Financial Summary

Recent Updates

Highlights

On February 1, 2012, Ship Healthcare Holdings announced that its subsidiary, Green Hospital Supply Inc., had acquired additional shares in AntCare Holdings, turning into a wholly owned subsidiary.

(For original Japanese-language only release in PDF format, please click here. )

Green Hospital Supply, a consolidated subsidiary of Ship, had acquired shares in AntCare back on December 27, 2011, turning it into a consolidated subsidiary. Its further acquisition of AntCare shares on February 1, 2012, resulted in AntCare becoming a wholly owned subsidiary of Green Hospital. Green Hospital acquired an additional 12,291 shares in AntCare (equivalent to 39.5% of shares outstanding) for 2.5 billion yen taking its ownership to 99.4% of AntCare’s shares outstanding.

AntCare is scheduled to merge with Green Life Holdings, a Green Hospital subsidiary, on 27 March, 2012, with Green Life Holdings becoming the surviving entity following the merger.

On January 13, 2012,the company announced that the dissolution of subsidiary Q-on System Co. would result in the realization of some uncollectable debts.

(For original Japanese-language only release in PDF format, please click here.)

Q-on System (a fully owned subsidiary of Green Hospital Supply Inc.) will be spun off on February 1, 2012 and then dissolved on February 28, 2012 and as a result a 980 million yen loan to Q-on System by Green Hospital will become uncollectable.

The bad debt has already been factored into loan loss reserves and as the debt is an inter-subsidiary loan it will have no effect on consolidated results In addition, the event is expected to lower the company’s tax burden. The development was already incorporated into the company’s projections and thus its FY 03/12 forecast was unchanged.

On December 9, 2011, the company announced that its subsidiary Green Hospital Supply Inc. was to acquire shares in AntCare Holdings, turning into a subsidiary on December 27, 2011.

(For original Japanese-language only release in PDF format, please click here.)

AntCare Holdings operate private 53 old people’s nursing home care facilities in Japan (with total capacity for 2,311 residents as of end-July 2011).

Ship operates seven large facilities in the Kansai region of western Japan (with a total capacity of 1,308 residents), whereas AntCare primarily operates small and mid-sized facilities in the Kanto region in eastern Japan. Through this acquisition Ship will be able to tap into AntCare’s operational expertise in running small to mid-sized facilities and also expand its geographical footprint.

• Sales – 5.5 billion yen
• Operating profit – 322 million yen
• Net Income - 293 million yen

Total assets as of end-October 2011 were 6.2 billion yen with net assets of 573 million yen.

The company will acquire 18,626 shares in AntCare (equivalent to 60.1% of shares outstanding) for a purchase price of 3.8 billion yen primarily from AntCare Business Investment Partnership No. 1 Ltd.

For corporate releases and developments more than three months old please refer to the News & Topics section.

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Trends & Outlook

Note: Historic earnings exhibit a degree of seasonality concentrated in Q4 owing to projects undertaken by the Total Pack System segment. In FY03/10, Q4 sales represented 35% of the full-year sales, while Q4 FY03/11 sales accounted for approximately 31%. Although the company has fixed costs evenly allocated throughout the year, sales associated with some business in the Total Pack System segment are almost purely concentrated in Q4. In FY03/10, Q4 operating profit represented 55% of full-year operating profits while in FY03/11 it was 39%.

1H/Q2 FY03/12 Results (Announced on November 7, 2011; please refer to table above)

The company upwardly revised its 1H FY03/12 forecast on October 28, 2011, and results came in largely in line with this revision. Sales increased 11.9% YoY to 81.1 billion yen while operating income rose 32.2% YoY to 4.3 billion yen. The company noted that booking of large scale projects, solid results at its Manufacturer Related and Dispensing Pharmacy businesses contributed to the strong set of results.

Details of the performance of its business units were as follows:

Total Pack System Segment

Sales were up 9.6% YoY at 26.5 billion yen and operating profit was up 23.2% YoY at 2.4 billion yen. Operating profit margin came in at 8.9% vs. 7.9% for 1H FY03/11. The increase in top-line was due to some sales for large-scale projects being booked ahead of schedule, strong sales of medical equipment and specialized bath equipment to existing customers and orders for operating room construction.

Medical Supplies Segment

Sales increased 14.3% YoY to 42.9 billion yen and operating profit was up 22.6% YoY at 872 million yen. Operating profit margin came in at 2.0% vs. 1.9% in 1H FY03/11. Higher sales and efficiency gains combined with the consolidation of Sapporo Medical Corp. since October 2010 were behind the higher sales and operating profit numbers.

Health Care Segment (Elderly Care Business)

The segment posted a 0.6% YoY decline in sales to 3.8 billion yen, and operating profit dropped 23.8% YoY to 567 million yen with the segment’s operating profit margin coming in at 14.9% vs. 12.0% in 1H FY03/11. Managed facilities (elderly-care facilities with nursing care available) occupancy numbers remained stable at 1200, resulting in a 92.0% occupancy rate. In the food services business while some contracts ended the company was able to ink new contracts with hospitals and elderly-care facilities.

Dispensing Pharmacy Segment

Sales were up 14.0% YoY at 7.3. billion yen, with operating profit coming in at 784 million yen - up 50.8% YoY. Operating profit margin was 10.8% vs. 8.2% in 1H FY03/11. Generic drugs, technical fees for dispensing pharmacists and the opening of three new pharmacies were the main drivers of better performance.

On October 28, 2011, the company upwardly revised its 1H FY 03/12 forecasts, citing the following reasons:

• In the Total Pack System segment, some projects were booked earlier than initially forecast.
• The Manufacturer-Related business in the Total Pack System segment experienced strong demand for its specialized bath equipment for old people’s homes and construction orders for operating room facilities.
• Patient numbers were strong in the Dispensing Pharmacy segment.

While the first factor was purely a timing issue related to sales being moved forward to 1H from 2H, the latter two factors were the result of performance coming in better than forecast.

The company is currently reviewing its full year forecast and said it would release any revisions once they are made. On this point, the company stated at its results meeting on November 15, 2011, it expected to exceed its full-year forecast if the operating environment remained stable. However, given the increasing uncertainty about the macro environment due to factors such as the recent European sovereign debt crisis, the company said it wanted to avoid a situation where it would be unable to achieve its forecasts and so was maintaining its initial full-year forecast for the moment.

Q1 FY03/12 Results

On August 1, 2011, the company released Q1 FY03/12 results (see table above).

Sales increased 16.0% YoY to 41.6 billion yen while operating income rose 79.5% YoY to 2.3 billion yen. Details of the performance of its business units are below:

Total Pack System Segment

Sales were 23.2% up YoY at 14.6 billion yen and operating profit was up 119.4% YoY at 1.4 billion yen. Operating profit margin came in at 9.8% vs. 5.5% for Q1 FY03/11. In addition to large-scale projects, sales of the company's specialized bath equipment were strong and contributed to the improved results.

The main factors behind the strong profitability at the Total Pack Segment were:

• Manufacturer-Related sales that could not be shipped by end-FY03/11 were then shipped and attributed to Q1 figures.

• Some projects that were expected to be completed by 1H were ahead of schedule and parts of these were thus booked in Q1 (around 4.0 billion yen in sales).

It is SR's understanding that the company had not foreseen these events, resulting in the upside surprise. However, Q2 projects could also decline in number as a result, and the two consecutive quarters should be viewed together to understand the overall trend in the segment.

Medical Supplies Segment

Sales increased 12.3% YoY to 21.0 billion yen and operating profit was up 13.2% YoY at 368 million yen. Operating profit margin came in at 1.8% vs. 1.7% in Q1 FY03/11. Higher sales and efficiency gains combined with the consolidation of Sapporo Medical Corp. since October 2010 all contributed to the improved figures.

Health Care Segment (Elderly Care Business)

The segment posted 3.5% YoY growth in sales to 2.0 billion yen, although operating profit decreased 1.7% YoY to 280 million yen with the segment’s operating profit margin coming in at 14.3% vs. 15.0% in Q1 FY03/11.

Managed facilities (elderly-care facilities with nursing care available) occupancy numbers remained stable at 1200.

Dispensing Pharmacy Segment

Sales were up 18.9% YoY at 3.8 billion yen, with operating profit coming in at 374 million yen - up 49.6% YoY. Operating profit margin was 9.9% vs. 7.9% in Q1 FY03/11. Generic drugs and technical fees for dispensing pharmacists were the main drivers of better performance.

The company maintained its forecasts for 1H and FY03/12. With regards to its unchanged forecasts, while Q1 results - led by the Total Pack System segment- were strong, the company commented it was paying close attention to trends since then.

Full Year (FY03/12) Outlook

The company’s FY03/12 forecast breakdown was:

• Sales of 179.0 billion yen, up 10.2% YoY
• Operating profit up 4.4% YoY
• Recurring profit of 9.0 billion yen, up 1.7% YoY
• Net profit of 6.0 billion yen, up 0.3% YoY

By segment the company was expecting sales and profits to increase at the Medical Supply, Health Care, and Dispensing Pharmacy segments, while sales were forecast to income at the Total Pack System segment but profits were expected to decline.

Total Pack System Segment

Sales were forecast to rise 4.6% YoY to 61.0 billion yen, of which Project sales were expected to fall 9.3% YoY to 18.0 billion yen; Routine sales were projected to increase 30.7% YoY to 16.0 billion and Manufacturer-Related sales were forecast to rise 3.1% YoY to of 27.0 billion yen.

30 contracts were forecast for the Project unit, which was the same level as in FY03/11. However, income was expected to decline due to lower sales values per contract. The forecast also accounts for some contracts in FY03/13 being postponed due to the impact of March 2011’s Tohoku earthquake. However, the company also thinks there will be an increase in other contract projects from FY03/13 onwards as some projects come back on line that had been previously postponed in the wake of the 2007 introduction of the new Building Standards Law. Extremely large projects in FY03/10 and FY03/11 inflated profitability, but there are no extremely large projects scheduled in FY03/12.

In the Routine unit, the company was expecting higher sales driven by increased capex from medical facilities as the effects of 2010’s upward revisions to medical treatment fees continue into FY03/12. For the Manufacturer-Related unit, the company expected any YoY increase in sales to be limited due to the base effects of large amounts of one-off demand that occurred in FY03/11.

Operating profit was forecast to come in at 4.5 billion yen, down 7.2% YoY due to a worsening sales mix and increased R&D costs.

Medical Supply Segment

Sales were projected to rise 16.1% YoY to 96.0 billion yen. The company forecast out-of-hospital SPD to increase by 2.0% YoY to 24.0 billion yen; in-hospital SPD sales were expected to grow 19.5% to 31.0 billion yen and other sales should grow 23.5% to 41.0 billion yen. The company said it expected in-hospital SPD sales to rise owing to an increased variety of materials and goods for distribution during the period.

Operating profit was forecast to come in at 1.7 billion yen, an increase of 16.8% YoY with operating profit margin at 1.8% - on par with FY03/11’s operating profit margin.

Health Care Segment (Elderly Care Business)

Expectations were for sales to increase 4.1% YoY to 8.0 billion yen with operating profit increasing 10.2% YoY to 1.1 billion yen. Numbers of occupants in managed facilities (elderly-care facilities with nursing care available) had been on the rise, as of end-March 2011 there were 1,200 occupants vs. 1,140 occupants at end-March 2010. Expected increases in average occupant numbers in FY03/12 were expected to drive increased sales and profit at the segment, the company said.

Dispensing Pharmacy Segment

The company forecast was for sales of 14.0 billion yen, up 10.8% YoY, and operating profit of 1.6 billion yen, up 17.1% YoY. It expected to open four new stores in FY03/12 which would take its total store count to 52 stores, up from 48 in FY03/11.

Impact From March 2011 Tohoku Earthquake

The company said it assumed there will be future demand for reconstruction for reconstruction of medical and elderly care facilities destroyed by the March 11 Tohoku earthquake and tsunami. However, as the timing and scale of these reconstruction projects were unclear as of the start of FY03/11, the company was unsure what effect reconstruction efforts would have on FY03/12 results.

SR Inc. interviews with the company indicated that both upside and downside risks in the Medical Supply, Health Care, and Dispensing Pharmacy segments should probably be limited. The company said that the segment with the highest probability of producing results different from the forecast would be the Total Pack System with the Routine unit being a particularly important driver of the order flow.

Medium-Term Outlook

SR Inc.’s impression was that management was confident it could reach its FY03/13 goal of 200.0 billion yen in sales and 10.0 billion yen in recurring profit.

The Health Care and Dispensing Pharmacy segments have entered their investment payback period, while the Medical Supply segment’s contribution to sales has also been increasing (FY03/11 contribution was 50.9% of sales). In FY03/11, the Medical Supplies segment operating profit margin (1.8%) was lower than Total Pack System (8.2% in FY03/11). However, the company was aiming to leverage economies of scale, higher efficiency in its Supply Processing and Distribution (SPD) business and shifting the sales mix to higher value-add products at its Medical Supplies segment to improve its profitability (the company added as of June 2011 it was aiming for an operating profit of 2.7% over the following two years).

SR Inc. believes the company is gradually moving towards a more balanced earnings structure with several segments contributing towards profitability.

The company was also forecasting an increase in the number of Total Pack System segment projects going into FY03/13 and also believed its profitable Manufacturer-Related segment had room for further growth.

The company is targeting growth in FY03/14 and beyond by further increasing its domestic market share and increasing the number of projects it is involved in. It noted that it was also considering M&A and other types of external growth driven strategies.

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Business

Summary

Segment Information

SHIP’s operations include the holding company and 38 consolidated subsidiaries; all operate in the medical, healthcare, and public welfare domains. Reported segments include: 1) Total Pack System 2) Medical Supplies 3) Healthcare 4) Dispensing Pharmacies and 5) Other. The most important segment in terms of contribution to earnings is Total Pack System, which includes the company’s core Project business (consulting services for medical institutions).

Example of combined construction of hospital and pay nursing home for senior citizens
(Source: Company Data Processed by SR Inc.)

A “monzen” pharmacy(Source: Company Data Processed by SR Inc.)

A typical example of the kind of work the company conducts in the Project category of Total Pack System is providing consulting for the relocation of a general hospital of approximately 500 beds. SHIP would provide consulting services three to five years prior to the opening of the new hospital, and then supply medical equipment and instruments (approximately 3.0 to 4.0 billion yen) and consumable goods such as syringes and surgical gowns (100 to 200 million yen monthly). The company would also supply additional machines and run a “monzen” pharmacy adjacent to the hospital. The company provides comprehensive support services for its general hospital clients. In addition, SHIP is sometimes involved in establishing and managing pay nursing homes for senior citizens when the facilities are combined with the hospital. In this scenario, SHIP would hope to cross-sell as much of the product portfolio as possible.

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Business Description

Detailed Segment Information

SHIP provides a sales breakdown for Total Pack System and Medical Supplies, but operating profit breakdown is available on a segment basis only.

Total Pack System

The business in Total Pack System includes consulting services, the sale and lease of medical equipment and facilities, and real estate rental - all of which are focused on medical and related institutions. In FY03/11 this segment represented 36.5% of sales, contributed 55.5% of operating profit before eliminations, and had an operating profit margin of 8.2%.

Sales in this segment are further broken down into Project (33.5% of FY03/11 segment sales), Routine (20.7%) and Manufacturer-Related (44.2%).

Project

The Project business focuses on providing consulting services related to the physical assets of medical institutions. Essentially, the company plays a similar role to that of an engineering company, like that of Chiyoda Corp. (TSE 6366) and JGC Corp. (TSE 1963) in oil services. Specific services offered include: layout of facilities before construction, relocation coordination, help planning extensions or refurbishing, and purchases of equipment. Sales per engagement in the Project business range from approximately 500 million yen to 3.0 billion yen, with a lead time of three to five years from the start of consulting services to the opening of a new medical facility. Project milestones are typically concentrated at the financial year-end (every March), so sales in the Project business are likewise concentrated in Q4.

(Source: Company Data Processed by SR Inc.)

Routine

“Routine” refers to renewal-driven sales at pre-existing medical facility customers. In contrast to Projects, which the company is involved with for several years, the company is involved with Routine projects for only one year. While various types of specialists handle hospital design and construction, SHIP also leverages its expertise in the workings of medical institutions to propose optimal solutions for renewals of medical equipment and/or new equipment installation to enhance efficient hospital operations. In addition, the rental of retirement homes and hospitals owned by the group’s real estate management company is included in the Routine business.

Manufacturer-Related

Skill Simulation Center(Source: Company Data Processed by SR Inc.)

Showroom of SAKAI Medical(Source: Company Data Processed by SR Inc.)

“Manufacturer-Related” refers to revenue from the manufacture and sale of medical gas (oxygen and anesthetic) delivery pipes, intensive care units and operating room facilities. It is made up of Central Uni Co., Ltd (made a subsidiary in November 2006), Yamada Shadowless Lamp Co., Ltd (made a subsidiary in April 2008), and SAKAI Medical Co., Ltd (made a subsidiary in October 2009).

Central Uni is mainly engaged in the manufacture and sale of medical gas supply equipment, and the design and operation of operating rooms. In addition, via their subsidiary FS Uni Management, they are engaged in medical supply, and Supply Processing and Distribution (SPD). Sales posted in the Manufacturer-Related sector of the Total Pack System come from the manufacture and building of medical equipment.

Yamada Shadowless Lamp Co., founded in 1927, is a manufacturer of medical lighting fixtures. They manufacture and sell shadowless lamps (lighting fixtures used during surgery that use many light sources to provide high-intensity illumination without throwing shadows on the area where the surgeon is working).

SAKAI Medical Co., founded in 1939, is a manufacturer of medical devices. They are mainly engaged in the manufacture and sale of specialized bath equipment, and rehabilitation devices.

The three Manufacturer-Related companies have a large share of the markets for their core products. Based on Yano Research Institute’s “The Present State and Future Outlook of the Hospital Equipment Market”, in 2009 Central Uni occupied 55.0% of the domestic medical gas equipment market and 50.0% of the domestic operating room interior design market, and Yamada Shadowless Lamp Co. occupied 40.0% of the domestic market for shadowless lamps. Yano Research Institute believed that Yamada Shadowless Lamp and Central Uni's combined market share in the domestic shadowless lamp market made them the largest player in the segment at 50.0% of the market. SAKAI Medical Co. occupied 30.0% of the domestic specialized bath equipment market and 25.0% of the domestic rehabilitation device market, which would make it number two in terms of market share in both segments.

SHIP has commented that with the addition of the three equipment-manufacturing companies into the group it can offer further value-added services and products to hospitals. As a hospital expands or renovates existing facilities, the company is able, on top of its engineering and consulting function in the Project business, to provide assistance in choosing medical devices, create layout diagrams for machinery; and build and install such machinery. Normally, this type of project would require architectural firms, medical device dealers, and many other firms. SR Inc. believes it is possible for the company to improve its work efficiency (which is passed on as cost reduction for the hospital) and provide more finely-tuned consulting services as a result of these organizational improvements.

At the FY03/11 results meeting, the company explained its future policy for the Manufacturer-Related business it was to further develop interoperability in the sales channels of the three companies and integration of their offices, as well as a Skill Simulation Center (which in 2011 became the Ship Tokyo New Showroom).

Regarding interoperability in the sales channels, the company states that Central Uni and Yamada Shadowless Lamp Co. have been mainly engaged in the installation of operating rooms in intensive care (acute phase) hospitals while SAKAI Medical Co. has been engaged in product sales to convalescent care and nursing care facilities. For this reason, by allowing the three companies to use each other’s core channels, it is hoped they will be able to deliver goods in fields where they previously did not do business.

Integration of offices refers to the approximately forty offices (as of December 2010) throughout Japan of Central Uni, FS Uni, Yamada Shadowless Lamp, and SAKAI Medical. The company has explained that this consolidation aims at management amalgamation, and will reduce fixed office expenses and allow group-wide business practices via information sharing.

The company will retain the Ship Tokyo New Showroom in Hongo, Tokyo showroom. The showroom has four areas, which include a state-of-the-art operating room, an ICU, a shadowless lamp corner, and an “other operations” corner. The space is set up so as to allow a visitor to experience conditions that are close to an actual medical treatment facility. Since its completion in October 2009, over 350 groups had visited the facility as of end-September 2011 (physicians, nurses, and others).

Medical Supplies

The Medical Supplies segment consists of sales of materials used in medical examinations and associated consumables. This segment represented 50.9% of sales in for FY03/11, and before elimination represented 16.6% of operating profit, with operating profit margins of 1.8%. The sales breakdown for this segment was 28.5% for Out-of-Hospital SPD (Supply Processing and Distribution - an outsourcing system for inventory control and logistics), 31.4% for In-Hospital SPD sales and 40.2% for Other.

Out-of-Hospital SPD

Out-of-hospital SPD is, to use one of the company’s examples, similar to the “Toyama Drug Sales” business model concept. The company has warehouses next to its headquarters (in Osaka) and can therefore quickly supply small-lot orders of medical materials, medical non-durables and other items according to the needs of medical institutions. The company uses this system for medical institutions that are located within a two-hour drive from the warehouse. Therefore, it is concentrated mainly in Osaka/Kansai area. In other areas, In-hospital SPD is used.

In-Hospital SPD

In-hospital SPD refers to the company stationing employees in medical institutions to manage medical materials and goods, carry out cleaning and sterilization duties, and sell and offer user-support for medical materials and goods. None of these duties requires a physician’s or nurse’s license.

Other

This indicates normal route sales other than the above-mentioned Out-of-hospital SPD and Uni-related. Lighttec Corp., Heart Life Corp., Sun Life Corp., Sapporo Medical Corp. and other subsidiaries that sell specialty medical supplies used in cardiology are included in this category. Specialty medical supplies are heart pacemakers, heart catheters, and other goods for which a handling license is required.

Healthcare

The Healthcare segment includes the operation and supply of food services to pay nursing homes for senior citizens. In FY03/10, this segment represented 4.7% of sales and 10.9% of operating profit before elimination, and had an operating profit margin of 12.4%. As of the end of FY03/10, SHIP was involved in the operation of 7 facilities concentrated in the Osaka/Kobe area, stating it specializes in facilities located in the immediate vicinity of hospitals which can accommodate a large number of residents. Most peers in this business accommodate 30 to 50 residents per facility, but SHIP’s facilities can run to a scale of 100 to 300 residents.

The total number of residents that can be accommodated at the company’s facilities is 1,308, but in practical terms the facilities can expect at best between 1,240 and 1,250 residents, assuming a 95% occupancy rate. At the end of FY03/11, the total number of residents was 1,200, a 92% occupancy rate, very close to the company’s 95% occupancy target rate. SHIP’s approach to its Healthcare business was to operate in cooperation with medical institutions. When SHIP began the segment, several operating companies were set up in conjunction with medical institutions (initially five operating companies were set up with medical institutions, and 7 facilities, 6 owned by SHIP, were put into operation). Two facilities have been taken off the balance sheet (securitized) and SHIP realized 14.3 billion yen from the securitization, and in order to centralize and improve efficiency, operations of all the facilities operated by 100%-owned subsidiary Green Life were integrated in November 2008. As of June 2011, the company had one new facility planned: “Asu to Nagamichi Redevelopment Project” scheduled for completion in 2014 in Sendai.

Expenses for stay in these facilities were approximately 360,000 yen per month (50% is typically reimbursed through elderly support programs), and the average stay is between two and three years.

Dispensing Pharmacy

The Dispensing Pharmacy segment, as the name suggests, is involved in the operations of dispensing pharmaceutical drugs. This segment brought in 7.8% of sales in FY03/11, and before elimination made 15.6% of operating profit, with operating profit margins of 10.8%. The company operates 47 dispensing pharmacies (as of end-FY03/11) through four subsidiaries, and many are “monzen” (Japanese meaning “in front of the gate”) pharmacies which are located adjacent to or in hospitals with which the company engages in consulting business. The proximity of the pharmacy to the hospital is a competitive advantage – once a pharmacy is closely integrated to hospital operations, the entrenchment is very difficult for entrants to overcome.

In a broad sense the business of this segment can be considered part of the company’s range of medical services. The company’s annual procurement value equates to some 20.0 billion; suppliers should give volume discounts, and thus the company should be able to maintain a certain level of drug-price margins (the difference between the actual price of the drugs and their delivery costs from the wholesaler to pharmacy).

The government mandates the maximum price for wholesale drugs after surveying the prevailing industry price. The typical scenario is that once the maximum price for a drug is set, vendors engage in fierce price competition, only to see the maximum price lowered at the next review once prices have found a natural equilibrium. The benefit of any competitive advantage is thus significant.

Others

Others consists of sales of equipment associated with physics & chemistry, environmental, as well running animal hospitals. This segment represented 0.7% of sales in FY03/11, and before elimination accounted for 1.4% of operating profits and operating profit margins of 10.7%.

Client Financing Business

The client financing is unique in that although there is associated credit risk, typically the funds provided by SHIP are less speculative in nature and could be considered bridge loans while a restructuring hospital develops a track record to secure financing from a larger institution. SHIP is not a provider of capital as a standalone business – indications are that because some clients have limited access to capital markets (especially during initial construction or rebuilding) SHIP is extending financing as a convenience to its clients as opposed to a dedicated business activity.

Group Companies

There were 38 consolidated subsidiaries as of FY03/11 end. The main subsidiaries are as follows:

Total Pack Systems

Ship Corporation: Consulting services to hospitals

Central Uni Co., Ltd: manufacture and sale of medical equipment and operation of operating rooms

Yamada Shadowless Lamp Co., Ltd: Manufacture and sale of medical lighting fixtures

SAKAI Medical Co., Ltd: Manufacture and sale of medical devices and rehabilitation devices

F&S Uni (subsidiary of Central Uni): Maintenance and repair of medical facility

Green Hospital Supply, Inc: Distributer of medical equipment

Medical Supplies

Green Hospital Supply, Inc: Distributer of medical equipment

F&S Uni Management (subsidiary of Central Uni): SPD related business

Sun Life Corporation: Sale of specialty medical supplies

Heart Life Corporation: Sale and lease of specialty medical supplies

Light Tec: Sales of specialty medical supplies

Sapporo Medical Corporation: Sales of specialty medical supplies

Healthcare

Green Life Co. Ltd: Operation of pay nursing homes for senior citizen

Hospital Food Supply Service Co., Ltd: Supplying of food services to pay nursing homes for senior citizen

Dispensing Pharmacy

Green Pharmacy Co., Ltd: Operation of dispensing pharmaceutical drugs

Sendai Pharmacy Corporation: Operation of dispensing pharmaceutical drugs

Other

Green Animal Company: Management of animal hospitals

Large contributors to operating profits are: Green Hospital Supply (mainly Total Pack System), Green Life (nursing homes for senior citizens), Central Uni, SAKAI Medical (mainly Total Pack System).

Market & Value Chain

Market Overview

Once there were over 10,000 hospitals in Japan with 20 or more beds, but this has fallen to less than 9,000 (including approximately 1,000 psychiatric hospitals) in 2009. Apart from full-service hospitals, there were also approximately 150,000 clinics (2009).

Given the market data, one would assume that there are potentially 7,000 to 8,000 large domestic clients for SHIP, but in future this number is estimated to fall even further, to around 6,000. In comparison to Europe and the U.S., the average number of days a patient is hospitalized in a Japanese hospital is extremely long, but the difference is forecast to shrink in the future, which is expected to propel a further decline in the number of hospitals. In Japan, with its universal care medical insurance system, hospitals maintain a business model where they pursue higher earnings by increasing the length of a patient’s stay as much as possible in order to add more billable items to the national insurance provider. However, this has been so prevalent that it has put strains on the national budget, so at a national level a policy is being put forth to limit the number of days a patient can stay in hospital and increase the turnover of patients.

There is speculation that should newer facilities use all of the efficient processes and technologies currently available, that the total number of hospitals could drop to approximately 6,000. Of the rationalized 6,000 facilities, 2,000 to 3,000 hospitals are expected to actively build systems which have improved efficiency (turnover of patients) of their emergency medical treatment. In these hospitals the need will arise for more facilities, such as new operating rooms and more examination equipment, which has the potential to reinvigorate the market.

In some areas in Japan there are a number of private, prefectural and local government hospitals in close proximity, creating an oversupply condition resulting in broad operating losses. Given the apparent need for consolidation, this could generate demand for SHIP’s medical consultation services.

Revisions to medical legislation are likely to bring about continued changes in the market. For example, as a result of the Fourth Revision to the Medical Care Act (2001), the floor space required for each bed was increased, which increased the demand for construction in order that hospitals could make sure they had a certain number of beds and were compliant with the new laws. A lack of clarity regarding the Fifth Revision to the Medical Care Act (2007) before the law was enacted resulted in hospitals delaying investments until the law took effect, temporarily impacting the company’s business.

The hospital industry is also becoming more cyclical. The durability of hospital buildings is an estimated 30 to 40 years, and given the construction boom in the late 1970s, the rebuilding period in the cycle should be approaching. Also, developments in medicine and machinery technology have also been factors that have had an effect on the market conditions facing the company. In recent times a lack of qualified doctors, poor emergency response, obstetrics and troubles faced in regional medicine have been the focus of attention, and moves have begun to provide budget allocations guided by government policy in order to improve these problem areas. Measures have also been taken towards strengthening operating efficiencies, such as allowing some or all local government hospitals to operate under a specified administrator, to be independent regional administrative companies, or making them operable under the Independently Operated Public Business Law. SR, Inc. speculates that the government’s focus on more efficiently run hospitals will drive multiple reform initiatives in the industry, which in turn will increase the need for types of consulting services that SHIP provides.

Customers

As discussed, it is estimated that there are currently from 7,000 to 8,000 hospitals which have the potential to be main clients for the company, but currently it participates in between 200 and 300 projects, and on an annual basis from 30 to 40 final acceptances are reported in sales. Across SHIP’s group its current client base not only includes medical institutions around Japan such as hospitals, but also large general contractors, construction companies and architecture firms, as well as cooperative companies such as regional medical equipment dealers. The services that SHIP provides to its non-hospital clients are related to the layout of hospital facilities as well as medical equipment distribution.

Suppliers

SHIP has a diverse range of suppliers and supply items. Its universal supply coverage contributes to its ability to offer the best fit of medical equipment and medical supplies to suit the needs of its clients. Supply relationships have been established with subsidiaries as well as with outside firms. SHIP focuses on meeting the needs of its clients, and claims to be unbiased when making a sourcing decision for client needs. Specifically, the company’s main suppliers and supply items are listed below.

• Fuji Film Medical Co., Ltd.: Imaging diagnostic machines, biochemical testing machines
• Toshiba Medical Systems Corporation: MRI, CT scan, X-ray equipment
• GE Yokogawa Medical Systems: MRI, CT scan, X-ray equipment
• Philips: MRI, CT scan, X-ray equipment
• Siemens: MRI, CT scan, X-ray equipment
• Shimadzu (TSE 7701): MRI, CT scan, X-ray equipment
• Hitachi Medico (TSE 6910): MRI, CT scan, X-ray equipment
• Nipro (TSE 8086): Medical equipment, materials used in medical examinations
• Terumo (TSE 4543): Medical equipment, materials used in medical examinations
• Sysmex (TSE 6869): Blood testing equipment
• Paramount Bed (TSE 7960): Hospital & nursing home-use beds, furniture for hospital rooms
• Nihon Kohden (TSE 6849): Electrocardiographs, physical data monitors
• Fukuda Denshi (Jasdaq 6960): Electrocardiographs, physical data monitors
• Central Uni (100%-owned subsidiary): Medical gas (oxygen, anesthetics) delivery pipe equipment
• Air Water (Jasdaq 4088): Medical gas (oxygen, anesthetics) delivery pipe equipment

Barriers to Entry

The largest barrier to entry is that it is not possible to learn how to be a medical consultant overnight – there is a significant learning curve to traverse. In SHIP’s case, it has recruited some 15 new university graduates each year since being founded in 1992, and out of these three to five can be relied upon develop sufficient experience and skill over many years to independently act as project leaders. The development of this learned skill could be compared to someone wishing to become a master craftsman – years of tangible experience has to be gained before expertise is recognized. In a similar way to master craftsmen, there are no particular licenses that confirm a medical consultant’s knowledge or technical skill. The amount of knowledge and know-how an individual can build up becomes a source of differentiation. From this perspective, the company’s depth of human resources in medical consulting can be thought of as a barrier to entry. Further, as support to the consulting business a technical department is also necessary, and the company has allocated ample resources to develop capabilities in this area.

SHIP can certainly be considered a pioneer in the field of medical consulting, and it needs to be ready to defend its position against new entrants. Mitsubishi Corporation (TSE 8058) group trading companies have entered the market. It will take a significant amount of time for new entrants to train up consultants to achieve the same kind of quality consulting and project experience. The hospital consulting industry is heavily dependent on relationships, and the personal networks of SHIP employees could not be easily replicated by new entrants, and thus can make entry into the market less attractive.

Competition

In the medical consulting field, Apprecia, Inc. (a Mitsubishi Corporation medical sector enterprise) and Nihon Hospital Service (another Mitsubishi Corporation medical sector enterprise) operate similar businesses to SHIP, but compared to these other firms in the sector, SHIP provides more complete and continuous consulting. Other trading-type companies in the same market seem to change the level of resources allocated to this business depending on how the economy is performing, and have not established a foothold to make it a core business. In strong economic periods trading companies tend to allocate their resources to those other higher growth sectors, while in periods of poor economic growth they tend to increase the allocation of resources into healthcare in a ‘defensive’ move to augment core earnings. In the weak economic environment in FY03/10-FY03/11, competition in the market could become severe as competitors refocus on the industry, but SHIP suggests that the market forces weaker peers to exit the market, and thus there should be less competitive pressure.

Further, SHIP has exposure to the medical equipment distribution business, as well as selling materials for medical examinations and medical-use consumables. In the distribution businesses it does compete with listed companies Yamashita Medical Instruments (TSE 3022), Medius Holdings Co. (Jasdaq 3154), Win International (Jasdaq 2744) and other unlisted companies such as Mutow Corporation, Yagami Co., LTD. and Miyano Medical Instruments Co., Ltd.

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Strategy

The company is focused on leveraging its long specialized experience in hospital engineering consulting (represented by the Project business in Total Pack Solution segment) to grow into a comprehensive provider of engineering, product, and supply solutions to hospitals across Japan.

The near term strategy has been about repositioning from simply trying to grow sales (making the company’s business vulnerable to pricing pressures), to that of a cost management focused operator. This specifically meant moving away from emphasizing individual transactions to comprehensive relationships and contracts. Clients are now increasingly presented with solutions that allow them to cut overall costs while letting SHIP maintain reasonable profitability. Localized information management systems (e.g. in-hospital supplies management and out-of-hospital sourcing and logistics) developed by internal subsidiaries and capitalizing on experience in hospital engineering consulting, should help lock-in customers more effectively.

The company’s manufacturing capability was boosted in 2010, and appears to be a pillar of the company’s future competitive strategy. The ability to combine manufacturing capability with project consulting means that SHIP should be able to expand its business from project consulting and tap into long term relationships supplying hospitals after project completion. The company also plans to enter into the Vietnamese, Turkish, and other foreign markets in order to grow into a global-scale niche specialist business.

On a more specific level the company has been focusing on the cardiovascular related supplies business. SHIP feels that the size and resulting economies of scale and influence are of paramount important in this particular market and indicated that it would be aggressively looking for M&A opportunities in the space.

Elsewhere for the group, as of the start of FY03/11 the company has been focusing on further “digesting” the previous acquisitions and exploring organic growth opportunities arising from this process. The management stated to SR Inc. that there are no plans for large-scale acquisitions of companies in fields other than cardiology supply and dispensing pharmacies. For the manufacturing part of the Total Pack System business, no new large-scale acquisitions are likely until at least FY03/13; revenues can grow organically about 10% YoY without further M&A. The company is limiting its focus area to large-scale regional core hospitals engaged in acute stage illness care. Securing business in those areas opens opportunities of obtaining supply, information management, and other contracts.

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Historical Financial Statements

Summary

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

FY03/11 Results

On May 9, 2011, SHIP released FY03/11 results. Sales came in 8% higher than the company forecast while operating profit beat projections by 25%.

In addition to achieving higher sales and profits in all four segments, the company indicated earnings in all four segments also met or surpassed forecasts. Details of the performance of its business units are below:

Total Pack System Segment

The unit posted sales of 58.3 billion yen (+16.4% YoY) for the period. Sales in the segment were as follows:

• Project sales - 19.9 billion yen, down 0.2% YoY
• Manufacturer-Related sales - 26.2 billion yen, up 28.7% YoY
• Routine sales - 12.2 billion yen, up 24.7% YoY

There were 30 Project contracts, up from 25 in FY03/10. However, since sales per Project contract decreased the overall sales figures remained flat. Nonetheless, sales in the Project unit were above company forecasts. The company attributed the rise in sales to medical fees revisions in 2010, increased capex spending by hospitals and the impact from Sakai Medical Co., Ltd becoming a consolidated subsidiary.

Operating profit was up 27.3% YoY at 4.9 billion yen and operating profit margin came in at 8.2% (up from 7.6% in FY03/10).

Medical Supplies Segment

Sales increased 19.3% YoY to 82.7 billion yen. Sales in the segment were as follows:

• Out-of-hospital SPD sales - 23.5 billion yen, up 10.4% YoY.

• In-hospital SPD sales - 25.9 billion yen, up 10.2% YoY.

• Other sales - 33.2 billion yen, up 35.9% YoY.

The company attributed the better performance to an increase in variety of materials and goods distributed in both in-hospital (Uni-Related) and out-of-hospital SPD and the full consolidation of subsidiary Sapporo Medical Corp. subsidiary in Q3 FY03/11.

Sapporo Medical sells cardiovascular and other specialized medical equipment and supplies. It is especially strong in the fields of cardiovascular surgery, cardiology, and other cardiology-related fields. According to the company, Sapporo Medical Corp. is expected to have annual base sales of 7.0 billion yen, operating profit of 250 million yen, with goodwill amortization of 130 million yen.

Operating profit increased 19.3% YoY to 1.5 billion yen. Operating profit margin came in at 1.8%; the same as FY03/10.

Health Care Segment (Elderly Care Business)

The segment recorded sales of 7.7 billion yen (+11.7% YoY). As of end-March 2011 the unit managed seven facilities with 1,197 residents (total capacity was 1,308 residents), with an occupancy rate of about 92%. According to the company, this occupancy rate was pretty much at the upper end of the expected rate.

Operating profit was up 61.8% YoY at 953 million yen. The improved occupancy rate driven by the increase in occupant numbers was the main contributor to this.

Dispensing Pharmacy Segment

Sales were down marginally by 0.2% YoY to 12.6 billion yen. Reimbursement price revisions under the National Health Insurance system had a downward influence on sales prices, but the addition of generic drugs and technical fees for dispensing pharmacists helped offset this and protected sales and earnings. Operating profit for the segment increased 19.2% YoY to 1.4 billion yen.

Sendai Pharmacy Corp. was forced to temporarily cease operations at three stores due to March’s Tohoku earthquake, but these stores were able to quickly reopen again. The company commented these temporary closures had minimal impact on performance.

Q3 FY03/11 Results

The company released Q3 FY03/11 results on February 7, 2011. There was no change to the full year estimate, but the company did revise the planned full year dividend payment upward, from 24 to 29 yen per share.

Summaries of each segment for cumulative Q3 FY03/11 were as follows:

Total Pack System Segment

Sales were 36.8 billion yen (+50.3% YoY). The company offered multiple reasons for higher YoY sales: increased facility investments by hospitals after medical fees were revised in FY03/11, SAKAI Medical (which became a subsidiary in October 2009) performed well, better than expected results for some large projects, and strong performance from its manufacturing subsidiaries.

Operating profit was 2.7 billion yen (+101.8% YoY) and OPM was 7.4% (vs. 5.5% for cumulative Q1-Q3 FY03/10).

Medical Supplies Segment

Sales were 59.7 billion yen (+17.1% YoY). The company commented that sales grew due to the combination of increased variety of materials and goods distributed in both in-hospital (Uni-Related) and out-of-hospital SPD. Subsidiaries that sell specialty medical supplies also contributed to growth in the segment. Additionally, making Sapporo Medical Corporation a subsidiary in Q3 FY03/11 also had an effect on sales. Sapporo Medical Corporation distributes medical supplies and consumables, and is strong in heart-related areas like cardiovascular surgery and cardiology. Going forward, the company thinks Sapporo Medical Corporation could add about 7.0 billion yen in sales per year, with 250 million yen in operating profit, and 130 million yen in goodwill amortization.

Operating profit was 1.0 billion yen (+33.7% YoY) and OPM was 1.7% (vs. 1.5% for cumulative Q1-Q3 FY03/10).

Health Care Segment (Elderly Care Business)

Sales were 5.8 billion yen (+14.3% YoY), and operating profit was 722 million yen (+75.3% YoY). As of the end of December 2010, there were 1,180 total residents in the seven managed facilities, and the occupancy rate was 90% of the total capacity of 1,308 beds.

Dispensing Pharmacy Segment

Sales were 9.7 billion yen (+2.9% YoY), and operating profit was 863 million yen (+5.2% YoY). Reimbursement price revisions under the National Health Insurance had a downward influence on sales, but the addition of generic drugs and technical fees for dispensing pharmacists offset the negatives, resulting in both higher sales and earnings.

Q2 FY03/11 Results

The company released Q2 (1H) FY03/11 results on November 10, 2010. 1H FY03/11 results were in line with the company’s revised estimate announced on October 26. As a percentage of the full year estimate, 1H FY03/11 results were as follows:

• Sales: 48.3% (vs. FY estimate of 150.0 billion yen)
• Operating profit: 51.8% (vs. FY estimate of 6.3 billion yen)
• Recurring profit: 55.4% (vs. FY estimate of 7.0 billion yen)
• Net profit: 66.2% (vs. FY estimate of 5.0 billion yen)

A recovery in medical institutions’ capex spending as well as better than initially projected sales for large projects, pushed both sales and operating profit higher than initial expectations (the initial budget was 63.0 billion yen for sales and 1.7 billion yen in operating profit). Recognition of a tax effect at the company's IT subsidiary also made a contribution of around 900 million yen, and net profit for the 1H considerably exceeded initial forecasts (1.0 billion yen).

Summaries of each segment for 1H FY03/11 were as follows:

Total Pack System Segment

Sales were 24.2 billion yen (+66.2% YoY). The company offered multiple reasons for higher YoY sales in the segment: increased investments in facilities by hospitals after the medical fee revision in FY03/11, including SAKAI Medical in consolidated results (adding about 3.0 billion yen), and better than expected results for some large projects and its manufacturing subsidiaries. The number of projects increased by just one in 1H FY03/11 from ten in 1H FY03/10. However, the average size of projects nearly doubled YoY, from 334 million yen in 1H FY03/10 to 647 million yen in 1H FY03/11. Also, the company pointed out that synergies between the three manufacturers helped their performance (e.g. sharing sales channels; for subsidiary details – see the "Business Description" section).

Operating profit was 1.9 billion yen (+136.5% YoY) and OPM was 7.9% (vs. 5.5% in 1H FY03/10). According to the company, part of the improvement in OPM was due to the effect of the strong yen lowering some costs.

Medical Supplies Segment

Sales were 37.6 billion yen (+11.7% YoY). A large contribution to the growth in sales was from Uni-Related (15.1 billion yen sales, +29.2% YoY), which the company commented was due to sales growth for in-hospital SPD. The company added three new out-of-Hospital SPD clients in 1H FY03/11, and out-of-hospital SPD sales (11.5 billion yen +17.4% YoY) also contributed to growth in the segment.

Operating profit was 711 million yen (+32.9% YoY) and OPM was 1.9% (vs. 1.6% in 1H FY03/10). The company said that one of the reasons OPM improved was better logistics efficiency as its staff gained experience.

Health Care Segment (Elderly Care Business)

Sales were 3.8 billion yen (+18.9% YoY), and operating profit was 458 million yen (+107.6% YoY). As of the end of September 2010, there were 1,173 total residents in the seven managed facilities (vs. 1,080 in 1H FY03/10), and the occupancy rate increased to 90% of the total capacity of 1,308 beds (vs. 83% occupancy in 1H FY03/10).

Dispensing Pharmacy Segment

Sales were 6.4 billion yen (+3.1% YoY), and operating profit was 520 million yen (+3.8% YoY). Reimbursement price revisions under the National Health Insurance had a downward influence on sales, but the addition of generic drugs and technical fees for dispensing pharmacists offset the negatives, resulting in both higher sales and earnings.

Q1 FY03/11 Results

SHIP released Q1 results on August 6, 2010. As a percentage of the 1H forecast, the Q1 numbers were as follows:

• Sales: 56.9% (35.8 billion yen vs. 1H forecast of 63.0 billion yen)
• Operating profit: 77.0% (1.3 billion yen vs. 1.7 billion yen)
• Recurring profit: 87.1% (1.7 billion yen vs. 1.9 billion yen)
• Net profit: 100.9% (1.0 billion yen vs. 1.0 billion yen)

Q1 FY03/11 results were strong due to recovering investments by hospitals. Non-operating income increased YoY due to amortization of negative goodwill from Central-Uni and SAKAI Medical acquisitions (2H FY03/10).

Total Pack System Segment:

Sales were 11.9 billion yen (+6.8 billion yen YoY), operating profit was 652 million yen (756 million yen YoY). There were more projects completed in Q1 than normal, and sales from newly consolidated SAKAI Medical (consolidated from October 2009) of approximately 1.7 billion also contributed. The revision of medical treatment fees was also a helpful factor: the upward revision of technical fees lead to increased investments in hospitals’ emergency room facilities and more orders for medical equipment such as large diagnostic machines. Demands for hospital beds also increased. According to the company, these orders will start to contribute to sales and profit from Q2. SR Inc. estimates that the segment’s Q2 operating profit could be about half of the Q1 level.

Medical Supplies Segment:

Sales were 18.7 billion yen (+2.3 billion YoY) and operating profit was 325 million yen (+97 million yen YoY). One Out-of-Hospital SPD contract was added in the quarter. Sales of In-Hospital SPD and cardiovascular related supplies increased. Out of the 72.0 billion yen segment sales budget for FY03/11, about 20.0 billion yen of sales will be impacted by the downward revision of medical treatment fees (lower official prices for some supplies). Assuming the price decline is 5%, the impact will be approximately 1.0 billion yen. The company plans to offset the impact by increasing volume and by adding 2 Out-of-Hospital SPD contracts.

Healthcare Segment (Elderly Care Business):

Sales were 1.9 billion yen (+386 million yen YoY) and operating profit was 256 million yen (+211 million yen YoY). The number of residents in the company’s pay nursing homes for senior citizens (capacity of 1,308 residents) increased to 1,153 residents, and all facilities were profitable. Catering was in line with the company’s plan. The company commented that the segment has entered into the cash generating period, and that no major investment is anticipated in the foreseeable future.

Dispensing Pharmacy Segment:

Sales were 3.2 billion yen (+100 million yen YoY), and operating profit was 250 million yen (+6 million yen YoY). Prices fell due to revisions to pharmaceutical prices, but were offset by the addition of generic medicines and technical fees, so results in the segment were similar to previous years.

The company announced plans to split each share into 100 (1:100) effective September 30, 2010, and change the board lot size to 100 shares. The dividend forecast for FY03/11 was revised from 2,400 yen to 24 yen accordingly.

There was no change to 1H and full year results forecasts.

Full Year FY03/10 Results

The company released FY03/10 results on May 11, 2010. The result was in line with the company’s estimate revision announced on April 30.

• Sales for the year were 140.0 billion yen (+18.0% YoY)
• Operating profit was 5.7 billion yen (+ 57.3% YoY)
• Recurring profit was 6.1 billion yen (+63.3% YoY)
• Net income was 3.2 billion yen (+53.6% YoY)

Strong progress relative to the company’s mid-term plan – with both sales and RP results exceeded the FY03/11 goals set in the plan.

FY03/10 Results Report Card

Revenues

Target: 135.0 billion yen (+13.8% YoY)

Result:140.0 billion yen (+18.0% YoY)

Operating Profit

Target: 4.8 billion yen (+32.4% YoY)

Result: 5.7 billion yen (+57.3% YoY)

Recurring Profit

Target: 4.8 billion yen (+27.6% YoY)

Result: 6.1 billion yen (+63.3% YoY)

Net Income

Target: 2.3 billion yen (+12.0% YoY)

Result: 3.1 billion yen (+53.6% YoY)

FY03/10 Highlights

Market Positives:

The medical treatment fee (technical fee) was revised up by the government in FY03/10 (effective from FY03/11), for the first time in 10 years. The company commented that this marked the bottoming out of the medical fees and could positively impact investment in new hospitals.

Separately, it also said at the analyst results meeting that the environment for new large hospital development was positive thanks to targeted government aid programs and substantial deterioration of the physical condition of average large hospitals, driving long term replacement demand.

Market negatives:

Maximum drug and supplies prices were revised down for FY03/11. The company commented that this would mean continued pricing pressure from the hospitals.

Total Pack System Segment: The sales of 50.0 billion yen exceeded the plan of 48.0 billion yen due to the originally unplanned contribution of SAKAI Medical (Note: less than a full year). Projects progressed smoothly, contributing about 19.9 billion yen; there were no particular surprises according to the company.

Maintenance contracts (mainly FS Uni medical gas supply systems) increased to 1,318 vs. 1,226 a year earlier.

The company emphasized the importance of the SAKAI Medical acquisition, saying that adding the rehabilitation equipment and specialized bath equipment manufacturer meant increased ability for Ship Healthcare Holdings (SHIP) to provide a “one stop solution” together with its hospital engineering consulting capability. In the short run, SAKAI Medical helped to boost the profit margin for the segment in FY03/10.

SHIP maintained that loans extended as bridge financing for hospital development projects were all performing. The company policy of extending such loans in the future remains unchanged. While this practice might raise the eyebrows of a casual observer, SHIP argues that it acts as an experienced project finance specialist, providing financing to reliable counterparties with which it has long-standing relationships. It further claims that no loans have ever defaulted (the write-off of few years back was related to a demand by the auditor concerned about the term of the loan rather than actual default).

On a technical note, the company changed the naming of the sub-segments to “Routine” (the business which cycle is within one year as opposed to longer-legged engineering consulting projects) from “Fixed” and “Manufacturer-Related” from Uni-related to reflect addition of new manufacturing subsidiaries.

Medical Supplies Segment: The segment performed strongly according to the company. Sales came in at 69.3 billion yen versus the plan of 67.0 billion yen with in-hospital Uni related supplies sales contributing strongly.

Of the total 69.3 billion yen, about 20.0 billion yen came from the cardiovascular related supplies; further 20.0 billion were miscellaneous consumables and equipment parts. The company was pleased with the growth in this sub-segment, driven by growing experience of the sales personnel and deeper relationship with client hospitals. It noted that such non-core equipment supplies (e.g. pumps, blood pressure measurement devices, EKG devices etc.) had higher profitability and mentioned that it targeted a 40% contribution from such parts by the time total segment sales reach the long-term goal of 100.0 billion yen (compared to 29% in FY03/10). The company further said that this higher contribution would lift segment OPM higher by 2%, approximately doubling it compared to FY03/10.

The OPM of the segment improved YoY, driven partly by improvements in performance efficiency as well as stronger volumes and higher “value added” in cardiovascular related supplies (a specialist company acquired in 2008). This was against the backdrop of lower average prices and harsh competition.

Healthcare Segment (Elderly Care Business): Good performance in line with the company expectations both for sales and operating profit. There were 1,140 residents as of FY03/10 end (87.2% occupancy). Higher occupancy and increased contribution from catering helped to boost OPM to just under 8.6%. One property has been securitized.

Dispensing Pharmacy Segment: Exceeded the budget. This was a mild positive surprise for the company itself. 47 pharmacies were in operation at the FY03/10 end.

FY03/10(Consolidated) Upward Revision

The company announced an upward revision to its consolidated FY03/10 earnings forecast on April 30, 2010. Key figures were as follows:

• Sales: 140.0 billion yen (+3.7% over the previous forecast of 135.0 billion yen)

• Operating income: 5.7 billion yen (+18.8% over the previous forecast of 4.8 billion yen)

• Recurring income: 6.1 billion yen (+24.5% over the previous forecast of 4.9 billion yen)

• Net income: 3.1 billion yen (+19.2% over the previous forecast of 2.6 billion yen)

Main reason for the revision is the impact of subsidiary SAKAI Medical, acquired in October 23, 2009 (the inclusion of 1H performance). In addition, operational improvement in Medical Supplies business and new store openings in the Dispensing Pharmacy business are expected to push up operating profit margin (from 3.6% to 4.1%).

Negative goodwill from Central-Uni and SAKAI Medical acquisitions was expected to increase recurring profit margin (from 3.6% to 4.4%).

Q3 FY03/10 Results

SHIP released Q3 results on February 12, 2010. As a percentage of the full year forecast, the Q3 numbers were as follows:

• Sales: 67.1% (90.6 billion yen vs. full year forecast of 135.0 billion yen)

• Operating profit: 52.0% (2.5 billion yen vs. 4.8 billion yen)

• Recurring profit: 60.0% (2.9 billion yen vs. 4.9 billion yen)

• Net profit: 66.1% (1.7 billion yen vs. 2.6 billion yen)

Q3 consolidated sales were 32.5 billion yen (+5.1% YoY). Q3 consolidated operating profit was 1.0 billion yen (+40.6% YoY), operating profit margin was 3.2%.

There was no change to the full year forecast.

Sales in the Total Pack segment were 9.9 billion yen (-7.9% YoY). Operating profit was 545 million yen (-20.1%). Segment sales were impacted by reduced hospital spending and sluggish demand for equipment.

The company indicated that the relative heavy weighting of sales in Q4 (49% of the full year plan) was a result of project timing (openings in February and March vs. typically April) and a smaller number of larger-value projects (25 in FY03/10, vs. 34 in FY03/09).

SR Inc. felt that management was optimistic regarding full year results. The company noted that an accounting change for some Central-Uni projects should make an impact in Q4 FY03/10 and that SAKAI Medical could contribute approximately 3.5 billion yen to sales. Additionally, negative goodwill related to Central-Uni and SAKAI Medical are amortized over different periods (10 years for Central-Uni, 5 for SAKAI Medical) and are recognized as non-operating items, increasing recurring profit margins.

The company suggested the FY03/11 project pipeline would be flattish compared to FY03/10, but expects upward momentum from FY03/12.

Sales in the Medical Supplies segment were 17.3 billion yen (+10.9% YoY). Operating profit was 246 million yen (+87.8% YoY). The sales increase was partially due to sales of cardiovascular supplies and the addition of approximately 50 new contracts. The company suggested that Q4 performance appeared on target.

The company suggested that although FY03/10 segment performance is progressing well, FY03/11 is an area of slight concern.

Sales in the Dispensing Pharmacy segment were 3.3 billion yen (+8.4% YoY). Operating profit was 319 million yen (+26.1% YoY). Sales growth was due to new stores opened in 1H and demand related to the H1N1 flu.

Sales in the Healthcare segment were 1.8 billion yen (+32.6% YoY). Operating profit was 191 million yen (vs. -21 million yen Q3 FY03/09). Sales increased due to improved facility occupancy rates (92% in Q3 FY03/10, vs. 74% in Q3 FY03/09) and additional catering contracts signed with large hospitals. The company suggested that full year operating profit (600 million yen) was achievable.

Q2 FY03/10 Results

1H results were released on November 13, 2009. Results were materially the same as guidance provided on November 6, 2009: sales 58,031 million yen (up 14.4% YoY); operating profit 1,519 (up 85% YoY); recurring profit 1,700 (up 59% YoY); net income 924 million yen (up 144% YoY). No change in the full year forecast released on November 6, 2009.

Background to the revision and performance: Sales in the Total Pack segment which had been earlier delayed during Q1 were realized during Q2, and sales initially expected in 2H were booked (and recognized) earlier than management had anticipated (effectively an acceleration of future expected sales). Higher than expected sales in the Medical Supplies segment and successful negotiations with suppliers led to the improvement in expected profitability measures.

FY03/10 (Consolidated) Upward Revision

Recurring profit revised upward by 2.1%; net income revised upward by 13%. Management cited the assumption of negative goodwill arising from the Central Uni acquisition and sales of fixed assets in the Green Life segment as the sources for improvement in FY03/10 profitability.

Q1 FY03/10 Results

The company’s Q1 FY03/10 results, released on August 7th 2009, showed 11.5% YoY growth in sales to 26.2 billion yen, 329.4% growth in operating profit to 0.2 billion yen, 12.8% growth in recurring profit to 0.3 billion yen and 608.3% growth to 0.1 billion yen. The results were roughly in line with company estimates released on May 15th 2009. SHIP suffered an operating loss in Total Pack System of 104 million yen, versus operating loss of 37 million in Q1 FY03/09. Medical Supplies and Dispensing Pharmacy saw improved earnings, resulting in consolidated operating profit margin improvement from 0.2% to 0.8%.

Additionally, the Healthcare segment also saw an improvement in earnings. The number of residents at the company’s pay nursing homes had increased to 1,013 in Q1 FY03/10, up from 980 at the end of March 2009.

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Income Statement

The company saw operating profit of 2.7 billion (+65.5% YoY) in FY03/05 and 3.2 billion yen (+19.0%) in FY03/06, having posted nice earnings growth during the same periods. In FY03/07, SHIP experienced slowed growth in operating profit 3.3 billion yen (+2.1%), and then a decline in FY03/08 when operating profit was 3.0 billion yen (-9.7%), combined with extraordinary loss of 4.5 billion yen and resulting in net loss of 3.8 billion yen in FY03/08. One of the key negative factors effecting operating profit levels were losses experienced by subsidiary companies Ainet and Central Uni.

Ainet’s business focus is the development of electronic care cards for hospital patients. Intense price competition with larger players like IBM and Fujitsu (TSE 6702) caused Ainet to incur an operating loss of 500 million in FY03/08. In addition, this subsidiary enforced the company to report extraordinary loss of 1.7 billion yen (comprising front-loaded write-off for its goodwill and devaluation of its assets).

Central Uni had an extraordinary loss of 1.1 billion yen (comprising a front-loaded write-off for its goodwill of 1.0 billion yen and devaluation for its inventory of 0.1 billion yen) in FY03/09. The subsequent decline of Central Uni share price required SHIP to report a loss on related-company share holdings of 3.7 billion yen.

Another component of the FY03/08 performance was an extraordinary loss of 1.6 billion yen associated with bad debt provision from lending to clients. The loans are typically repaid within a year, however in one specific case the term was such that accounting conventions required that it receive impairment.

Performance in FY03/09 was a stark contrast to FY03/08. Operating profit in FY03/09 rebounded 21.7% to 3.6 billion yen (operating profit margin was 3.1%). Recurring profit for FY03/09 rose 23.5% YoY to 3.8 billion yen, driven by lower non-operating expenses. A drop in the share price of Cytori Therapeutics, Inc. (NASDAQ CYTX), a U.S.-base cell research company, had to be written down by 1.4 billion yen. SHIP took a nursing home off of its balance sheet through securitization, and realized an extraordinary gain of 2.1 billion yen which offset an extraordinary loss of 1.6 billion yet (net impact was a gain of 970 million yen).

Company Estimates versus Results

Comparing SHIP’s performance with initial estimates yields no predictable pattern with respect to a persistent over or underestimation of results. This could be a result of the revenue recognition required for some consulting projects (revenues are booked upon final delivery acceptance). Project lifecycles are typically spread over several years, so precise timing of completion and acceptance is likely a daunting task. Percentage of completion revenue recognition will be used for the manufacturing business (Manufacturer-Related) so this could change the usefulness of estimates in the future.

More specific guidance for the Total Pack System segment is difficult due to the limited breadth of competitors in the market. According to SHIP, disclosure of seemingly minor details of specific projects or engagements would give competitors instant visibility into proprietary details of their operations.

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Balance Sheet

Reduction of Interest Bearing Debt Progressing

The company’s net-debt-to-equity ratio was less than 5.0% as of the end of FY03/05, but soared to 255.1% as of the end of FY03/08. Looking at the change in the absolute amount of interest bearing debt, it ballooned from 11.2 billion yen to 47.0 billion yen. By procuring capital through debt financing, SHIP was able to perform M&A and invest in real estate (most operations are of a trading-company nature so its fundamental requirements for new finance are low), but due to returns on many of its investments being much lower than expected, the amount of interest bearing debt seems to have remained at a much higher level than was expected. However, measures taken to apply the cash flow resulting from the securitization of assets in FY03/09 to repayment of interest bearing debt has had a large effect, bringing interest bearing debt down to 36.1 billion yen and the net-debt-to-equity ratio to 149.6%. Further, despite the fact that the company sees low figures in FY03/09, such as quick ratio of 80.1%, current ratio of 104.4% and shareholders’ equity ratio of 17.3%, comparing these to the equivalents in FY03/08 it is noted that they have improved from the bottoms in FY03/08, as in the case of net-debt-to-equity ratio. When return relates to net profit, ROA was 2.0% while ROE 12.4%. Compared with historical levels, the ROA is slightly inferior to normal equivalents just above 3%, but the ROE is almost in line with those during regular years.

Capital Investment and Securitization

The company’s capital investment had increased to a level of 14.6 billion yen for FY03/08, which mainly consisted of 9.0 billion yen invested in land and building acquisitions for its hospital consultation clients, and 3.0 billion yen in investments in facilities of pay nursing home for senior citizens. The former remain operated by the previous hospital administrations, which pay rent to SHIP. A net 1.8 billion yen was added to fixed assets (after accounting for depreciation) resulting in tangible fixed assets reported at 25.7 billion yen at the end of the FY03/09 (a 15.5% YoY decline). The sale of fixed tangible assets could have produced an adjustment value of 6.5 billion yen, and this was an off-balance-sheet transaction (sale value 9.3 billion yen) that resulted in a corresponding reduction in fixed tangible assets.

Per Share Data

The number of shares outstanding increased in FY03/10 to 412,567 (excluding 28 treasury shares) following the share swap involving the Central Uni (a YoY increase of 78,565).

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Cash Flow Statement

Financing cash flow continued to see net inflows every year until FY03/09 as the company was investing in future growth. In FY03/08 when capital expenditure surged, financing cash flow reached positive 18.0 billion yen, while the investment cash flow hit negative 21.9 billion yen. In FY03/09 SHIP took fixed assets off the balance sheet, and investment cash flow was 8.6 billion yen in net inflow. Combining the operating cash flow of 5.1 billion with investment cash flow of 8.6, it resulted in a net inflow of 13.7 billion yen in FY03/09. To a large extent, this net inflow was spent on paying down interest bearing debt, and thus financing cash flow was 12.2 billion in net outflow. In the table above, free cash flow not affected by sale of assets and other irregular factors has been calculated, whereby it is suggested that the company saw net inflow of 1.8 billion in terms of free cash flow. So, the company has effectively generated cash with its underlying businesses in FY03/09, with no reliance upon sale of assets etc.

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Other Information

History

Established in 1992

• Aug 1992: Ship Corporation Limited (now “the company”) was established in Suita City, Osaka, with the aim of operating as a consultant to medical, healthcare and welfare institutions.
• Nov 1992: Green Hospital Supply Co., Ltd. (taken over by SHIP through a merger) was established in Suita City, Osaka, with the objective of selling X-ray films and automatic developing machines made by Fuji Film (4901) as well as medical equipment.
• Oct 1999: The former Green Hospital Supply Co., Ltd. divested its Medical Imaging Division operations to West Japan Fuji Film Medical Imaging Co., Ltd.
• Feb 2005: The company was listed on TSE2.
• Nov 2006: Central Uni Co., Ltd. and its five subsidiaries were made into subsidiaries of the company.
• Mar 2007: The company’s listing designation was changed to TSE1.
• Apr 2008: Yamada Shadowless Lamp Co., Ltd. and its five subsidiaries were made into subsidiaries of the company.
• Oct 2009: Central Uni was made a 100%-owned subsidiary through a share swap, and concurrently the company’s name was changed to Ship Healthcare Holdings, Inc.
• Oct 2009: SAKAI Medical Co., Ltd. and its one subsidiary were made into subsidiaries of the company.

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News & Topics

November 2011

On November 7, 2011, the company released 1H/Q2 FY03/12 results: click here to go direct to the 1H FY03/12 results section.

(For original Japanese-language only release in PDF format, please click here.)

October 2011

On October 28, 2011, the company announced an upward revision to its 1H FY03/12 forecast, the revision was as follows:

• Sales: 81.0 billion yen (vs. previous forecast of 75.0 billion yen)
• Operating profit: 4.3 billion yen (vs. previous forecast of 2.9 billion yen)
• Recurring profit: 4.9 billion yen (vs. previous forecast of 3.3 billion yen)
• Net income: 3.0 billion yen (vs. previous forecast of 1.8 billion yen)

The company cited the following factors behind the upward revision:

• In the Total Pack System segment some projects were booked earlier than initially forecast.
• Manufacturer-Related business in the Total Pack System segment experienced strong demand for its specialized bath equipment for old people’s homes and construction orders for operating room facilities.
• Patient numbers were strong in the Dispensing Pharmacy Segment.

The company is currently reviewing its full year FY03/12 forecasts and said it would release any revision once it occurs.

(For original, Japanese language only release in PDF format, please click here.)

August 2011

On August 1, 2011, the company released Q1 FY03/12 results: click here to go direct to Q1 FY03/12 results section.

(For original PDF announcement in Japanese-language only please click here.)

May 2011

On May 9, 2011, the company released FY03/11 results.

March 2011

On March 17, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• The safety of all company and group company employees was confirmed.
• Sendai Pharmacy Corp. stores have mostly reopened, but three stores remain temporarily closed due to a combination of damage from the earthquake and hospitals switching to in-house prescriptions.

Future outlook:

• The company thought that losses from the earthquake and effects on earnings would be minor.
• The company is proceeding with measures to deal with shortages of SPD goods in some hospitals, shortages of in-pharmacy medical supplies, and shortages of everyday goods for employees in Tohoku (northeastern Japan).

Note: The company attached a separate page for donations to disaster victims to its press release.

On March 14, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• The safety of most company and group company employees was confirmed, but the safety of some subsidiary employees was not yet confirmed. Efforts to confirm the safety of those employees continued.
• Regarding the condition of group company equipment, some of Sendai Pharmacy Corp.'s (a subsidiary) stores were damaged. The company was gathering more detailed information on the situation.

Impact on financial performance:

The company thought that losses from the earthquake and effects on earnings would be minor. The company said it would release details if it became clear that earnings would be impacted.

February 2011

On February 7, 2011, the company released Q3 FY03/11 results and an upward revision to the planned full year dividend.

November 2010

On November 10, 2010, the company released Q2 (1H) FY03/11 results.

October 2010

On October 26, 2010, the company announced an upward revision to 1H and full year FY03/11 forecasts. The revised figures were as follows:

1H FY03/11 forecast

Sales: 72.5 billion yen (previous forecast: 63.0 billion yen)

Operating profit: 3.2 billion yen (previous forecast: 1.7 billion yen)

Recurring profit: 3.8 billion yen (previous forecast: 1.9 billion yen)

Net income: 3.3 billion yen (previous forecast: 1.0 billion yen)

FY03/11 forecast

Sales: 150.0 billion yen (previous forecast: 145.0 billion yen)

Operating profit: 6.3 billion yen (previous forecast: 6.0 billion yen)

Recurring profit: 7.0 billion yen (previous forecast: 6.5 billion yen)

Net income: 5.0 billion yen (previous forecast: 3.7 billion yen)

The company mentioned that the upward revisions were due to stronger results than expected for key subsidiaries. Specifically, Green Hospital Supply completed more projects in Q2 than originally planned, Central-Uni benefitted from growth in medical facility construction, and SAKAI Medical sold more bathing equipment than expected.

August 2010

The company announced Q1 FY03/11 results and updated trading arrangements (a split and revised board lot size) on August 6, 2010.

May 2010

The company released full year results on May 11, 2010.

April 2010

The company announced an upward revision to its FY03/10 earnings forecast on April 30, 2010.

March 2010

The company announced an upward revision to its expected dividend payment for FY03/10 from 1,650 yen to 2,150 yen (+30.3%) on March 19, 2010.

February 2010

The company announced Q3 FY03/10 results on February 12, 2010.

2009

The company announced on October 23, 2009 that SAKAI Medical Co., Ltd. became a subsidiary of Central Uni after it acquired an additional 5.91% of shares outstanding of SAKAI Medical in addition to the 38.48% that Central Uni already owned. The percentage of votes after this acquisition amounts to 50.57% of the total voting rights. SAKAI Medical is an established manufacturer in the field of elderly care and social welfare (FY06/09 sales 4.1 billion yen, recurring profit 327 million yen). The company commented that the acquisition is aimed at strengthening the Total Pack System business.

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Top Management

Specializing in Medical Consulting

The company’s most senior manager is the President and Founder, Kunihisa Furukawa, born in 1945. Furukawa entered employment at Nishimoto Sangyo (now Elk Corporation, 9833) in April 1964. Furukawa created Ship Corporation in August 1992 with the objective of building a firm specializing in consulting to medical institutions. As of June 3 2010, the company had a bord of 10 directors excluding auditors, six of whom, starting with Furukawa, were previously employed at Nishimoto Sangyo.

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Employees

As of end-FY03/11, 2,275 staff were employed on a full-time basis (at the consolidated level), with an average of 2,314 temporary staff employed over the year. By segment, Total Pack System employed the most full-time employees at 879, followed by 578 in Healthcare and 511 in Medical Supplies.

Employees by Segment (Source: Company Data Processed by SR Inc.)

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Major Shareholders

The top 10 shareholders as of March 2010 can be found here.

As of end-FY03/11, the largest shareholder - excluding trust accounts of trust banks - was the founder of the company and current company president, Kunihisa Furukawa. The shareholdings of the 10 largest shareholders represented a total of 49.88% of the company’s shares outstanding. The ratio of shares held by non-Japanese persons or entities stood at 20.28%.
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Dividends and Shareholder Benefits

The company target dividend policy is based on payout ratios rather than a specific minimum amount. The company stated a mid-term goal of increasing the payout ratio from then current 20% to 30% when it announced on April 30, 2008 its new mid-term plan.

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Investor Relations

The company holds twice-yearly results meetings.

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By the Way

Latest Q&A

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