Olympus Corporation (7733.T) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us. I'm Naoko Saito from JPMorgan. Welcome to JPMorgan Healthcare Conference Olympus Presentation. Again, it's my pleasure to be introducing Olympus. From the company, we have CEO, Robert White for the presentation. And after that, we'll have a Q&A session. With that, I will pass on to Mr. White. Thank you.

Thank you. Good afternoon, everyone. Thanks for joining us. As she said, I'm Bob White, the CEO of Olympus. Olympus, is a 100-year-old company and a leader in endoscopy care. My objective over the next few minutes to share with you our vision and how Olympus is going to shape the future of endoscopy-enabled care. Let's start with the world around us for a moment. Populations are aging. Over 40% of the population is over 60 years old. And with that aging population becomes chronic diseases. It's estimated that people over 65 will have at least one chronic disease by the year 2050. But that's driving underlying growth in endoscopy for us. The market is growing at roughly 5% a year. And if you look at just the big developed markets of the U.S., of China, of Europe and Japan, that's 155 million endoscopy procedures done annually. But importantly, those geographies only represent about 25% of the world's population. So as care becomes more available, you can see that becoming 600 million endoscopy procedures a year. But importantly, expectations are changing as well. Patients want earlier detection, faster answers, less invasive care and better outcomes and oftentimes looking for diagnosis and treatment in exactly the same visit. Clinicians want consistency, automated workflow and actually the ability to spend more time with patients. And hospital administrators want greater reliability, simplicity and efficiency and actually in an environment where quality and cost work together, not against each other. So today, endoscopy-enabled care is adding years of lives to millions of people. Our ambition is to do that for millions of more people. And we believe Olympus is uniquely positioned to deliver such a future, our global presence, long-standing relationship with clinical experts and the world's largest installed base of endoscopy systems actually forms the foundation on which much of the world's endoscopy care is delivered today. And our strategy brings together imaging platforms, devices, therapeutic devices, digital solutions and artificial intelligence to form an adaptive ecosystem. And as we bring together more technologies, robotics, artificial intelligence, endoscopy-enabled care becomes more precise. It evolves, becomes more efficient and widely available. We see a future where patients get improved outcomes through earlier diagnosis and faster treatment. More conditions will be treated endoscopically, which means organs are safe, recovery time is faster and patients get healthier. And this is powered by an integrated AI ecosystem. And looking ahead, we see this ecosystem where technology, devices, data come together into an adaptive environment that learns from every procedure, refined workflow, and empowers clinical decision-making. This is the future that Olympus is creating where endoscopy-enabled care extends life and enhances its quality and sets a new standard for what minimally invasive medicine actually looks like. Let me show you what I mean. [Presentation]

Okay. So having seen the future, let's turn to how we're going to make that real. Our vision will be achieved through three strategic imperatives, each of equal importance, innovation-driven growth, simplicity and accountability. As I mentioned, innovation-driven growth is at the heart of what we do, leveraging the world's largest GI installed base. We're focused on key product launches in our core markets. Included in innovation-driven growth is also expanding our presence in China and ensuring that our products have access to that important market. And lastly, to complement our innovation-driven growth is to build on our M&A machine through inorganic means through tuck-in acquisitions and partnerships to really complement the robust offering we have. The second pillar of our strategy is simplicity. And simplicity ensures we have a very strong operating foundation on which to run the business. Beginning this year, short-term restructuring actions, improve our operational efficiency, while longer-term structural moves position us for sustainable growth and driving us towards leading medtech benchmark cost levels. That brings me to our third pillar, accountability. We're taking the opportunity to further strengthen a high-performance culture, where excellence and execution are rewarded. This is critical because the better we operate the business, the better we serve patients. And this patient-first mindset is critical to us. It's the reason we exist and we embed patient safety and quality in everything we do. We will continue to execute on our ESG commitments, and we are implementing an Olympus management system to improve our operational rigor. These three strategic pillars are built on our purpose and our core values, and those aren't changing. Those values resonate deeply with me and all 30,000 Olympus employees. Our financial ambitions are also clear: a 3%, 4%, 5% revenue plan, 100 basis points of operating margin expansion and double-digit EPS growth. Let me go one step deeper. As we look at our strategic plan, our 3, 4, 5 plan accelerates growth from 3% to 4% to 5% or about a percentage point each year. Importantly, this plan is grounded in very real drivers in our pipeline. Our playbook is absolutely clear. We deliver innovation, we fortify our core portfolio and expand it. So Olympus customers can standardize on Olympus with the right tools in the right geographies at the right time. And you can see the launch cadence across our core businesses from GI, GIET, respiratory and urology and also across geographies. On systems and scopes, we're expanding our EVIS X1 Scope lineup, region by region, U.S. Europe, Japan, China, keeping Olympus at the center of the endoscopy suite. In parallel, we're scaling high-growth adjacencies with real clinical benefit. Luminal patency stents, stone management, single-use ureteroscopes and cystoscopes, EVIS and single-use bronchoscopes. I'd offer to you this is what innovation-driven growth. Looks like focused investment, faster execution and a pipeline that supports growth and oh, by the way, additional upside from M&A. Let me take this one level deeper for you. Because to be concrete about what's driving near-term growth, we're executing two levers with urgency. The first one is targeted portfolio expansion through partnerships, and the second one, the step change in our competitiveness in local manufacturing in China. Our partnerships have secured exclusive distribution agreements in really important areas. Our MacroLux offering, as you can see on the slide, strengthens our neurology offering with a single-use cystoscopes, ureteroscopes, and uction access sheaths, bringing capabilities across regions, and we've already defined launch plans. And in GI endotherapy, our GORE VIABIL partnership adds a differentiated biliary metal stent, which is so important to our HPV portfolio and positioning us to expand further in GI metal stents and our launch plan is fully committed on that as well already in the U.S. and launching here in Europe in the next couple of months. And then alongside that, you see our EU-ME3 ultrasonic processor, which is really important in our GI respiratory ecosystem. And we have to find launches for that as well. And then importantly, then, on the China localization, as you can see on the page, this is a strategic inflection point. We're executing with tangible milestones. We have recent product launches, our EVIS X1 video capable system, already started in December, and we got a full launch here this month. So the takeaway is clear. We're expanding our platform through the right partners and improving our ability to win. But I also want to talk about how we're shaping the future through AI and robotics. So first, OLYSENSE. OLYSENSE is our AI-powered ecosystem, which is designed to revolutionize workflows, device training management, disease detection characterization and ultimately, standardize complex procedures. OLYSENSE has recently launched several AI-powered applications in the U.S. and select European markets. By FY '28, we'd expect that 5% of our installed base is connected to this AI cloud platform. And up to 30% to 25% by FY '31. Endoluminal robotics is a top priority for us. And this is anchored by our recent joint venture with Revival Healthcare Capital. Leading this joint venture, we recently announced that Erik Todd was joined as CEO of this, and we're very excited to bring Erik on board. As you think about where Olympus is by leveraging our AI footprint, our capabilities, our opportunity in endoluminal robotics. These are tangible high-impact opportunities that propel our growth. What alongside this technology-driven strategy, we're also evolving our approach to cost management, and let me show you how we're doing that. We aim to deliver approximately 100 basis points of improvement year-on-year through a plan that is both very executable in the short term and structural in the long term. In the short term, our focus is on organizational simplification, SG&A efficiency. We're moving to a division-led model, reducing spans and layers, and redundancies to make accountability, clearer and decision-making faster. These actions are expected to drive approximately JPY 24 billion savings on a run rate basis, about 2,000 net positions in fiscal '26 and '27. But in the longer term, we're building a structural productivity engine to strengthen our manufacturing and supply chain, digitize where we need to give us more flexibility. And importantly, we're adding end-to-end integrated planning. And what this will enable us to do is drive down to medtech benchmark cost levels over time. So in the near term, we execute simplification and simplicity with decisive executable actions, and then longer term, will drive structural changes. And what this means, this provides durable opportunities for lock in margin expansion over time. So I want to take a minute to talk about the important topic of capital allocation. We think capital allocation is one of the most powerful levers we have to shape Olympus' future and deliver value to our shareholders. Our approach to capital allocation is rooted and discipline. Starts with investments in growth drivers, organic development, strategic M&A. Also, we've committed to sustainable, improving dividend for our shareholders, and we'll dynamically look at share buybacks as we have in the past year, and we'll certainly do so this year. And importantly, increasing our focus on free cash flow is very important. And so when we talk about that for a moment. We're focused on free cash flow to strengthen our financial foundation and improve it. But at the same time, we're leveraging our balance sheet. And you've seen this in our recent announcement to triple our investment in our Olympus Innovation Ventures, a $150 million investment. We're tremendously excited about this. Because what this allows us to do is invest and learn faster and more quickly, and we are going to see us continue to deploy that wisely throughout the year. So as we advance our innovation agenda, we'll also enhance our financial performance and ensure that we have the resources to drive long-term growth. Let me take a minute to recap where Olympus stands today. We have several tailwinds as we build business momentum. We've got a really good GI performance in Europe and APAC, and we see significant improvement opportunities in the U.S. Our respiratory BU continues to excel and operate above market growth in the U.S., EMEA and Japan. In China's market has recently shown signs of improvement, and the launch of local production is expected to reinforce this trend. Emerging markets have been a strong, high single, low double-digit grower for us. And our distribution agreements with MacroLux and GORE, strengthen our portfolio in really key areas. Over alongside, these positive tailwinds -- we must acknowledge that headwinds exist, that demand our full attention. The regulated and quality environment within Olympus remains elevated. And this is important because our quality and patient safety commitments are nonnegotiable. We've proactively managed product recalls, temporary suspensions of products to ensure safe and effective products are delivered to the marketplace. To reinforce this commitment, we're elevating the role of the Chief Medical Safety Patient Officer, to report directly to me as well to ensure we're driving patient safety everywhere, every day with inside of Olympus. So we're building momentum. And our quality transformation remains central to our strategy. So in closing, look, we have an exciting and clear vision backed up by very pragmatic actions that we're executing and our journey is underway. We're executing with focus, with purpose, and determination to improve the lives of millions of patients around the world. So thank you for your time.

Thank you so much for the great presentation, Mr. White. So let me now open up the Q&A session. From Olympus, CEO, Mr. White, will be providing the answers. So let's start with my first question. So it's been over 6 months since you became CEO of Olympus. Compared to other global medtech companies, how do you evaluate Olympus? Could you share both the strengths and the challenges you see?

Yes, thanks for the question. It's been a fantastic 6 or 7 months inside of Olympus. When I came to Olympus, having been in medtech my entire career, I felt a couple of things were true, which Olympus had an amazing brand, great people, great legacy of technology and just a history of innovation. And what I found is those are true. We have amazing people. We have incredible customer relationships who stuck with us. And our position in really important markets is what fundamentally drives our success. I talked about the chart. If you're in a market that's growing at 5%, that's a great market to be in. And at the same time, our opportunity to reshape the future of endoscopy-enabled care is what is so exciting. We've got the great legacy and an opportunity to reshape the future. And so when we talk about artificial intelligence, robotics, what care will look like in the future, that's where Olympus is positioned to be. Because, as I mentioned, when you think about our installed base and how we are powering and forming the foundation for much of the world, endoscopy-enabled care, that's a beautiful platform to get on. Now similarly, though, we need to drive our innovation faster. Absolutely. We need to get better commercially, 100%. We need to think about our global operations footprint, those things I talked about. So I think we have a pragmatic view, but I've spent time in the past 7 months all over the world talking to customers, meeting with our employees, and it's great to see not only the pride and the commitment of our employees, but the commitment of our customers to Olympus and what we mean to them in their practice.

Thank you so much. Great. So actually, what do you think about the reorganization from ESD and TSD business to GIS and SIS business so far. I think Olympus changed many things to focus on patient first in the couple of last 2 or 3 years. So what do you think about the effect of changes, many changes?

Yes. Thanks for the question. What my colleague, the moderate mentioned through a lot of acronyms at you. All that meant was we moved to a divisional model to get really close within our GI business and our surgical business. And we did that very intentionally to align with our customers and how our customers operate. And so when we think about the future of the endoscopy suite, that's how we align. And I think it's a really good sign that when we think about Olympus, we think about how do we dynamically adapt to where the market is going, to where our customers' needs are going. And that's why this intelligent ecosystem is so important for us. So we really -- I really like our businesses. They're well positioned in good markets, but we'll always change and adapt. So thank you.

So how is the situation with the FDA reinspection? So do you have any update for us?

Yes. Thanks for the question. So as I've talked about on previous earnings call, the FDA has come in and we inspected it. It's an open regulatory matter. So I can't talk about the details, but know that we're committed and have been, and will be committed to complete transparency with the agency, very regular communication with them, and we look forward that to continue.

Thank you very much. So we look forward to the additional updates going forward. [Operator Instructions] And what is -- what are your thoughts on the market share for GI endoscope going forward? So I feel competition is intensifying, especially in China.

Yes. Thank you for the question. We're fortunate, but we never take it for granted to have a 70-ish percent market share around the world. We come into that knowing we have to earn that every day. I want to pick up your question specifically about China. And when I think about China and talk to also my medtech peer CEOs, you may get different perspectives. Well, let me show you our view on China. China for medtech has historically been a strong double-digit growth market with great margins. But there's been three fundamental changes that have taken place in the China market over time. The first was the move to volume-based purchasing, which took a lot of margin out of the channel, very clear. The second was the anticorruption campaign that the Chinese government did. Of course, Olympus wasn't involved in any of that, but it did actually put a chill into the marketplace as hospital executives didn't know where they were going to be. But the third one and most fundamentally is the buy in China, a policy that the Chinese government has put in place, which is why I think smart companies adapt their strategy. So you saw us move to localization in China with the factory. I talked about that on the pages. But in addition to that, changing our commercial model, strengthening and thinking about our service and repair environment, strengthening our government relations involvement as well. So you bring those together in a new strategy that I believe. And then final point is China, like many other markets has segments of the marketplace. And so when we looked where we were a shared donor, it was in the low and mid-tier segments of the market more than in the high tier. So we're going to adjust our strategy to get at that. So I look where our strategy is, I like the actions we're taking, and my expectation for China is just to be at market growth. I think it's a reasonable inspection for a company as big and strong as Olympus to be in China at market growth levels.

Thank you very much. Also. How about U.S. and other areas, GI endoscopy market shares?

Yes. Thanks for that. There are pockets where I believe our share moves around a little bit. And I would offer to you where we have donated share is because we had gaps in our portfolio and competitors filled in those gaps or where we weren't as good commercially as we needed to be. The beauty of that is both of those are very fixable problems. So we have the opportunity to build the portfolio, as I mentioned, with the road map that's very focused on what our division leaders said, these are the products we need. So those are the products we're building. And then much more -- when I talked about the third pillar of our road map being accountability, much more of a performance culture that rewards execution and excellence.

So back to the question of China. You mentioned there is signs of recovery in China. So what do you think about China outlook in fiscal year 2027 and going forward? So would you like to continue to China businesses going forward?

Thanks for the question. I'd like to think about gradual recovery in China. It's not going to turn out overnight. Just getting products out of our factory, change the commercial model to now be very specific. So the salespeople don't carry everything. They carry products specific to their business unit. And like I mentioned, the other steps we're taking. So -- but we're click, we should see quarter-on-quarter improvement in our performance in China, and I or my executives will be satisfied until I said we're at or above market growth. That's our position we should be at.

Thank you very much. Do you have any questions?

[ Derek ] A question for you. Is there any sector or stage or specific guidance you've given your business development team for future acquisitions as you're looking to fill your pipeline and innovation with external assets?

Yes. Thanks for the question. When we think about business development, the way we think about it with inside of Olympus, it begins with strategy. So every one of our businesses have a very clear strategy and a pathway to leadership. And that pathway to leadership is born on what are we going to do organically. And if we don't have an organic pathway to leadership, what are we going to do inorganically. And to this point specifically on BP, we think about it in terms of three categories: one, tuck-in M&A. We've got a nice robust pipeline of that. Two distribution deals and partnerships and structured relationships like you saw us do with MacroLux and GORE to get a tuck-in of an added technology. And third, of course, joint ventures. As you saw us do with Revival Healthcare Capital to create Swan EndoSurgical, which we're pretty convinced we would not be able to do that internally. So for each one of those, we have clear targets in areas that we think will accelerate our growth. The other final thing I'd say to your comment, when we think about M&A in med tech, oftentimes, it's about buying R&D. It's about buying a technology that you can add in your bag, develop and you become the better owner of. And it's rarely you could buy a channel because generally, what we're trying to do in M&A is sit into our existing channel. But this is about driving our weighted average market growth up. So we're going to do acquisitions. We're going to do partnerships. It's about increase our WAM.

So your corporate strategy for the next 3 years shows an accelerating sales growth target. So 3%, 4% and 5% in the next 3 years. So you explained the scenario, but could you more? Elaborate about this?

Yes, sure. So the 3, 4, 5 plan, as I talked about, is pragmatically based on fundamental drivers inside our pipeline. So we have very focused business units. And each of our division leaders have said these are the specific products that we need to fulfill the portfolio. So when we look at the products that are in our pipeline are those that are generating to our revenue growth. Of course, we said our internal plans higher than the 3, 4, 5 plan, as we said and noticed the 3, 4, 5 plan. Importantly does not include any M&A. So we think what we wanted to do is establish credibility deliver a track record of hitting our numbers, knowing that we didn't put a ceiling on that and we'll accelerate it as we go. That's how we think about the plan driving that important organic engine first and foremost, which is the real pipeline.