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Hello, everybody. I am Chikashi Takeda, the CFO of Olympus Corporation. I would like to thank you all for participating with this conference. I would like to provide a review of our consolidated financial results for the first quarter of fiscal 2024 and talk about our full year forecast for fiscal 2024.
Next slide, please. This slide highlights the main points for our first quarter financial results for fiscal 2024. Revenue increased 8% on a consolidated basis. Growth was mainly driven by China, which recovered from the Shanghai lockdown, and other factors and APAC, which grew in all segments. By product, EVIS X1 and VISERA ELITE III were the main contributors. Both ESD and TSD achieved high single-digit growth, setting a record high in the Medical business for the first quarter.
On the other hand, profit decreased due to an increase in personnel expenses for future growth and strengthening our operational infrastructure, such as QA/RA as well as upfront project-related expenses for improving efficiency, et cetera, coupled with the absence of a gain of approximately ¥16.4 billion on the sales of land in Tokyo, which was recorded as other income in the previous fiscal year.
FDA-related expenses amounted to ¥700 million in SG&A and approximately ¥5 billion in other expenses. Those are mainly for complaint responses, medical device reporting MDR and process and design validation, ensuring that we comply with all applicable quality laws and regulations and strengthening our quality assurance function. Steady progress has been made in corrective actions for FDA findings, while engaging in constructive dialogue with the FDA.
Adjusted operating profit, excluding other income expenses, decreased 5% with an adjusted operating margin of 13.6%. Profit as a sum of continuing operations and discontinued operations reached a record high of ¥240.6 billion due to a gain on the transfer of Scientific Solutions business, Evident, that was booked in the first quarter of the current fiscal year. EPS is ¥192.
Moving on to our full year forecast for fiscal 2024. The initial forecast announced in May remains unchanged as we still aim to achieving the budget and have taken appropriate actions despite slightly slow first quarter results. We think that the growth will be seen in the second half. Revenue is expected to reach ¥940 billion, up 4% year-over-year, and adjusted operating profit is expected to reach ¥182 billion, up 3% year-over-year, with an adjusted operating margin of around 20%, on par with the previous year. Profit as a sum of continuing operations and discontinued operation is expected to reach a record high of ¥336 billion with EPS of ¥273.
The business environment is expected to remain uncertain to a certain extent in the second quarter and onwards. We continue to operate with a keen awareness of those risks. We also strive to maintain appropriate cost control while allocating resources to strengthen our operating infrastructure, including QA/RA, R&D initiatives to improve productivity.
Next page. This is an overview of our consolidated financial results. Consolidated revenue totaled ¥207.7 billion. The Medical business achieved a record high for a first quarter, up 8% year-on-year. Both ESD and TSD achieved a high single-digit growth. Gross profit was ¥137.2 billion, with gross profit margin improving 0.7 points. The improvement was due mainly to a decrease in procurement in the semiconductor spot market and the depreciation of the Japanese yen.
SG&A expenses totaled ¥108.8 billion with SG&A ratio worsening 2.4 points. The main factors were an increase in personnel expenses for the future growth and strengthening of operational infrastructure, such as QA/RA as well as various project-related expenses to improve efficiency and others.
Adjusted operating profit was ¥28.3 billion, down ¥1.5 billion or 5% year-on-year. Adjusted operating margin deteriorated 1.9 points at 13.6%. Other income and expenses were negative ¥6 billion as we posted a gain of approximately ¥16.4 billion on the sale of land in Tokyo in the previous fiscal year, whereas we recorded approximately ¥5 billion as FDA-related expenses in the current fiscal year. That’s the main factor for the year-on-year decline.
Profit from continuing operations was ¥13.5 billion with EPS of ¥11. With the completion of the transfer of discontinued operation, or Evident, in April, we recorded a gain on the transfer in the first quarter of the current fiscal year. Total profit, including both continuing operations and discontinued operation, was ¥240.6 billion with EPS of ¥192.
Lastly, but not the least, I would like to look back on what we have done under the new management team since this April. When we formulated our company strategy announced in May, we established a revenue CAGR of 5%, a target some of you may have viewed as conservative. The initial quarter, however, validates the realism of our projections as we now find ourselves necessitating investments in corrective measures and the establishment of a robust framework for the quality systems following an FDA audit. Rigorous assessment and implementing corrective actions are of utmost importance to us. And these endeavors will persist throughout the fiscal year, necessitating the outlined investments.
Although our endeavors have just commenced, we are steadily advancing while actively engaging in constructive discussions with the FDA. This dialogue is sustained by significant transformative initiatives aimed at enhancing our quality infrastructure, optimizing the size of our quality system and ensuring consistent global adoption of processes across manufacturing, repair and distribution centers. Through this novel quality transformation program, we firmly believe that we safeguard patient safety and contribute to value creation for all stakeholders. Ultimately, this strategy will enable us to excel, fostering innovation for growth.
Simultaneously, we continue to champion our four key drivers for value creation and pursuit of enduring sustainable growth, business and global expansion, strategic M&A, enhancement of care pathways and development of an intelligent endoscopy ecosystem. Progress across all pillars is proceeding according to plan. Despite the prevailing challenges in our operating environment we maintain our forecast, confident in our ability to realize our goals through appropriate measures. Our foreign exchange assumptions remain unchanged and their positive impact will counterbalance risks observed in the first quarter. We regard this situation as an opportunity to evolve into a leading global med tech company, realizing innovation for growth and alignment with our three-year plan.
That concludes my presentation. Thank you for your unwavering trust and support on this journey.
Before we go to the Q&A session, we would like to answer a question that was specifically of high interest among investors. I would like to read out the question. Against your internal plan, the first quarter start was slow. In terms of revenue and profit, how lower was it against your target? And what are the reasons behind these? First, Mr. Takeda, the CFO, will respond to this question.
Well, normally, this should be integrated into our slide or into our narration, but I would like to offer my explanation about this question, which was of high interest to investors. So I do understand that this has been a high interest of the investors. Well, first of all, in terms of revenue, basically, about a 3% lower than our internal target was the situation. Mainly, this was due to the suspension of the shipment of the products or the lack of supply of the components.
These are the main reasons because we lost the sales opportunity due to these factors. So for 1.5% to 2% downward pressure, again, in the consolidated revenue growth. Specifically for TSD, this situation was more pronounced. If you look only at TSD, it was a 3% to 4% downward pressure against our growth. The remainder will be the quarterly -- accuracy of the quarterly plan that we have compiled. So maybe this is related to this activity, for instance, in the U.S. X1 launch, it was -- is near. So there has been a bit of holding back of the purchase.
In China, in terms of the number of cases, it has improved, but the inventory at the customers has been more than we have expected. So compared to the number of cases, the procedures, the shipment hasn’t increased. But as a result, the revenue was weak. In terms of the cost of goods, there has not been such a change -- such a change. This is basically related to the change in the sales composition.
In terms of SG&A, about 4%. I was more -- 4% against our internal target. I think half of it is due to the timing issue. And the remaining half would be -- so there’s a compliant -- within the QA/RA talent is the compliant handling. So there was more than we have anticipated. So we have been using outsourcing. So that is the reason why the cost has gone up. In terms of the amount, about ¥2 billion more than we have anticipated. So this ¥2 billion is basically a timing issue when we have booked the cost. That’s all for me. So we will now take questions.
I would like to ask about the TSD business. I see that the royalty business was a little bit weak and just explained that there was some issues that you could not ship some products. Could you explain some data on that? And also, respiratory, we see some negative impact from the suspension of the product shipment and then also I would like to hear the detail on this. But especially for the royalty business, I see that compared to the major competitors, your growth rate looks quite sluggish in the last couple of quarters. And I thought that, that was more mainly because of the weak sales, higher sales exposure to China and Japan, but maybe it’s different now. So could you explain that any fundamental reasons that your royalty business has been weak in the last couple of quarters? That’s my question. Thank you very much.
Thank you for your question. Well, I’d like to respond briefly and ask Gabriela to follow up for further response -- for further details. First, in my presentation, we said that suspension of shipments and the parts supply disruptions are the issues that we faced. And that was particularly true for urology main products: plasma electrodes and SOLTIVE. In those product areas, we felt strong impact, especially in Europe and North America. In Australia, on the other hand, SOLTIVE was strong, which made up somewhat for the decline. So that was the high-level situation for the first quarter.
Gabriela, anything to add on the question she asked, please.
Thank you very much. This is Gabriela Kaynor. I have really very little to add from what Chikashi has just explained. I think, as you pointed out in the question in over the last few quarters, we have had and have commented on some of our ongoing supply constraints. And I think while we are seeing some recovery from the suspension of shipments in some of these areas, we are still in the pathway to recovery on that front. But I think, again, as stated, over the coming months and quarters, we are continuing to work closely with our customers and supply chain teams providers to ensure that we are continuing on the journey of recovery. We did, however, see, as Chikashi just said, strong increase in sales in our key areas of focus when we have been able to provide the shipment. So that is what is giving us confidence for the quarters to follow. Thank you.
Thank you very much. One follow-up for this question. One is that could you explain the reasons for this suspension of some key product? Is that related to the FDA warning or it's not? And then also, could you explain the exact timing that you are going to expect the recovery of the product shipment? And also this suspension of certain key product is already included into your guidance for March 2024? That's additional question. Thank you.
Gabriela, can you take that also for us?
Sure. Thank you. So we do have several different drivers and products. We have some ongoing component and supply chain-related issues, that this is a recovery that unfortunately is not happening overnight as we have component supply chain-related issues, that lag into our production and manufacturing facilities. Then we have some capacity constraints, and we're managing that very closely with our manufacturing sites to ensure that we are trying to expand our production volumes and capacity as much as feasible. We do have some contract manufacturing conditions in some of our cases. And in those cases, again, we're working with our suppliers. So it's not one single issue, as we've explained in the past few quarters. And it's a matter of, again, from a timing perspective, in some of these cases, it's rolling back orders that we're already providing or satisfying some of the customers, but again, across the five regions, across multiple product categories.
And then additionally, we have had some suspension of products from a quality perspective. And again, these are, in some cases, intermittent back orders or product suspensions. And so it's hard to give you a specific timing because we have this across multiple product categories. Maybe one final thing is from a ship hold perspective, we had a ship hold for our plasma electrodes for the first quarter of this year, which obviously created some impact that ship hold has been lifted. And again, we're trying to supply all of our supply chain customers in different regions. And recovery on that is expected fully in the second quarter.
Okay. Thank you very much.
Thank you.
So this – in terms of the QA/RA related costs, in terms of the full year outlook, I would like to confirm what your outlook is about this cost. It said ¥22 billion? So about ¥2 billion increase you saw in the first quarter, in the full year into the fourth quarter, how much do you expect this cost would be and related? In terms of the – besides the QA/RA-related costs, so the project related costs to improve efficiency, that cost has increased. How much has it increased in the first quarter? And for the full year, how much cost increased are you anticipating? Thank you.
Well, first of all, in terms QA/RA related cost, so we call it the remediation cost. In May, we have explained about the ¥22 billion. The total cost in itself is not going to change. However, we'll be monitoring the situation and review the ongoing situation. Whether this would be over or under that cost, we are actually frequently observing the situation currently. Our outlook is unchanged. That is what we have explained. In the first quarter, as I have explained, about ¥5 billion is in the others expenses and a couple of ¥100 million is in the SG&A. In terms of the progress, so it depends in terms of the equity how much we can anticipate in each quarter, but it's basically on track.
In the remaining three quarters, we deduct a ¥22 billion deducting – the ¥5 billion will be allocated for each remaining three quarters. For the SG&A, the progress is a bit lagging behind. So I think basically, we're going to see a more higher allocation for SG&A costs for the remaining nine months. Another point is that for this fiscal years – from the overall SG&A situation, the foreign exchange adjustment – before foreign exchange adjustment, I think that's the most understandable figure in terms of the absolute amount is about ¥3 million for the full year or ¥2.99 million that is for the full year. It'll – that's the increase that we are anticipating for the full year.
And for this fiscal year, in this first quarter, ¥8.5 billion. We have already booked that increase in the first quarter. So if you consider the balance, overall balance, I think in the first quarter we are seeing more of that coming out against the full year forecast. For instance, I have talked about – and ¥4 billion will be – about ¥4 billion more than we have expected. So that has been a overspend of the core business. But this ¥2 billion out of the ¥4 billion, this will be – go out in the full year. About ¥2 billion would be the unexpected amount. So what we are trying to basically achieve the ¥2.9 [ph] billion gain for the full year. So does that answer your question? I have answered from a different perspective.
Well, I would like to ask a follow-up question from a different topic. With the endoscopic ESD business with the North American business. So the last year, the first quarter against the local currency basis, it was flat. This year it's a negative. So in the GI endoscope business in North America, especially for the system side, the interest rate is going up. So I think basically you have, maybe you're seeing impact on the leasing side of the business. So this weakness, is it – can this be explained only through the replacement for EVIS X1? Or is it that you are seeing pressure for the overall CapEx for your clients in North America? Can you talk about?
First of all, from a more high-level perspective, I would like to answer your question. Well, currently the hospital management is becoming tougher, but in terms of the endoscope business, I think basically it's not a kind of overall pressure. I think it's kind of a limited impact. I think the simple answer is that may EVIS X1 we have announced in the DDW. And since then, I think people have taken a wait-and-see stance. That's our analysis. So I would like to ask Frank to follow up add something that's to my, or correct me if I'm wrong.
Thanks for the question. And I can confirm Chikashi’s observation. I think, your point about the CapEx modification or situation change in the environment in America, we do not feel that that is the major impact that leads to this flat/slightly negative GI development. It's very much related to what Takeda-san pointed out that we have in a positive term, we have a very high expectation, positive high expectation of our customer base into the X1 platform. And everybody now knows that by the end of this summer, September, October timeframe, we will – we are planning to start to launch and deliver products. And that means that I think the GI community in the United States is waiting for this.
In addition, any CapEx pressure that comes our way, we feel the impact on our side is rather softened by our big part of the leasing business. So, far we are really accrediting the sales numbers from GI in America to the kind of unusual situation to show a product in May and to start shipping only in autumn. That's our reading of the situation.
So that's all.
Is it, okay?
So that's all for me. Thank you.
In the first question, there was a focus on urology, the shipment suspension and the supply chain issue of the parts were mentioned. How about respiratory? Were there similar issues? I think in your presentation, you do talk about such similar issues for respiratory areas. Well, can you give us the backdrop as to why that is and what are the products that are affected? And in July in your release, the laser treatment device. You did issue a press release on that. In Q1, I – was there an impact of that as well? Can you include that in your response as well?
Thank you for your question. Okay. So maybe I was not responding fully to question by Yoshihara-san in respiratory area, so I'll take that question. First, about Veran-related products and our respiratory scope, shipment delay in EVIS and the barcode for the therapeutic devices. Those were the things that we saw take place one after another. And I'd like to ask Gabriela to respond to that or maybe – yes, if you have anything you want to add. So maybe start with Gabriela.
Sure. Thank you. So from a supply chain-related – to answer your question, so we have had some ongoing supply chain related issues on the respiratory side. Again, since the last few quarters and dating actually since last fiscal year, it's intermittent back orders on our needle side. And so not across every product category, but these are some of the areas that historically we have seen double-digit growth even in our EVIS product portfolio. And so these are some of the concerns and constraints that we have had over really the last year or so. We continue to work with our suppliers. And again, this is something that is manufactured internally by Olympus, but we have some material constraints and supply chain related issues.
We've – I think mentioned this in past releases. From an overall respiratory perspective, we are also awaiting on the X1 launch. And in general, in some of our regions, we have continued on see some of the constraints from a capital perspective. And for the last question related to the – well, and from the slowdown of capital, I think that we have seen some hospital slowdown and we've mentioned that in other reports where we've had a slowdown in Japan. We've seen this slowdown in Europe as well from a respiratory capital perspective. So on the impact from a laser perspective for the scope, for the VF scopes, we have not have – we have not felt a significant impact on that from a business perspective. And from – we've – this is something that we don't expect to continue or have an impact, a material impact to our business in the following or the quarters to follow.
Understood. Thank you very much. I'm good. Thank you.
Thank you, Gabriel.
So this is a very detailed question. But first of all, you have explained your plan in terms of the underperformance of the revenue. And I would like to ask about the breakdown. The 3% shortfall, 1.5% to 2% is from the shipment suspension, recalls, supply chain-related issues. So for the other part, what other reasons served for this underperformance of the revenue?
And in China, in terms of TSD, the revenue has not increased as much as the procedures has increased. You have explained about that. Is that all? If that is the case, what is the background of this? That is the gist of my question.
Yes, maybe my explanation was not well structured. But this 1.5% to 2% - pressure, that is from the shipment suspension, a lack of supply of components and that is a downward pressure on the growth. The remainder, there's various reasons. But for example, I gave an example of the U.S. X1, people holding back to buy before the launch of new product, that was more than we have expected in China. So that's the inventory pile up at the customer side, that was more than we have anticipated. So it is not completely linked to the recovery of the procedures. Our shipment has not been linked with that recovery of the number of procedures that was seen in Q1. So there's a lot of other reasons. But these were the two typical examples that I gave. Okay, go ahead.
So if that is the case – well, thank you very much for your explanation. Well, not that I wasn't hearing you clearly. But for the numerous other reasons, you say you are anticipating recovery and you can catch up. But what will be predictable is that the timing is that the shipment suspension is going to be resolved. Is that the – your take?
Well, in terms of the suspension, we are taking measures as much as possible. Depending on the product, for instance, instruction for use, it will be changed, and then we can resume shipments, some products, we can do that. So I think for a lot of things, we are already taking measures and the – some have resumed shipment, some are ready to be shipped anytime soon. So in any case – in that case, I think it's possible for us to catch up by taking these measures.
And the holding back of the purchase of the United States in the second half, the X1 will be launched, and the response is very good, as Frank has said. I think we will be able to recover with this launch. In the issue related to China. Of course, as soon as the inventory is sold out from the customer side, and then it will recover in line with the procedure growth. So growth will be – we want to expect the growth to be higher than the first quarter in terms China.
So these are not the only examples, but there are other factors. The sales and marketing people, I think they can talk about one hour about these reasons, but I just focus on some typical examples. Thank you very much.
So a very brief follow-up. So in terms of the suspension of the shipment, and you have not been able to sell as much as you have wanted to sell, it's a kind of external factor. So by changing internal structure and we have raised the hurdle. So structurally, you're more prone to suspension of the shipment?
Well, in terms of the supply of the components, it's basically is an external factor that has impacted us. In terms of the shipment suspension, there's a lot of products that are – we have to talk about. So it's very difficult to give you a blanket answer. It will not be accurate. So maybe Pierre would like to – will be the right person to follow up on this. Did you catch the question?
So the specific question of...
The background of the more – or those ship holds we saw in quarter one. So simply said, that's the question, if that's...
Yes. So on the quality regulatory side; we are going through all of our processes, all of our products. We're making sure that not only are we – we've always maintained high patient safety and quality of our products, but we're also having to concentrate heavily on our compliance. So we're going through all of our processes, making sure that we have all the paperwork, making sure everything is the way it's supposed to be. And if we find that we have an issue on a product that doesn't meet the compliance requirements, we will stop that product until we can fix it.
As Takeda-san said, sometimes the directions for use, we need to reword it or things like that. So what we're doing is we're going through all of our products, making sure that not only do they meet the highest quality patient safety levels, but also they meet the compliance of all the regulators around the world.
Thank you very much.
Yes. Perfect. Thank you very much.
Thank you. For the first quarter, April to June, the operating profit, just the numbers would suffice, compared to your internal plan, how much was the difference? And if possible, can you break down into ESD versus TSD? Just the numbers.
So maybe ¥7 billion, ¥8 billion, ¥9 billion approximately. ¥7 billion, ¥8 billion, ¥9 billion downside. And in terms of ESD versus TSD, what will be the breakdown, roughly? Hold on. If the secretariate can give us a more detailed number, that would suffice. I have another follow-up question.
In China, the situation in China. Year-on-year, CC may be 40% increase. But quarter-on-quarter, on CC, on a constant currency basis, may be down 30%. And the background is the question. For example, in China, the corruption-related regulations being strengthened, more monitoring, and we understand that there's a slowdown in the auction or the bidding. Is that what you're seeing? So can you give us some qualitative differences that you see in China?
The anticorruption case that you talked about, I think on July 21 or somewhere there that made headlines. So it's more of a recent development. So right now, at least to our business, we do not see or we're not hearing any impact being felt. But we'll keep a close eye on the development, of course. Anything to note? Well, since we do have Frank and Gabriela online, anything to add? Gabriela, you – something.
Our ESD capital business, you are completely correct that the news about these anticorruption activities is very fresh. Quite some years back in the past, there was a similar movement in China. And at that time, we did feel some impact in our business for a certain number of months. So we are, at the moment, evaluating very closely how much this time it will impact us. But we are looking at kind of confusing numbers, right? The first quarter growth, if you just compare it year-on-year is very big in China, but that is mainly due to the lockdown last year.
And if we now look at the coming months, we are – as we said, we are looking very closely at these impacts. So there is not only the anticorruption situation in China that we have to monitor carefully, but there is also the situation that with the low interest support programs, which were are running last year, we obviously had some maybe business put forward. So therefore, we are in constant exchange with our Chinese management team to get a better grip on how this might impact us. But so far, Takeda-san's point is correct, it's too early to say.
Thank you, Frank. And anything you want to say, Gabriela? If not, that's, of course, good.
Nothing to add on TSD.
All right. Good. Thank you. So does that answer your question?
Yes.
Can you refer to the numbers I was asked about while the secretariate is coming over to me.
Thank you for your question. I'm Sakurai from the IR division. So against the internal plan, how much is the shortfall? So overall, the numbers is, as Takeda has mentioned, against the internal plan is about ¥9 billion shortfall against our internal target. By division breakdown, because some are not allocated, so that is all I can say at this point.
Thank you very much. So in terms of the decline of the CapEx from the hospitals, in terms of the endoscopic business, I heard that that's not much of an impact. In Japan and Europe, there is some impact. So can you talk about by each region, how much this is impacting? And this is already reflected to your outlook? I would like to ask about that.
So rather than me talking, Frank would be the better person to respond. Did you get that question, and answer...
Thank you for the follow-up question. And yes, the message or the answer before was mainly geared towards the situation in America, where we are also having this staggered launch approach. The region-by-region impact, I struggle to give you perfect numbers there. But I agree that we see in EMEA some slowing down in terms of the economical environment, partly from that, but also from general budget availabilities and the big spending we used to have in last year, especially in the UK and also in Russia, also connected partly to still the aftermath of the corona times.
So I think we see at the moment in EMEA and Japan an environment that is not very positive. But we feel that that's what we have planned for. If we look at the other regions like APAC and emerging regions like Latin America, we still see very strong growth, and we are at the moment rather struggling with this mixture of product availability or product regulatory availability like the X1 in some regions of the world. And then some of those geopolitical risks, which are connected also the CapEx.
But the answers to your two questions is we feel it's included in our estimations for the rest of the year. But to break it down into region by region and percentage impact, I don't want to speculate too much.
Does that answer your question?
Thank you very much. A follow-up question or a different question, may I?
Yes, go ahead.
So regarding the ¥9 billion shortfall from your internal plan. So ¥2 billion QA/RA delta and ¥2 billion, the timing of others in Q1 time lag. So do I understand that the remaining ¥6 billion or so are due to the slowdown in sales?
Yes. Yes, that will be the breakdown. Thank you.