Olympus Corporation (7733) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the conference. My name is Naomi Kumagai, Japan pharma and med tech analyst at JPMorgan. It's my great pleasure to introduce Mr. Takeuchi, President and CEO of Olympus. Breakout will be in Georgian room. And with that, I'll turn it over to Mr. Takeuchi.

Thank you, Kumagai-san, for your kind introduction. Today, I am privileged to be here for the first time as Olympus. Good morning, everyone. I am Yasuo Takeuchi, CEO and President of Olympus. Before jumping into main topic, I want to share a little bit of who I am. I am a pure breed of Olympus. This year marks my 40th anniversary working here, and took office last April. But half of my career was built outside of Japan, that gave me opportunities to look at my own company performance with eyes of outsider, and I have come to believe that Olympus has a potential for much stronger growth if we put right levers. So my ultimate goal today is to help as many of you deepen understanding Olympus and what plans we have to accelerate the growth for the future. And I want to thank you for your being here today for my story. What brand image do you have for Olympus? The last October, we celebrated the 100-year anniversary. We are 100-years-old company with strong background in life science and optical technology. Today, we are known more as one of the leading med tech brand with significant GI endoscopy market share. After all, we marketed the world's first -- the practical endoscope in 1950, which is 70 years ago. This is our mission. We call our company philosophy as our purpose, and we do business every day to fulfill the mission. This is to making people's lives healthier, safer and more fulfilling around the world whatever business, service we are in. That's what we stand for and what we try to do better. All of our employees around the world are united by this purpose, regardless of ethnicity, gender and other personal values. To give you more ideas of who we are, I would like to share a snapshot of our Medical Business, which marks up about 80% of our entire business. Our factor sheet is on the screen here. The Medical division top line is JPY 634 billion, which is roughly $6 billion. We have subsidiaries in 39 countries and operations globally. What differentiates us from the others is the history and ongoing evolution of GI endoscopy. Currently, GI endoscopy market share is around 70% global, and the business is continuing to grow at 3% annually. In addition to that, we now have therapeutic solution device business unit headquartered here in the United States. This is -- business is growing at a rate of 8% annually. So much for the period. Now I would -- I'd like to walk you through what we prioritize to accelerate our growth. First and foremost, this is our aspiration, where we want to be and will be in the future. Our strategic goal to maintain annual growth of 5% to 6%, achieve more than 20% operating margin and to gain a leading position in the therapeutic areas where we have the competitive advantages. Our aspiration is to become a top-tier globally recognized med tech company, delivering truly innovative values to our stakeholders. To achieve the aspiration, we have 4 primary -- the strategic pillars, as you can see here. Of the 4 pillars, I will focus on the 3 important pillars today. The first, how we will strengthen the corporate portfolio. Second, what we will do to further reinforce our leadership in endoscope. Third, how we will accelerate the growth of our Therapeutic Solution business. First, it's how we prioritize our business focus on the strengths in the corporate portfolio. Our portfolio is currently consisted of 4 divisions, the Endoscope Solutions, Therapeutic Solutions, Scientific Solutions and Imaging division. As the bubble chart illustrates, much of our growth is expected to come from endoscopy and therapeutic business. Therefore, we will prioritize our investment for the Medical segment. In terms of the Scientific Solutions and Imaging divisions, we will continue the operations while regularly improving efficiency and profitability. Now next is how we will further strengthen our leadership position in endoscopy. Our stronghold is reusable segment, so that we will continue bringing innovations to enrich our offerings to help health care professionals and patient to have better results and outcomes. And I am excited to announce that the long-waited launch is planned this year. And I will come back to you in the next slide about this. And we will dial up our activities in a single-use endoscope to complement our offerings to support health care professionals under the various clinical situations. This is a natural course of our evolution as a leading endoscopy manufacturer to adapting rapidly changing medical and safety needs. Third, again, it's no-brainer. We will relook at the service model to better cater to the needs of our customers, to ensure safety, more values for money and the convenience. So here comes our exciting new product launch. Our next generation has been long waited from not only medical professionals but also the capital markets and our stakeholders. And finally, we will start to market them as soon as we have the regulatory approvals. The new models are loaded with brand-new technology to deliver higher medical values, cost and operational efficiency. They will support the doctors in advanced procedures such as magnification, the lesion detection and identifying hemostasis points. Also they would not only bring greater efficiency to testing and treatment, but also contribute to the greater quality in the diagnosis themselves. I'm very excited with this launch and confident that it will set a new standard for the endoscopic products, very exciting news for us. Now let's talk about single-use endoscope. You may be interested in why we believe it could increase our corporate values, not jeopardizing kind reusable business. There's an increasing demand for the single-use endoscopes for the different use occasion, such as in emergency rooms or under the situation when the tighter infection control is a must. As a leading endoscope manufacturer, we believe that it's our commitment to quickly adapt to the medical needs. Therefore, we'll provide a -- single-use endoscopes where we believe they provide the optimal values. With that, we will build a comprehensive portfolio to become a one-stop brand, helping the health care professionals select a most suitable scope to address their various -- their clinical needs. Our advantage lies in understanding of the clinical unmet needs. Our proprietary endoscope technology accumulated over the years. That would help us jump-start the single-use development and its marketing, and which the product portfolio would further cement our position as a leading endoscope brand. Helping physicians in every situation. The product story are always exciting, but there's another exciting outlook, that's emerging market, especially Chinese market. As we all agree, the China still stands firm and present room for the growth in the medium term. It is a vital market for our growth. Two, preventive medicine and early diagnosis are in high demands in China as vast populations age. And the use of the endoscope is the lower compared to the Japan and the western countries, leaving huge potential group in non-ideal situations. That's partially due to the fact that the number of endoscopies is still very low, which gives us huge potential for the growth by helping the development of eligible doctors through our training centers. The government policy is backing our direction in China, investing more in the regional areas. That's helping hospitals in the target areas, rapidly adapting advanced medical treatment and triggering the purchase of the high-end model endoscope. By the end of December last year, the Endoscope segment has grown far beyond our forecast. I am very much looking forward to continuing our presentation into the market to deliver the better cases to people in China, and sustain the leading position there. So far, I've talked about our corporate portfolio, our global strategy for the reusable and disposable endoscopes. And the slide that you're looking at summarizes our ambition and the strategies for the Endoscope business. By executing the 3 strategies I just outlined, we are confident to achieve an annual average growth rate out of about 6% in the next 3 years. The next, let me share our growth plan for the Therapeutic Solution division. This division is led by Mr. Nacho Abia, who is in the room today. We have moved this division headquarter to the U.S. to stay closer to the complex and diverse needs of their customers, and Nacho is leading it. In Therapeutic Solutions divisions, we are focusing on the area where we have significant competitive advantages. In GI endotherapy, urology and respiratory endotherapy devices, we are placed #1 to #3. The 3 therapeutic areas are where we will focus for the time being. By expanding products and the adoption of the techniques, while building a stronger sales force. We are confident to give more contributions to the health care professionals, and to accelerate our growth from here, United States. How we focus our growth comes in the next page. What you're looking at shows the revenue growth of our Therapeutic Solutions business in the past 3 years. It illustrates that our performance has steadily grown at the rate of 8.7% over the past 3 years for GI and respiratory endotherapy devices, urology and surgical, energy. In our therapeutic device field, in particular, we are introducing more than the 10 new products every year. Very unique device, making the best use of our technologies, coupled with the proactive use of external sourcing. As we continue to expand our lineup and enhance sales force excellence, we believe we can maintain the growth in high single-digit figures. This is our growth ambition for the Therapeutic Solutions business for the next 3 years. We aim to continue growing at a rate of 8% annually and expanding our product offerings. So far, I've been talking about the growth drivers, such as the product portfolio in the region. From here, I would like to share what it takes to achieve the goal and enablers, we plan further growth. Simply put, we will equip the organization with the right talents for the new journey and transform the culture to be more marketing, customer-centric to adapt to the -- and outperform the speed of the industry change. It sounds so cliche but we will roll up our sleeves to revamp the organization. We have already implemented, accompanied by the program called Transform Olympus, to improve company's efficiency since last year. And I would give you some ideas what it is. And we have achieved so far in the next page. Transform Olympus, the program is -- it's all about making Olympus leaner. End goal is to save up for the investments as well as transform the way we work and the way we think to be more globally competitive, performance-driven culture. The program touches the entire value chain, including R&D, supply chain, manufacturing, sales, marketing, indirect expenses and Agile. We have come up with already the sign-off close to the 1,000 improvement initiatives. Already some benefits are being observed. The program is expected to generate huge savings over the next 3 to 4 years. In terms of the profitability improvement, we are forecasting that roughly 40% of the improvement would come from the cost efficiency improvements in product sales and R&D. An additional 35% is expected from the commercial sales by reducing the sales promotion and other costs and the growth in the sales of the product and services. In corporate area, 25% is focused through the reduction of indirect expenses. Majority of our associates are involved in this program, adapting to the new ways of cross-functional working with agility. They're learning how to be more efficient and performance-driven. And their changed behaviors and mindset will be one of the great enablers for our cumulative gross target. And the last but not the least, I will close my presentation sharing a set of KGIs, key goal indicators, and time frame. So this is our goal. During the previous medium-term management period, we -- our credit rating recovered to a single A. And our capital adequacy ratio improved to approximately 50%, bringing into the site of the financial soundness targeted in our previous medium-term plan called '16 Corporate Strategic Plan. In order to firmly cement our position as a sustainable growth -- the global medical technology company, we have set an ongoing operational margin to be above 20% by March '23. 20% is almost double of what we currently have. Ambitious target, but I am confident we are capable to achieving this goal. I will lead to achieve the target by driving the strategic drivers and enablers that I shared with you today. And this is our time line. Our transformation initiatives will be executed in 3 steps. The first, we will focus to gain the short-term results in areas such as procurement, R&D portfolio and inventory management. And second focus is to improve profitability through the innovation initiatives from the Transform Olympus, and the result of which we will achieve an operating margin of 20% by the term ending March '23. And the third, after we become the leaner and operates more efficiently, we will leverage the generated free cash flow to accelerate M&As and large-scale investments to build the competitive strengths to gain sustainable growth. In addition to the operating margin target, supplementally, our financial KPIs are also in place. The 3 indicators selected are to reflect our ability to generate investment resources, capital, as efficiencies and improvement of the shareholder values, which obviously, they are very closely related. Achieving all of these together with the operating margin target would reinforce Olympus' ability to invest for the future business and for enabling infrastructures. And this is my last slide, it is our thinking for the cash allocations. We will prioritize resources allocation for our growth of Medical Business. M&A is one of the enablers to accelerate the business expansion, and we will have our eyes wide open for the opportunities. In order to meet our shareholder expectations, we will achieve the 30% level of the total return ratio by the term ending March '21. From that point, while keeping track of our investment funds, we will adopt the policy of strengthening allocation to the shareholder gradually raising the level of our total returns. So thank you, everyone, for your patience to listen my presentation here. I hope my story makes sense to you and also hope that it helps you better visualize where Olympus is heading to. We turn to the 100 years old last year, but we are just embarking on another new journey to better serve to the people around the world, getting access to the healthier, safer and more fulfilling lives. That's what we do today and we'll do better tomorrow. I'm very much looking forward to receiving the many questions and feedbacks from you in the later session. Thank you for listening.