter was driven by lower sales from customers based in Japan, partially offset by higher sales from export markets including the United States and Europe. Japan remains the companies largest market and accounted for approximately 60% of the total sales revenue from the medical systems business during the first nine months of 2020.
In Japan, sales contracted significantly during the quarter (-35%) resulting in lower cumulative sales for the year (-20%). This was driven by customers postponing capital investment decisions due to the increased uncertainty and market disruption caused by the Coronavirus pandemic. The comparable quarter sales (Q3 2019) is also a tougher comparable due to the consumption tax dynamics already noted. Sales of angiography systems were notably lower, driven by lower procedure volumes as well as strong sales during 2019.
In America, sales grew explosively during the quarter (+23%) which was largely driven by North America which reported sales growth of +28% year-on-year. This resulted in cumulative sales growth of +12% for the first nine months. The sales growth during the quarter was driven by higher sales of mobile x-ray systems which have remained strong throughout the year. The company also reported sales uplift driven by the consolidation of its acquisition of CORE Medical Imaging Inc during 2019. During April 2020, Shimadzu completed the integration of this acquisition and has begun to operate under the Shimadzu Medical Systems USA (SMS) brand, located in Kenmore, WA. Sales of angiography and fluoroscopy systems were reportedly stable at the start of the year, although demand for these systems has been materially impacted by the pandemic situation as the year has progressed.
In Europe, sales also grew explosively during the quarter (+33%) which was driven by higher sales of mobile x-ray systems across Europe as well as higher sales general radiography systems to customers based in Eastern Europe and Russia. This resulted in cumulative sales growth of +11% for the first nine months. Sales from angiography and fluoroscopy systems were reportedly weaker at the start of the year due to weakness from Eastern Europe.
In China, sales contracted significantly during the quarter (-23%) resulting in cumulative sales growth of +9% for the first nine months. This was driven by some softening of demand following strong sales growth for the first half of 2020 as well as tough comparable Q3 2019 sales result. The strong sales growth earlier in the year was driven by higher sales for mobile x-ray systems as well as angiography and fluoroscopy systems. During February-20, Shimadzu launched its latest dedicated breast PET system in China, branded Elmammo.
In other parts of Asia, sales grew at an explosive pace during the quarter (+56%) driven by higher sales of mobile x-ray systems which have remained strong throughout 2020. This resulted in cumulative sales growth of +30% for the first nine months. The company noted that sales of angiography systems were lower during the start of the year, in part, due to the significantly higher demand experienced during 2019 from countries such as India. During January-20, Shimadzu established a new subsidiary company in Vietnam which has been contributory toward recent strong sales growth from the region.
Recent investment in manufacturing
The firm made a 1.74 billion yen investment into expanding its existing manufacturing plant at Izumo City (Shimane) which was completed during February 2019. This is the firm’s core manufacturing plant for its diagnostic x-ray systems and the expansion will enable approximately a +50% increase in production capacity due for delivery by 2025. Along with additional capacity, the investment is expected to enable improved operating margins from cost reductions as a result of increased automation, improved production efficiency and further centralising product distribution.