Olympus Corp Ord

Hello, everyone. I'm Stefan Kaufmann, CEO of Olympus Corporation. And as you could hear at the beginning, my Japanese has not significantly improved over the last 12 months. Sorry for this. I would like to thank you all for participating in this conference despite your busy schedules. First of all, I would like to express my deepest condolences to the victims of the Noto Peninsula earthquake, their families and everyone involved, and my heartfelt sympathies to everyone affected by the disaster. No employees of the Olympus Group were seriously affected by the earthquake. Also, the Kanazawa and Niigata branch offices of Olympus Group have not sustained any particular damage, and there are no manufacturing facilities of Olympus Group in this region. You certainly have seen our two timely disclosures from last Friday and this afternoon, and I would like to give you now more background information. I'm sure that you may have more questions in the Q&A part of the earnings call, which I will then, together with my colleagues, try to answer, hopefully to your satisfaction. Olympus Group procures endoscope parts from a supplier located in Ishikawa Prefecture. The earthquake has impacted and damaged the factory of this supplier. The production of the supplier is stopped at this moment and the timing for resumption of operations has not yet been determined. We are in very close contact with the supplier and actively support him and his employees to resume production as quickly as possible. We are also working closely with the second supplier who manufactures the same component to increase production volume as quickly as possible. However, out of an abundance of caution, we decided to slow down the sales of new endoscopes in order to ensure the continuity of patient care, and safeguard healthcare supplies for service and repair, either by keeping spare parts on stock or utilizing new endoscopes to increase our loaner pool. The likely impact of the earthquake on fiscal year 2024 result is estimated to include shortfalls of revenue of approximately 24 billion yen, and the impact on our business performance for fiscal year 2025 is still being confirmed. It is very important to understand that this forecast is based on a scenario for slow recovery of production. Further, not all our scopes are affected by the supply shortage. For example, scopes within TSD like bronchoscopes and surgical scopes will be manufactured and delivered to our customers without any timely delay. Finally, based on the current information available to us, We are confident that the loss of sales occurring in this last quarter will shift to the first quarter of fiscal year 2025 and the months commencing. Next, I would like to talk about the change of executive officers from fiscal year 2025 onwards. Starting from April, we will welcome three new executive officers and Gabriela Kehner, who has been serving as TSD head to date, will assume the post of Chief Strategy Officer. Nacho Arbea, to our regret, has decided to accept an offer from a public-listed pharmaceutical company based in Barcelona and leave Olympus after 23 years of service for the company. I would like to congratulate him to his new role as CEO. Now I would like to briefly describe three new appointments. Tatsuya Isumi, Boris Solnyk and Seiji Kuramoto. First, I'm excited to introduce Izumi-san, who will be newly appointed as Chief Financial Officer. With his track record in different finance roles of Itochu Corporation and its group companies, we expect him to contribute to further strengthening governance in finance and improving efficiency and profitability of Lumpus. Jikashi Takeda decided for personal reason to resign. Boris will be newly appointed as Chief Quality Officer. We are currently executing our comprehensive quality transformation program Elevate, and he has been leading Elevate's ongoing efforts, providing strong leadership and fostering a culture of patient safety with his expertise in quality management. Meanwhile, Pierre Bossier, who currently serves as Chief Quality Officer, will continue in fiscal year 25 for a defined period of time as quality executive advisor reporting directly to me. By enhancing our quality management capabilities and strengthening our patient safety focus and product quality culture through Elevate, we will build a solid foundation for the prosperity of the quality assurance and regulatory affairs function, which are key capabilities in a global meta-company. Finally, Seiji Kuramoto, who currently serves as co-head of TSD, has extensive experience in research and development, sales, and marketing in the medical business, along with achievements in forging innovative collaborations with our business partners, including Sony. He will be appointed to executive officer while continuing to serve as co-head of TSD and will further accelerate the growth of the therapeutic solutions business. CG will be supported by the new co-head of TSD, Gabe McHugh, who is based in Boston and has reported directly to Gabriela before. I'm happy to say that we have a very robust talent pipeline in our company, and we will continue to strengthen our corporate values and focus on long-term sustainable growth under the new leadership team. As you are aware, our most important priority is patient safety. The remediation of the findings that resulted into our three warning letters and the transformation of the entire company towards a company with the highest level of patient safety focus and a quality first mindset. I'm happy to report that our remediation efforts are well underway and our relationship with our regulators are constructive and reassuring. We expect The expenses related to Elevate to be approximately 30 billion yen, SG&A expenses of approximately 7 billion yen and other expenses of approximately 23 billion yen in fiscal year 24. But these expenses are expected to decrease after this fiscal year. Culture plays a pivotal part in any transformation. And on January 31st, 2024, our new core values of patient focus, integrity, innovation, impact, and empathy were introduced to our employees. Olympus established its first set of core values in 2018, and our core values have served us well until now. However, since then, Olympus has transformed into a medtech company. Our core values were reviewed not only to address the culture of true patient safety focus and customer centricity, but also to align with the expectation of quality and innovation from all stakeholders of the evolving medtech industry landscape. Our core business remains robust and grows steadily, specifically in the area of GI diseases. But unfortunately, we continue to face some temporary headwinds which negatively impact the overall growth story. The suspension of shipments of some products in addition to the impact of purchasers' decision to delay tenders as they manage the effects of the anti-corruption campaign in China and other regionally located headwinds are a few examples of this and the Noto earthquake now comes as an additional growth obstacle to us. However, excluding China, we achieved solid 4% growth after exchange adjustment in the third quarter October to December. In North America, where our new EVX-X1 was successfully launched, sales performance has been strong from the beginning and order intake is high. Also, our GI endotherapy business grows double-digit in North America. Finally, we also continue to actively pursue M&A opportunities and partnerships with other companies to further maintain our sustainable future growth. Specific examples include the acquisition of Tevong Medical, a manufacturer of metallic stands for GI, a business alliance with Sony in the field of GI and respiratory endoscopes, and an agreement to collaborate with Canon Medical Systems on ultrasound endoscopy systems. Today, I would like to focus on the gastroenterology area in North America, our growth driver. First, let me start with GI endoscopy. In October 23, we launched X1 GI endoscopy system in the U.S. In the U.S., EVIX X1 received 510K clearance from FDA at the end of April and has been exhibited and demonstrated at several academic conferences since DDW. In our last earnings call, I outlined that X1 has been very received by endoscopists globally. And after the launch in the U.S., we see this confirmed by our sales numbers. EV61 has been performing very well in the U.S., with 9% growth in the third quarter since its launch. The latest order situation is also favorable, and we would expect growth over 30% in the fourth quarter, putting the supply chain shortage aside. As you are aware, the North American market accounts for about 35% of all total sales in the GI endoscopy segment. Next, I would like to talk briefly about our GI endotherapy devices. North America accounts for about 25% of our total sales in this segment and has been growing at a double-digit year-on-year rate for six consecutive quarters since the second quarter of the fiscal 23. And sales in the first nine months of this fiscal year also grew by 15% and continue to grow strongly. Growth is particularly strong in three core clinical areas. Colorectal cancer detection, e.g. endocuff vision, collateral cancer treatment, product lines for ESD and EMR, hepatopancreatic biliary, HPP diseases, e.g. stone retrieval baskets, stone extraction balloons, hemostasis powder. We will continue to invest in this portfolio to expand our business. We are also very pleased to highlight the recent completion of our acquisition of Taewong Medical. This acquisition opens new segments, enhances our care pathway strategy, and provides additional synergies for Olympus, which we believe will help us grow our entire GI portfolio. Let me explain. As many of you already know, the success with our GI endoscopes has created a complementary growth engine through our GI endotherapy business. One place where GI endotherapy has done very well is in the treatment of HBP. HPP diseases are a $1 billion plus opportunity for Olympus and a segment where we have a leading position. Our success in HPP resides from our broad portfolio of GI endoscopes where we have a strong market presence and from the frequent innovations that Olympus has made with access and treatment devices such as guide wires. Metal stands and radio frequency ablation solutions are a great addition to our portfolio as they are very important for HPP procedures and their use is growing rapidly beyond HPP as well. These new solutions open up new geographic areas globally, such as China and Japan, as well as additional procedures, such as endoscopic soft tissue ablation, which Olympus could not address before. Bringing metal stand technology in-house and having access to radiofrequency ablation catheters will both open up new segments for us to address and create greater product pull-through for our leading HBP portfolio. Now, I would like to pass on to CFO Chikashi Takeda.

Thank you, Stefan. So, once again, hello, everyone. I'm Chikashi Takeda, CFO. Using several slides, I'd like to go over the financial results for the third quarter as well as the four-year forecast. Slide 11. This is the overview of our consolidated financial results. Consolidated revenue amounted to $675.7 billion. The medical business reached a record high for the third quarter and for the first nine months, a 5% growth. For all areas, we saw an increase in revenue. By region, all region except for China grew on the backdrop of favorable foreign exchange by business segment, medical services, and GI endotherapy continued strength. Gross profit was $400. $51.4 billion with gross margin deteriorating 0.8 points due to a provision of approximately $5 billion associated with a voluntary recall of the small intestine endoscopy system and others in ESD. SG&A expenses were $340.9 billion with SG&A ratio deteriorating by 2.7 points. Major factors include include an increase in expenses related to remediation and quality transformation program Elevate, and expenses for improving efficiency and strengthening of operational infrastructure for innovation and sustainable growth. Adjusted operating profit declined 18 billion yen to 110.2 billion, down 14% year-on-year. The adjusted operating margin deteriorated by 3.7 points to 16.3%. Other income and expenses, a loss of $71.5 billion, a loss of about $50.8 billion due to the discontinuation of manufacturing and sales of electromagnetic navigation systems by Varon Medical, and expenses of about $17 billion related to the Remediation and Quality Transformation Program, Elevate. In the previous fiscal year, we recorded a gain of 14.9 billion, including a gain of approximately 16.4 billion on the sale of a land in Tokyo. Profit was 7.5 billion from continuing operation. In the meantime, with the completion of the transfer of evidence in April, we recorded a gain on the transfer in the first quarter of this fiscal year. Total profit including both continuing and discontinued operations amounted to 235.2 billion with EPS of 192 yen.

Next, I would like to explain a full-year forecast of fiscal 2024 utilizing page 17. So we have revised the forecast to reflect results up until the third quarter in addition to changes to Forex assumptions from the previous forecast. In addition, revisions have been made to incorporate what we believe will be the impact of the Dodo Peninsula earthquake, which amounted to approximately 24 billion yen in sales. The assumed exchange rates out of the basis for forecasts are 143 yen to the U.S. dollar and 156 yen to the euro. We project that revenue will increase 5% year-over-year to 924 billion, with adjusted operating profit declining 18% year-over-year to 145 billion yen, with adjusted operating margin of 15.7%. We project the record profit attributable to owners or parents of 252 billion yen, with EPS of 208 yen, reflecting a gain on the transfer of evidence. Also, profit from continuing operations is expected to reach 24 billion yen with EPS of 20 yen. Regarding dividends for fiscal 2024, we plan to issue a dividend of 18 yen per share unchanged from the forecast announced in May. Going to slide 18. This is the forecast by segment. In ESG, both revenue and operating profit have been raised down, mainly due to the impact of the notorious earthquake, suspension of shipments of some products in surgical endoscopy, and the impact of Patricia's decision to delay tenders as they manage the effects of the anti-corruption campaign in China. In TSD, we also have revised down both revenue and operating profit due to the impact of the market environment in China and the North Peninsula earthquake, in addition to supply delays due to the quality issues and part shortages. Expenses related to the remediation and quality transformation program elevated are estimated to be approximately 7 billion yen in SDN expenses and approximately 23 billion yen in other expenses for the full year. Yes, actually we have another slide. This is the last slide. This slide shows the factors behind the increase or decrease in adjusted operating profit compared to the previous forecast. This is a waterboard chart. As already explained, we continue to face a challenging situation this fiscal year due to various factors. In addition to a decline in sales, adjusted operating profit is expected to be 145 billion yen due to the impact of the suspension of shipments of some products, a change in sales composition by region due to sales decline in China, and a change in the product mix due to the Norto Peninsula earthquake. So in terms of the operating income workforce chart, please refer to the appendix under IFRS, page 27. So please refer to that page. Thank you very much. That is all for me.