Edited Transcript of 7733.T earnings conference call or presentation 29-May-20 10:59am GMT

Tokyo May 30, 2020 (Thomson StreetEvents) — Edited Transcript of Olympus Corp earnings conference call or presentation Friday, May 29, 2020 at 10:59:00am GMT

Greetings. I am Chikashi Takeda, and I was appointed Chief Financial Officer back in April 2020. I must say that I am very excited to have active dialogues with our stakeholders, particularly in the capital market going forward.

First of all, I would like to express my sincere condolences for those who have passed away from COVID-19 and to express my heartfelt sympathies to those affected. We are continuing to provide stable supplies of products and services in order to fulfill our responsibilities as a medical device manufacturer, while giving due consideration to employee safety and social responsibility.

Now I would like to thank you indeed to all of you for participating in this conference call for the consolidated financial results for fiscal 2020. I will begin with a summary of financial results.

Slide 3. Highlighting our consolidated financial results for fiscal 2020. Compared to the previous year, although revenue growth slowed down in Q4, particularly in March, when COVID-19 spread around the world, we finished the year with both revenue and profit increased. Consolidated revenue grew 4%, excluding FX impact.

Mainstay Medical business achieved a record high revenue for 3 consecutive years. Operating profit significantly increased as a result of drastic SG&A reduction. Compared to the forecast, both revenue and operating profit missed the target. This is due mainly to the slowdown in revenue growth in Q4 triggered by COVID-19, which we could not have anticipated back in February, when we revised the forecasts.

I will now explain our consolidated financial results and business review for fiscal 2020. So please turn to Slide 5. Consolidated revenue amounted to JPY 797.4 billion, driven by Medical, which achieved record high revenue for 3 consecutive years. Consolidated revenue grew 4%, excluding FX impact.

Gross profit amounted to JPY 499.6 billion. COGS ratio increased due mainly to onetime duodenoscope-related expenses of JPY 10.4 billion. But gross profit increased 2%, excluding FX impact. SG&A expenses decreased by JPY 32.5 billion to JPY 405 billion as a result of company-wide efforts in SG&A streamlining.

Operating profit amounted to JPY 83.5 billion, significantly up 232%, excluding FX impact, due to reduced on the other expenses in addition to reduced SG&A expenses. Profit attributable to owners of parent increased by JPY 43.5 billion to JPY 51.7 billion. EPS increased significantly to JPY 39, including the effect of reducing total number of issued and outstanding shares, due to the repurchasing of our own shares. We were negatively impacted by COVID-19 in Q4, particularly in March. For your reference, this slide provides figures after adjusting foreign exchange and COVID-19 impact.

Excluding these, we achieved 5% increase in revenue and 259% increase in operating profit.

So please turn Slide #6. This slide shows factors which affected full-year consolidated operating profit followed with a waterfall chart, so for your reference.

Slide #7. I will provide the details of our efforts to improve SG&A efficiency. When we announced “Transform Olympus” in January 2019, we listed improvement of operating margin as a key task in becoming a truly global medtech company.

As the first step, we set a goal to contain SG&A expenses to the level of fiscal 2018. We have launched these projects for all businesses and functions, picked up themes and implemented improvement measures one after another. As a result, we are seeing some progress.

We reduced R&D expenses by JPY 16 billion year-on-year, as our R&D activities have proceeded steadily to enable us to capitalize more R&D expenditures. Another reason was that we thoroughly reviewed long-term R&D projects based upon the profitability. In addition, we reduced sales promotion expenses by JPY 5 billion by reexamining our sales promotion activities, t&E expenses by JPY 3.9 billion by proactively using web-based meetings and drastically reducing business trips in and outside Japan. All 5 executive officers, including CEO Takeuchi, have been closely involved in projects by attending relevant meetings to check the progresses and to make quick decisions, as needed. We are certainly — we’ll continue to work towards achieving the goals set out in our corporate strategies.

Slide 8. Comparing the results with the forecast announced back in February. We finished with both revenue and operating profit below the February forecasts. Profit attributable to owners of parent was down 19% compared to the forecast, due to underachievement of operating profit and the partial reversal of deferred tax assets. According to our estimates, COVID-19 pushed down revenue and operating profit by approximately JPY 13 billion and JPY 8 billion, respectively. Missing targets can be more or less explained by the impact of COVID-19.

Slide 9. I will go into the details about the results of each segment. Let us begin with the Endoscopic Solutions division. Revenue increased 2% to JPY 425.7 billion, due to overseas, particularly in China and Russia, where government-led cancer prevention project is underway. Excluding FX impact, full year revenue was up 5%. In Q4 alone, revenue was flat year-on-year, excluding the FX impact, despite COVID-19.

The duodenoscope-related expenses of JPY 10.4 billion that I explained a little bit earlier were charged to this division. Operating profit increased by 30% to JPY 109.4 billion, excluding FX impact, due to increased revenue, improved SG&A efficiency and decreased onetime expenses, even after posting the duodenoscope-related expenses in COGS. The operating margin stood at 25.7%.

Moving on to Slide #10, Therapeutic Solutions division. Revenue amounted to JPY 216.1 billion as a result of steady progress in the field of GI endotherapy, in which sales of products which meet market needs in each region have been increasing. Growth was 4%, excluding FX impact.

In Q4 alone, revenue was down, driven by North America and China, where the number of procedures declined due to COVID-19. Operating profit increased 26% to JPY 26.2 billion, excluding FX impact, due to increased revenue and decreased onetime expenses. Operating margin stood at 12.1%.

Slide 11. I will review the performance of Medical business in China. Recently, the Chinese market has continued to show double-digit growth. Particularly in FY 2020, growth rate was accelerated to 22%. Growth slowed down in Q4 due to COVID-19, but we are currently seeing signs of recovery.

We believe that the Chinese market still has great potential to grow over the medium to long term, and its growth trend remains unchanged. We will continue to capture growth opportunities steadily in this market.

Now Slide 12, Scientific Solutions division. Revenue amounted to JPY 105.2 billion and increased 4%, excluding FX impact. In Q4 alone, revenue declined as deliveries were postponed in some areas due to COVID-19. However, full-year revenue grew as biological microscopes performed well in all regions, and sales increased, including industrial videoscopes and nondestructive testing equipments.

Operating profit achieved a record high, which showed a considerable year-on-year increase of 37% to JPY 10 billion, excluding FX impact, due to revenue growth, coupled with efficient SG&A expense control.

Slide 13, the Imaging division. Revenue amounted to JPY 43.6 billion and declined 8%, excluding the foreign exchange impact. Operating loss was reduced to JPY 10.4 billion, an improvement by JPY 8.1 billion, excluding the foreign exchange impact due to the absence of expenses for the restructuring of manufacturing base recorded in the previous fiscal year, coupled with improved SG&A efficiency.

While we saw a solid start of new product, OM-D E-M1 Mark III, introduced in the fourth quarter, operating profitability was not improved as planned due partially to our being unable to perform usual sales promotion activities in the fourth quarter because of COVID-19, amid a tough competitive environment.

Slide 14, financial position as of March 31, 2020. Assets and liabilities both increased due to the impact of adopting new lease standards under IFRS. Bonds and loans increased as we issued commercial paper and corporate bonds. That, coupled with increased operating cash flow, led to an increase in cash balance.

Inventories increased by JPY 14 billion. This was mainly because sales did not grow as planned due to COVID-19. Total equity stood at JPY 372 billion, down from the end of the previous fiscal year as a result of a share buyback conducted August 2019. The equity ratio was 36.5%, down 10.8 points from the end of the previous fiscal year.

Slide 15 highlights the status of cash flows. Cash flow from operating activities increased by JPY 66.6 billion year-on-year to JPY 133.5 billion against the backdrop of steady progress in business, mainly in Medical.

Cash flow from investing activities amounted to minus JPY 62.4 billion, down by JPY 2.1 billion year-on-year, due primarily to an increase in capitalized R&D expenses. Free cash flow amounted to JPY 71.1 billion. Cash flows from financing activities amounted to minus JPY 19.5 billion due to the share buyback and the repayment of loans, while we issued commercial paper and corporate bonds. As a result, cash and cash equivalents at the end of the fiscal year stood at JPY 162.7 billion.

Next, the impact of COVID-19 and the schedule of upcoming investor events. Slide 17, the impact of COVID-19 in the period from January to March. The graph on the left shows year-on-year revenue comparison of each division, with previous year set at 100%. Revenue kept moving down gradually after February, when COVID-19 started to spread around the world. In March, when the outbreak became a pandemic, revenue fell short of the previous year. The status of each division is shown on the right.

In Medical, the number of procedures declined, as academic societies of each country recommended to postpone or suspend GI endoscopies and surgeries depending on urgency. We also kept hospital visits to a minimum to prevent the spread of infection. As a result, sales promotion activities were restricted.

In SSD, deliveries were postponed in some areas. The good news is that we began to see the signs of recovery in electric components and semiconductors in China after March.

In IMD, many stores were closed and business talks and events were canceled around the world from February, precluding us from carrying out planned sales promotion activities. Although not included here, we donated our own products, such as laryngoscopes and biological microscopes to support the medical front line. We will continue to provide support where possible.

In April, there were no significant changes in terms of market trends or our activities in each business segment. Revenue in April decreased approximately 10% in ESD, 30% in TSD, 20% in SSD and 60% in IMD year-on-year.

New order intake is on a downward trend year-on-year, due to continued restrictions on sales activities, and the situation is even tougher in May. We will continue to monitor the situation and take flexible measures, as needed.

Slide 18 lists our outlook for fiscal 2021. We are currently revising our plans for fiscal 2021 and scheduled to disclose it at another conference. Here, let me share our outlook and assumptions. We assume that the impact of COVID-19 will gradually settle down by the end of the second quarter. And for China, it could happen 3 months earlier. We also assume that hospital operations will be gradually normalized, and we can resume usual activities in the third quarter. But we expect the full demand recovery to take time in all divisions, particularly in IMD, which deals in consumer products.

Our plans will be based on these assumptions, but considering the possibility of unexpected risks, including the second wave of infection, we will update the plans according to the situation. There should be changes in the way we work and customer needs. We will reconsider our businesses and operation models centered on digitalization to fit the coming new normal. For example, we have already started a new marketing initiatives in SSD by using online demonstrations and sales promotions.

Slide 19. Assuming the possibility of the prolonged impact of COVID-19, cash management has become increasing important to maintain stable business operations. As the first step, we have issued commercial paper additionally, amounting to JPY 80 billion to secure liquidity. As a result, consolidated cash balance, as of the end of April, stood at approximately JPY 210 billion, an increase of JPY 47 billion from the end of March, meaning that we have liquidity on hand, equivalent to about 3 months worth of sales.

Moreover, starting from this April, we have implemented the global cash pooling for centralized and efficient cash management within the Olympus Group. This will enable us to quickly supply cash from a region having excess cash to another region having a shortage, thereby establishing more efficient and flexible cash management system in an unexpected situation like now.

Slide 20. Under the current uncertainties, we have implemented the initial and urgent cost control in April. We froze and reviewed the hiring plan, examined the starting time and the priorities of new projects to postpone, if needed. We will continue to review costs depending on the situation.

Slide 21. Even though the current situation still precludes us from carrying out business activities as planned, we have successfully launched the strategic product in endoscopic situations or solutions division, which we believe will lead our growth in the future. We released EVIS X1, a next-generation endoscopy system, in Europe and some areas of Asia on April 23.

The system adopts the new technologies to improve the quality of detecting, diagnosing and treating diseases by endoscope and aims to increase examination efficiency. It is also our first globally unified platform.

In our efforts to spur further innovation, we are engaging in the development of next-generation technology, incorporating artificial intelligence. With this system and other new technologies, we aim to support endoscopists worldwide and improve the quality of endoscopic diagnosis and treatment. In other regions, we will introduce the system in respective markets as we obtain the approval from the regulatory authorities.

Next, last slide, Slide 22, shows the schedule of our upcoming investor events. We will hold another session hosted by CEO Takeuchi on June 24 to provide fiscal 2021 forecasts. And as we have announced earlier, we have postponed our general meeting of shareholders to July 30. Following the postponement, the record date for voting rights for the meeting and the year-end dividend has been changed from March 31 to May 31.

We deeply apologize to our shareholders for the inconvenience and appreciate your understanding regarding this matter.

This concludes my presentation, and thank you for your kind attention. Now we are ready to have Q&A session. If you have a question, this is your opportunity to ask them.

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Questions and Answers

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Unidentified Analyst, [1]

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Thank you very much indeed for your presentation, and thank you for allowing me to ask questions. Question #1. In Page 17, thank you very much for describing the revenue decrease and then the impact of COVID-19. Mr. Takeda, you talked about revenue decrease in the month of April, 10% drop in ESD and 30% drop in TSD. And if possible, March, April, May period for ESD, TSD or if it is more convenient then to combine both in the form of the Medical in total? Would you be able to describe situation by region? That’s my question #1.

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [2]

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Thank you for that question. Indeed, there’s variability among regions. To say, in particular, that the TSD in Americas, that’s the division and region which they showed quite noticeable or the big drop year-on-year. And then also, TSD in Europe, maybe the magnitude of the downward trend is not as noticeable as in Americas but still big enough.

Now in that, our horizon is still rather opaque. I would like to say a little bit about China. I don’t know, I may even venture to say that we are starting to see some incipient signs of recovery or at least to say that, in comparison with other regions, the impact has been a little bit less. I don’t know whether we should say that it’s a sign of a turnaround or not. Honestly speaking, I don’t know.

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Unidentified Analyst, [3]

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Okay. That’s enough. You said in the TSD in Americas and the others had followed by TSD in Europe. You even went on to say that China even possibly showing the initial signs of the recovery. But ESD, in regions such as Japan, Europe and Americas, not much difference among the 3.

And also, according to the graph on the page, the month of March, 10% is down. Would you say that March and April, those 2 months, was basically the same in terms of the overall trend? However, what about the expectations for April, May and June?

You talked about new order taking activities have had to be halted. I would just say that May and beyond, the magnitude of at the mind is may become more visible?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [4]

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My answer. In comparison with TSD for the ESD business, to read the tendency and the trend is a little bit more on the challenging. I’d say that not really relying on my calculator, I would say that basically, Japan, Americas and Europe, more or less the same or with similar situations. In April, in Japan, actually, the negative. That probably stood out more than in other regions.

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Unidentified Analyst, [5]

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My second question is about IMD. At the end of December, the inventory was JPY 18.6 billion, which, of course, you quoted on the occasion of the last presentation. What was IMD end of March inventory for the imaging business? And similarly, for the period between March through June, be it the industry statistics or listening to your competitors, the April, June period maybe as harsh as 60%, 70% or even have the 80% magnitude of drop.

Now whatever the percentages, the situation is going to be severe, given your scale of an Imaging Business that you control. I wonder whether you can do enough to absorb that impact?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [6]

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My answer. March ending inventory for the Imaging business was JPY 19.3 billion. So that means that JPY 19.3 billion at the end of March was slightly bigger than in December. For instance, under for mirrorless cameras, maybe not much of the movement of constant from December. However, on the compact cameras, inventory increase was there.

And would you clarify your second question once again for my sake?

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Unidentified Analyst, [7]

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That’s right. Yes. So it seems that March 2020 was a tough year with losses. And the new fiscal period has certainly — is likely to be quite severe. And given your size of imaging business and that you have been making all the efforts already, what extra room for the further savings or the improvements? I wonder what additional elbow room, if I may, you have in your Imaging business to absorb a severity.

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [8]

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My answer would be that simply put, if we stay with the current operating model or the business model in all regions as we conduct the Imaging Business operations now, then sooner or later, we are going to hit the limit of what we are able to do. And therefore, zero-based review, so called, where we are going to operate and how, those are the possibilities for change would be needed. And unless we do something like that, it will be difficult to break through in the current situation.

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Unidentified Analyst, [9]

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My last question to you. Back in November, you announced your new corporate strategy, and this is the outsider’s view after all. But to accomplish that OP margin 20%, what concrete road map or the concrete actions you had in mind? At least back then, we could not see from outside. And then came COVID-19, and now you are postponing under the new fiscal year, the plan and its presentation. So March, April through May, at least from the outsider perspectives, I, for one, have not come across any major specific actions that Olympus that you have put together, be as it relates to HR or the organization. And I can certainly understand that because of the new coronavirus, to reach the future is becoming kind of more and more challenging.

Would you say that any improvement then that you can make would happen not in the first half of this fiscal year, but the accelerated income that you yield benefits in the second half of this year?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [10]

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Well, my answer. Well, thank you very much for the question. To be very honest with you, this is the totally unprecedented situation. We certainly — no one would have expected this sort of situation. So ever since the second half of the month of March, COVID-19 became the preoccupying kind of issue. We saw that all attention had to first go there. So production efficiency, the plans and other specific action plans that we had written down had to be slowed down. So of course, there are some differences here and there. But by and large, it has been — had a sense of delay. At the same time though, the executive level strategic discussions, they have been going on very, very actively. 5 executive officers, through remote accessing means, we’ve been having meetings so frequently. So I’d say that if and when we come up with some substantial or the measures sort of — the actions that we are confident to disclose, I’m sure that we’ll make a timely disclosure. And you would take note of that, and you will listen from — you will hear from us.

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Unidentified Analyst, [11]

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Thank you very much for giving me this opportunity to ask questions. I also have 3 questions. The first question, having to do with the impacts from COVID-19. Sorry, everyone asks you about that, ESD and TSD business divisions.

Recently, the drop in procedure and the case procedures, we all acknowledged it. But about the expected speed of recovery? What faster or more modest speed of recovery? It seems that the TSD is the business area where, with the recovery in the case procedures, then the revenue recovery may come faster than in ESD where, in the hospitals, the income situation would have to first improve enough so that the hospitals are ready to make capital investments. So I wonder if you have any observation that you can share with us so that this is — where is the so-called post-COVID period?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [12]

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Thank you very much for that question. We really have been having difficulty closing down on their plan. After all, the situation is so liquid, it keeps moving. And on one hand, we are so eager to finalize the new fiscal year business plans. We’ve been gathering data. And in the coming months, we are scheduled in order to have rounds of discussion among the executive officers. So I would say that we should be able to draw some sort of double scenario, which we should be able to hopefully share as we hold the FY 2021 forecast meeting on June 24.

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Unidentified Analyst, [13]

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I understand the situation. Thank you very much. To ask a little bit related to — relating to that, for ESD new model launch in Europe and parts of Asia. But in the U.S., the previous model is still in the market.

So about ESD business. If hospital’s appetite to purchase or to make investment is slow to come about, then ultimately, there may even be the risk of impairment losses for the inventory of the scopes that you have on your balance sheet?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [14]

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Well, my answer is that not for now, we do not have any such expectation or assumption as of now.

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Unidentified Analyst, [15]

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Okay. Understood. Then my second question has to do with SG&A expenses. Well, now having closed the year in comparison with the initial plan or the budget, the magnitude of reduction was bigger significantly so. However, on the Q4 alone, the SG&A decrease was JPY 6.3 billion year-on-year. At the same time, you said that there was JPY 6 billion worth of R&D capitalization.

So if we are to focus on the pure SG&A expense portion, there may be hardly any SG&A expense reduction in the January-March quarter. So I wonder whether my reading is correct?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [16]

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Okay. Thank you for the question. I mean, looking through some data right now, as I speak. But for instance, through the third quarter, outsourcing expenses were safe and down cumulatively. But into the final quarter, some rather unexpected regulatory, even the legal sort of the activities, the initiatives became necessary, meaning that the additional expenses had to be incurred. So by that March, which happened unexpectedly in the final quarter, the speed from the efficiency had to be slowed down or at least, it was affected negatively.

Now R&D expense capitalization. In the final quarter, yes, the capitalization of R&D expenses was the biggest of all quarters in the year.

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Unidentified Analyst, [17]

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So excluding R&D capitalization, in the final quarter, SG&A expense reduction was hardly any. So you said that there was some sort of onetime expenses. So that would explain that?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [18]

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My answer is yes. So there was unexpected expenses, which came about in the final quarter and slowed it down.

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Unidentified Analyst, [19]

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Okay. Expected. And then my third and the final question. I am looking at Page 8, I think it is. The forecast versus the actual other income and expenses. Back in February, you said minus JPY 7 billion, and the actual was minus JPY 11.1 billion. There are some noticeable difference between the 2. So what happened outside of your plans, so one-off? Any lingering effect going forward?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [20]

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Thank you for that question. Some points, I believe, that I can discuss. For instance, in Americas. Duodenoscope-related discontinuation, the decision, which resulted in the impairment of the action.

And also, in Japan, R&D, the fixed assets impairment. So those will be one-off. But at the same time, I’d say that so long as we conduct our — or carry out business operations, these are the sort of situations that we would come across from time to time. And also Transform Olympus-related expenses, as you know, we have been relying on the help of experts, the outside consultant.

Some expense, which actually had to be booked, was not included in the February forecast. So that also pushed up other expenses in actual.

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Unidentified Analyst, [21]

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Okay. Would it be possible for you to quote by how much? For instance, Transform Olympus-related? Back in February, I think you said JPY 3 billion. So how much more did you have to spend?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [22]

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Well, my answer is to describe our situation. We are bound by the contractual obligation with a counterparty, so I must refrain from quoting anything specific.

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Unidentified Analyst, [23]

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Okay. Then Page #6. The details of major other expenses for FY 2020, 3 bullet points. Which one or ones were outside of your plan?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [24]

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Well of the 3, the second and the third bullet points. And the first one, part of that, being outside of the plan.

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Unidentified Analyst, [25]

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I have 3 questions. First is on the situation for April. You said that for ESD, the revenue was about 10% down year-on-year. And compared to TSD and other Medical equipment business, ESD, obviously, saw a decline more moderate. Maybe it’s going to get worse in May, but could you give us the reason why the drop, the decline was rather moderate in April? Was it because of the type of the endoscopes, the surgical endoscopes, being the rigid scope? I wonder if there is a special reason why the sales decline was more moderate. Could you explain that?

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Akihiro Taguchi, Olympus Corporation – CTO & Executive Officer [26]

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This is Taguchi, CTO. I would like to answer your question. For ESD, for April. As mentioned earlier, about 10% down year-on-year. We were able to keep it to that level. This is directly related to the nature of the products under ESD, because we’re talking about the capital product. So basically, we are selling based on the inquiries made previously.

As was mentioned earlier, most probably for May, we expect a further decline because the activities to secure inquiries had been almost suspended for the last several months. So we expect the result to be more tough in May.

Fortunately, for April, the inquiries secured during the period when the impact of COVID-19 was more moderate benefited.

Now TSD, consumables. So they are in direct relation to the number of procedures. Lower the procedures, lower the revenue. So without time lag, the COVID-19 impact was felt.

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Unidentified Analyst, [27]

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I see. A follow-up question. You have the lease contracts as well. So it’s not just the revenue coming from the sale of units. You have other type of businesses as well.

Was that the reason for the moderate decline as well, repair, service maintenance? I think that they generate certain revenue as well. Was that the reason — part of the reason why the level of decline was more moderate? That’s my guess. Am I correct?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [28]

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I think that’s a very good. What we call the run rate business, within ESD, we have the capital sale business plus the lease-based businesses, maintenance contracts, consumables, for example, disinfectants. Sale from all these are included. And we have been trying to promote the increase in the proportion of that type of business. And that proportion varies from region to region. But in Japan, for example, they account for 30%, 40%. And that part was not much affected and will not be much affected, I think.

But the number of procedures affecting the consumables, that is being felt. The lease contract part, no change. And the proportion of lease contracts and maintenance contracts, again, the proportion varies from region to region. It’s Japan and the U.S., of course, where the lease contract accounts for the largest proportion.

In other regions, the proportion is still very low. And increasing that, I think, would be one way forward.

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Unidentified Analyst, [29]

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I see. My second question, your peers, I think, said that for the respiratory endoscopes, for example, that could be used for COVID-19 treatment. Maybe the size of sales is not that large, but you do have such products. And within ESD, how much does those products account for in terms of sales revenue? And during the COVID-19 pandemic, are you enjoying special demand?

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Akihiro Taguchi, Olympus Corporation – CTO & Executive Officer [30]

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This is Taguchi speaking again. I will be responding to the question. The respiratory system endoscopy, BF, LF series, the airway endoscopes, the revenue accounts for approximately 5% of ESD revenue overall.

And what is the impact of COVID-19 you asked. As you have correctly indicated, BF, more so for LF and MAF, which is the handy-type endoscope with the monitors for intubation and phlegm suction, for this product, we have significantly increased the production volume. The size of sales are still small, but the production expansion increase is rather significant.

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Unidentified Analyst, [31]

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I see. Thank you. My last question. You talked about new normal and the response to new normal. In SSD, you talked about the online sales activities. How about in Medical, ESD and TSD, what are the responses in ESD and TSD to new normal?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [32]

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Of course, it’s not just SSD in Medical business. For example, in Europe, already for the last several months, almost no hospital visits were possible. And still, we did secure certain sales in Europe thanks to online and web-based promotion activities and the business negotiations. Those are being done already in the front line. And in addition, the web-based trainings and web-based academic society meetings, we have been participating in this, and we have been planning this. We have already started those activities. So in the post-COVID-19 situation, what would the new normal be? We don’t have the answer yet. We have to make further studies into that. But as was mentioned earlier, have to clearly identify the new normal and transform the business to fit that new normal situation.

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Unidentified Analyst, [33]

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So what you’re saying is that you have yet to clearly identify and envision the new normal? And you have yet to work out the details of the responses. Am I correct?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [34]

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Yes. One thing we can say for sure is that conventional on-patient demonstrations, that practice is going to have to change and the alternatives, whether online or web-based, does need to be enhanced and strengthened.

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Unidentified Analyst, [35]

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I see. Thank you. I hope you can hear me.

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [36]

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Yes.

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Unidentified Analyst, [37]

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My first question, it’s been discussed excessively already. But looking at the revenue for ESD for April, down only by 10% year-on-year, is astonishing because JGES, ASGE, and I think it’s the same for European society as well. Since middle of March, the guidance is not to perform any screening endoscopy. And that must be hurting the endoscopy area. And I think it’s particularly tough in the U.S. where ASCs account for about 60% of screening endoscopy. And since their revenue is going down, means it’s hurting their pocket as well. You talked about lease contracts, BPP, CPP, cost per procedure. I think account for about 25% in the U.S., North America and only about 10% in Japan or Europe. So that alone would not explain why the year-on-year decline was only 10%. So could you elaborate on that by region? I wouldn’t be surprised, frankly, to see the decline of 50% in May or June. So can you please explain only 10%? Why not 50%? And I guess it’s — it will be the question for Taguchi-san.

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Akihiro Taguchi, Olympus Corporation – CTO & Executive Officer [38]

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Thank you. Taguchi speaking. Overall, 10% down in ESD April revenue; two, U.S. saw a decline year-on-year decline but in Europe and China, in particular, it was a year-on-year increase in April. In Europe, about the same year-on-year, if you just look at the results for April, and overall down by around 10%. That was for April. So as you indicated, the nonurgent endoscopy, like screening endoscopy, all being postponed. It’s not just the U.S., Europe and Japan, all endoscopy societies are issuing such guidance, and that is having an impact. But relatively speaking, the decline in procedures are affecting not really the capital product business but the consumables business. That is as far as April is concerned. True. The U.S. has suffered the most in April. If you break down ESD, I think services are included. And I think all the services are included in ESD, not TSD. In that part, no change, and what would remain would be GI endoscopy and surgical endoscopy. In GI endoscopy, maybe no change and maybe larger impact on the surgical endoscopes because no surgeries are being performed. Well, if you just look at the U.S., that’s not necessarily the case. GI endoscopes, if you just look at April or since the COVID-19 impact, meaning the fourth quarter included GI endoscopes, suffered quite a bit. Of course, surgical endoscopes suffered as well, but it’s not that surgical endoscopes were less affected.

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Unidentified Analyst, [39]

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How about for May? You can’t give us how much decline you expect in May for ESD and TSD?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [40]

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This is Takeda speaking. We do have the preliminary results on a management basis, but they are too rough to be shared with you here. But as was mentioned earlier, in a nutshell, we expect May to be more tough. That’s all we can say for now.

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Unidentified Analyst, [41]

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I see. My second question. Going forward, when can we expect the screening endoscopy to resume? My very personal assumption is that other medical devices companies in Japan like catheter or plates, maybe they can expect earlier resumption. Whereas in your case, the GI endoscopy patients will cough when the endoscopes are inserted. And so there is a great risk of infection. So I’m afraid the upper GI endoscopy would be rather difficult. And I guess it’s the same for the lower GI endoscopy as well. So I thought it’s going to take maybe 3, 6 months before the procedures would resume. But then you said that it’s already coming back in China. So where is it that I’m wrong? What are the factors for the resumption? Are the procedures themselves changing?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [42]

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You are correct. The COVID-19 infection risk does exist for both the upper and lower GI endoscopy. That risk does exist. And it is true for the screening endoscopy. But when you look at China, for example, the early cure is the momentum in that country, driven by the national project. And that momentum remains, I think, even under the impact of COVID-19 and that is helping us.

But what you are saying is true. So we are looking at the various possibilities in the area of GI endoscopy, for procedures themselves. PPE, the personal protective equipment, there is a strong request coming from the physicians for better PPEs, and we are looking into that.

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Unidentified Analyst, [43]

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I see. My last question in the interest of time. SG&A expenses went down for the period ended March 2020. How much of that was attributable to the foreign exchange? And in the balance sheet, I think the provision increased by about 100 — or JPY 10 billion. Which business division was involved in that?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [44]

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Your first question was on the foreign exchange, right?

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Unidentified Analyst, [45]

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Yes, the impact of foreign exchange on SG&A.

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [46]

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Yes. The answer is around JPY 10 billion.

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Unidentified Analyst, [47]

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And the provision, an increase of JPY 10 billion in balance sheet. What is it?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [48]

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It’s the provision for the TJF buyback operation, exactly that amount.

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Unidentified Analyst, [49]

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TJF? What is it?

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Chikashi Takeda, Olympus Corporation – Executive Officer & CFO [50]

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The duodenoscope. We’re talking about the duodenoscope buyback. I think we talked about that at the last briefing.

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Unidentified Analyst, [51]

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Yes, I got it. thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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