Olympus Corp Ord

Hello, everyone. I am Takeda. So first of all, I would like to provide a review of our numbers. And then in the second half of the presentation, Stefan Kaufmann will talk about growth and value creation. So thank you very much for participating in this conference for the financial results for the second quarter fiscal 2024, despite your busy schedule. First, I would like to provide the review of the second quarter results and then talk about a full year forecast for fiscal 2024. And please go to slide three. This will be the highlights. revenue increased 5% on a consolidated basis. The medical business reached a record high for the second quarter and for the first six months of the fiscal year. However, Profit declined in addition to the absence of the 16.4 billion gain on the sales of land in Tokyo according to previous fiscal year. And due to the discontinuation of the manufacturing sales of electronic magnetic navigation systems by Vera Medical Technologies, this is a loss around 49.6 billion yen. and provision of approximately five billion associated with the voluntary recall of small intestine endoscopy system, etc., ESG. Other factors, including expenses, various projects to improve efficiency, as well as personal expenses for future growth and strengthening the operational infrastructure, such as QERA. Expenses related to the US FDA were approximately ¥1 billion under SCNA expenses, and approximately ¥11.9 billion incurred under other expenses. These expenses were mainly comprised of complaint handling, medical device reports, MDRs, and the validation processes and designs, and a redesign to strengthen the quality assurance function for medical devices as required by the FDA and authorities in various countries. We have been engaged in constructive dialogue with the FDA to date and have made steady progress in dealing with the issues indicated in the warning letters. So adjusted operating profit, which excludes other income and expenses, declined 16% with an adjusted operating margin of 15.2%. Regarding total profit, including both continuing and discontinuing operations, we posted a record high of 216.7 billion with EPS of 174 yen due to a gain on the transfer of scientific solutions divisions, according to the first quarter. We have revised our forecast to reflect results up until the end quarter, in addition to changes to forex assumptions from the previous forecast. Revenue will increase 9% year-over-year to 958 billion yen, with adjusted operating profit declining 1% to 174.5 billion. We forecast an adjusted operating margin of 18.2%. We project combined profit for continuing operations and discontinued operations to reach a record high of 289 billion with EPS of 238 yen. Additionally, as announced in the time disclosure today, we have decided on an additional share buyback of 80 billion yen in accordance with the capital allocation policy. In fiscal 2024, we plan a share buyback of 180 billion yen in total. In fiscal 2024, while we expect profit to decline due to various internal and external factors, we will steadily implement measures to address the specific factors that inhibit growth while continuing to implement upfront investments for sustainable growth. Our CEO, Stéphane Gaffin, will talk more about these points later. Going to slide four. I will now explain the consolidated financial results and provide a business review for the second quarter of fiscal 2024. Please go to slide 5. This is an overview of the consolidated financial results. Consolidated revenue amounted to $136.6 billion. The medical business reached a record high for the second quarter, and it was up 5% year over year. All business segments, whether it's DTSD and others, all grew. Asia and Oceania, APAC, which grew in all areas, performed well by business segment, medical service, and GI endotherapy continued strong strength. Gross profit was 288.4 billion yen, with the gross margin deteriorating by 0.4 points. Despite a decrease in procurement in the semiconductor smart market, the ratio worsened due to a provision of approximately 5 billion yen associated with the voluntary recall of small intestine endoscopy systems in ESD. SCNA expenses were $221.6 billion, with the SCNA ratio deteriorating by 3.2 points. Major factors behind this include increasing expenses related to various projects to improve efficiency, as well as rising personal expenses and future growth and strengthening of operational infrastructure, such as in QERA. Adjusted operating profit declined 12.8 billion to 66.6 billion yen, down 16% year-over-year. The adjusted operating margin deteriorated 3.8 points to 15.2%. Regarding other income and expenses, a loss of 62 billion yen was posted, a loss of about 49.6 billion due to discontinuation of manufacturing and sales of electromagnetic navigation systems by Varon Medical Technologies. and FDA-related expenses of about 11.9 billion yen were recorded. In the previous fiscal year, we recorded a gain of 14.6 billion yen, including a gain of approximately 16.3 billion on the sale of land in Tokyo. A loss of 11.5 billion from continuing operations was posted in the meantime. With completion of the transfer discontinued operation evident in April 2023, recorded a gain on the transfer in the first quarter of this fiscal year. Total profit including continuing discontinued operations amounted to 216.7 billion yen with EPS of 174 yen.

Next, I'd like to explain full year forecasts for fiscal 2024 on page 10. Sorry, could you go to page 11? Our full-year forecast for FY24, we have revised our forecast to reflect the results up to Q2 in addition to changes to FX assumption from the previous forecast. The assumed rate now is on the basis of forecast are 145 yen to the dollar and 155 to the euro. We project that the revenue will increase 9% year-on-year to 958 billion with adjusted OP declining 1% to 174.5%. billion with adjusted operating margin of 18.2%. Despite the weekend as a tailwind, we expect challenging results due to various internal external factors. We project a record profit attribute of the owners apparent at over 289 billion with EPS of 238 reflecting gain on the transfer of evident profit from continued operation is expected to reach 61 billion with EPS of 50 yen. Capital expenditure forecasts have been revised to 78 billion yen due to a review of investment items based on the results until Q2 and impact of weaker yen. Dividends of fiscal 24 is planned at 18 yen per share. unchanged from May forecast. In addition, today we announced additional share buyback of up to 80 billion yen. The EPS figures discussed today will reflect this. So we plan a share buyback of 180 billion yen for the full year. Slide 12, moving to forecast by segment. We have revised on the ESDOP forecast from the August announcement considering the delayed tenders due to the anti-corruption campaign in China and the provision for voluntary recall of small intestine endoscope system. EVA-6-1 was launched in North America, our largest market, and China from October 2023, which is expected to drive our future business expansion. We also have also revised down the TSD OP forecast, considering supply delays caused by quality responses and the parts shortages, as well as loss of approximately 49.6 billion yen related to VERA medical technologies posted in Q2. FDA-related expenses include around 9 billion yen in SG&A and 20 billion yen in other expenses for the full year. For elimination on corporate, despite the absence of gain on sale of land in Tokyo of approximately 16.4 billion yen recorded last year, the expected increase in corporate infrastructure reinforcement expenses such as IT related expenses operating result is expected to improve due to revised classification for each project this year. Lastly, discontinued operation will generate a gain on transfer of evidence, resulting in a significant increase in profit year-on-year. Slide 13, please. This slide waterfall chart shows the factors behind change in adjusted operating profit from the previous announcement. As was explained earlier, we have a difficult situation this year due to various factors, such as the lower sales provision associated with the voluntary recall of some products, expenses related to FDA response, and other factors. Because of this, adjusted operating profit is projected at 174.5 billion yen. Please refer to the appendix for the factors behind change in operating profit on the IFR space. Now, this is all for my part, so I would like to hand over to CEO Stefan Kaufmann.

Thank you very much for your explanation, Chikashi. So, hello, everyone. I'm Stefan Kaufmann. Thank you for joining this earnings call. Today, as the President and CEO of Olympus, I would like to share with you my view on our current situation and give you some insight on our actions to sustain growth and value creation for all our stakeholders, mid- and long-term. Our clear priority is the remediation of all issues outlined in the three warning letters and transforming Olympus into a best-in-class medtech company with highest focus on patient safety and quality. We are making significant progress in meeting our FDA commitments and transforming our operational approach to deliver innovative, high-quality products and solutions to the market with enhanced efficiency, paving the way for the future. As already indicated in May, when we shared our three-year strategy with you, Some of our remediation activities have a short-term impact on growth and profitability. Foreign exchange is helping us this fiscal year, but our mid-term ambition level with respect to growth and margin expansion is obviously higher than what we will be able to deliver in this year. Our shareholders' trust is important for us. Our capital allocation policy remains valid and we will this fiscal year and in the future increase value for our shareholders and improve our capital efficiency. Now I would like to provide you with some more details to the respective points mentioned so that you hopefully gain a good understanding of my leadership and direction for Olympus. Our company strategy and comprehend. We have defined three strategic priorities, patient safety and sustainability, innovation for growth, and productivity. We invest and will harvest from four strategic value pools, business and global expansion, strategic M&A, care pathway enhancement, and intelligent endoscopy ecosystem. And all of this we do in three prioritized investment areas, and focus areas, GI, urology, and respiratory. As announced in the company's strategy, we will invest approximately 60 billion yen over the next three years in strengthening QA-RA. These will be invested in both remediation and transformational activities, which cannot be clearly segregated due to the complexity and dependency of the different projects. And we have therefore consolidated remediation and transformation under one holistic program management, which we named Elevate. We believe that Elevate will be one important enabler for innovation, growth, and improved profitability through sustainable benefits such as improved lifecycle management and digitally enabled processes to reduce cost, improve effectiveness, and shorten time to develop, clear, and launch new products. Once more, the remediation of the findings that led to our three warning letters as committed to FDA is the undebatable top priority, but we will at the same time unleash Olympus' full potential. We do not want to miss out on this opportunity for fundamental change. In addition to the QAR efforts I've just described, we are also making investments and implementing initiatives in the three strategic priorities to achieve sustainable growth and value creation over the midterm. And I would like to introduce some of those examples today. As one of our remediation and transformation projects, we have strengthened our capabilities and completely revisited our structure and processes for regulatory approvals. I'm proud that we launched EVIX X1 endoscopy system as promised in the US and even earlier than planned in China. EVIX X1 is now available in all relevant markets worldwide. It will provide the company with stable growth and cash flow. in markets where we launched already a few years ago and from now on also in the US and in China. In China, the effect may delay due to the local anti-corruption efforts. So all in all, we are incredibly excited about this progress as we will be now able to cover the remaining 50% of our sales for further growth potential. In the last months, I had numerous opportunities to talk with healthcare professionals at congresses in Europe and Japan and other occasions. Their feedback is unanimously reassuring and everyone is specifically praising that we have reached the next dimension of visualization. Therefore, please let me highlight some of the specifications that give us again a unique position in the market ahead of competition. The EVSX-1 endoscopy system is our most advanced endoscopy system and introduces several easy-to-use technologies that aim to revolutionize the way gastrointestinal disorders can be detected, characterized, and treated. The imaging advancements include TXI, RDI, MBI, EDOF, and NO8 CADE. The EVSX-1 system, first launched in Europe, has seen immense success and adoption. A recent customer testimonial claimed that the imaging capabilities delivered by the EVIX-X1 platform really improve our capabilities to diagnose lesions and GI cancer at an earlier stage than was ever possible before. The EVIX-X1 provides a combination of diagnostic and therapeutic innovations to streamline and improve endoscopic procedures and scope handling. We are excited to continue to elevate the standard of care with EVIX X1. Sales growth in TSD is more impacted by remediation activities. And unfortunately, we have not yet solved all our supply chain challenges. Nevertheless, the basics are still in place. NGI endotherapy, complementary to our core GI portfolio, We have built a broad and differentiated GI endotherapy portfolio of ESCP, ESD sampling, and homesthesia solutions. Sales in U.S. grew in the first half double-digit, which demonstrates our strong competitiveness in these therapeutic areas. As you are aware, we are in closing discussions with Taewong Medical. Their product portfolio is largely complementary to ours, and we regard their metallic stand portfolio as a significant future growth driver. In respiratory, we lead market position in pulmonary and EVOS bronchoscopes. Now our investments in single-use airway management scopes in the slim EVOS scope, which are under development, are expected to re-evigorate the growth in this segment. In urology, for the upper urological tract, Olympus was the first company to launch the newest volume fiber lasers for lithotripsy. And we command the top market share in this category for both the laser systems as well as the consumable fibers. Competition has increased in this segment, and we are currently revisiting our go-to-market strategy for the U.S. In the lower urological tract, we have a similarly compelling and market-leading portfolio of solutions for the treatment of bladder cancer and BPH. We expect to see significant growth from the Plasma Plus technology system and more good news to come on the following page. Today, I'm delighted to introduce iTint, which we expect to be a mid- to long-term growth driver for audiology. iTint is a minimally invasive treatment device that contributes to early improvement of symptoms of BPH. It does not require cutting or heating of prostate tissue, does not require permanent device implementation and contributes to avoiding complications associated with other treatments. For patients, it is also a great way to maintain sexual and urinary function and recuperate at home as it does not require an uncomfortable catheter and can be inserted with a simple procedure without hospitalization. For ITINT on October 20th, 2023, The American Medical Association, CPT Committee, published its decision to establish two Category 1 CPD codes, a reimbursement code for clinics, which is expected to go into effect in January 25. Although we have already obtained reimbursement in hospital, outpatient, and ambulatory surgical center, iTINT is in high demand in the clinic or office setting due to its minimally invasive device and day treatment capability. and more patients and physicians will have access to the novel ITIN procedure. The U.S., where the CPD code applies, accounts for approximately 40% of BPH patients worldwide, and ITIN is expected to drive future growth in the urology field. Next, we will discuss our efforts to improve productivity. Since this fiscal year, we are not a conglomerate of different businesses anymore, but a pure MedTech player. Now we have the opportunity to create an operating model that puts the divisions on top of the organization with the full accountability for the global P&L and verticalize all supporting functions with an aligned set of targets and KPIs and clarity about accountability. We have already allocated targets for productivity improvements in fiscal year 25 and will in addition take a more structured approach next year to baseline the global organization, clarify value contribution and benchmark with industry peers to seek for further simplification and higher efficiency of our organization. Regarding capital allocation, the policy of investing into innovation into business and M&A remains unchanged, with business investments as the top priority. In terms of M&A, we will continue to strengthen our product portfolio through tuck-in M&A opportunities that complement and enhance our existing business and fit our portfolio in focused disease areas in GI, urology, and respiratory. As in the past, we aim to increase dividends to shareholders in a stable and gradual manner, And we'll consider share buyback when there are surplus funds available, after securing sufficient liquidity on hand for working capital and investments. We announced today that we decided on an additional share buyback of 80 billion yen. The total share buyback for fiscal year 24 is expected to be 180 billion yen. The total shareholder return ratio for fiscal year 24, including an annual dividend forecast of 18 yen per share, is expected to be 69.5%. We will proactively continue to consider share buyback in accordance with our capital allocation policy for fiscal year 25 and 26. We are committed to allocating our capital with a view to improve the capital efficiency of Olympus and optimize returns to our shareholders. This is the last slide of my presentation. As we are holding the Q2 earnings call today, it is not the right time to update our midterm target until fiscal year 26. Nevertheless, I would like to give you today at least an indication of how I expect our financial KPIs will develop in the next two years and beyond. We are facing temporary headwinds on our top line caused by our quality remediation efforts, macro political and macro economical factors, and some supply chain shortages. But we take actions to mitigate those headwinds and defend shareholder value because we believe we have a great business and the right strategy in place. In fiscal year 25, our remediation will not be finalized. I also don't expect that the macro-political and macro-economical headwinds we experienced this fiscal year will go away quickly. It's too early to say, but while I believe sales growth will be higher than this year, I don't expect a V-shaped recovery. Our EPS target is including the 1000 AUKUS share buyback, but not the one announced today. Also, foreign exchange effects are not included. So we aim to achieve an EPS growth well above the target of 8%, as we will proactively continue to consider share buyback in fiscal year 25 and fiscal year 26, in addition to the share buyback of 180 billion yen in total in fiscal year 24. Part of being a leading global meta company is having industry-leading capital efficiency, so we have room to improve our capital efficiencies. We have started already our productivity measures, but some of them will take time to fully positively impact SG&A and bottom line in fiscal year 26. With all this said, in fiscal year 26, I expect us to achieve our mid-single sales growth target and adjusted operating margin and finally meet our target of 20%. After fiscal year 26, I expect Olympus to be set up for steady margin expansion above 20% by higher sales growth on a more efficient global operating model. The three takeaways of my presentation are as follows. Number one, remediation and transformation is progressing successfully, but it's not a walk in the park. It hampers growth and profitability this year, and also it will hamper growth and profitability in fiscal year 25. Second, our business, our strategy, our business model, our technology, our customer relationship are robust, and they secure sustainable growth and value creation for all stakeholders in the future, also in challenging times. And last but not least, fiscal year 26, we will be back on track for higher sales growth and margin expansion above 20%. Thank you for your trust and your support. And this finalizes my presentation. And now we're looking forward to receiving your questions.