Olympus Corporation (7733) Earnings Call Transcript & Summary

Thank you. Greetings. I am Chikashi Takeda, Chief Financial Officer of Olympus Corporation. I would like to thank you indeed for participating in this financial briefing for fiscal year 2021. I would like to give a review of our consolidated financial results for fiscal year 2021, and also, I'd like to talk about our forecast for fiscal year 2022. Please turn to Slide #3. This slide highlights our financial results for fiscal year 2021. Let me start with revenue. We are seeing a recovery trend from the second half of the fiscal year, particularly so in the final quarter when we achieved a significant increase in revenue led by double-digit growth in both ESD and TSD. In response to the remarkable recovery in the second half, we surpassed the full year forecast announced back in February, limiting the revenue decline only at 3%. Full year operating margin was 11.2%, exceeding our forecast. In the fourth quarter, operating profit increased due mainly to increased revenue despite upfront investments and measures for future growth and efficiency gains. We decided to increase dividend by JPY 2 per share to make it JPY 12 per share from the forecast of JPY 10 per share. Next, our full year forecast for fiscal year 2022. We expect to see an increase in revenue by 10% led by growth across all divisions following improved market conditions. Operating profit is expected to achieve JPY 126 billion, up around 50% from the previous year, along with an operating margin of around 16% and JPY 89 billion net profit. Please note that each of these figures will represent record highs for Olympus Corporation. For fiscal year 2022, we plan to increase dividend by JPY 2 per share over the previous year to make it JPY 14 per share. Now I will explain the consolidated financial results and provide a business review for fiscal year 2021. Please turn to Slide #5. This is an overview of the consolidated financial results. As we pre-announced in a timely disclosure on April 30, revenue and each profit has surpassed the February forecast due to steady recovery of our business performance. Due in part to a mature -- larger-than-expected decrease in corporate tax expenses, profit was significantly higher in the end of February forecast. Consolidated full year revenue amounted to JPY 730.5 billion. Despite being impacted by COVID-19 in the first half, we saw a recovery in the market environment in the second half, particularly in the fourth quarter when we achieved double-digit growth in both ESD and TSD, limiting the full year revenue decline only at 3%. Gross profit was JPY 459.5 billion. There were several factors that raised the cost ratio, including a decline in factory operation due to COVID-19, and of course, with the voluntary recalls of endoscopic products and the therapy devices. But the rate of decline significantly improved towards the end of the fiscal year. SG&A expenses totaled JPY 357 billion. Although we implemented necessary investments and measures, strict cost management and efficiency improvement as well as restrictions on activities, we resulted in the SG&A ratio of 48.9%, under the 50% mark. Other expenses increased. Although this was included in our full year forecast, we recorded around JPY 12 billion as the expenses associated with the career support for the external opportunity in the fourth quarter. Please note that operating profit rose in the fourth quarter even after posting these expenses. Operating profit was JPY 82 billion and with an operating margin of 11.2%. This is slightly higher than the February forecast. Profit from continuing operations was JPY 65.7 billion, up 8% year-on-year. Corporate tax expenses declined significantly in connection with the divestiture of the Imaging Business. Profit, including continuing and discontinued operations, was JPY 13 billion. Despite recording a loss of around JPY 50 billion associated with the divestiture of Imaging Business, profits far surpassed the February forecast. Regarding dividend for fiscal year 2021, based on our policy of stable and ongoing dividend increase and in light of our recent strong business performance, we decided to pay dividend of JPY 12 per share, a JPY 2 per share increase over the JPY 10 per share forecast back in February. Slide #6. This graph shows the monthly revenue status. The monthly revenue trend by division with the previous years as a baseline of 100%. At the beginning of the fiscal year, we had to brace for extremely tough year, but revenue improved month by month. And we achieved positive growth in the second half, especially so in the fourth quarter. In March in particular, ESD and TSD grew 23% and 28% year-on-year, respectively. Slide #7 is next. Now we will look at details about each business segment. First, the Endoscopic Solutions division. Full year revenue amounted to JPY 419.5 billion. In response to a market recovery in the second half, year-on-year decline in revenue was held at 1%, excluding FX impact. In terms of region, revenue rose in Europe driven by the U.K. and Eastern Europe as well as in China. In terms of product, sales of disposable endcap-type duodenoscopes and bronchoscopes grew. In the fourth quarter, revenue increased considerably in the continuation of the third quarter trend. The ongoing recovery in the market environment drove double-digit growth in China, North America and in Japan. In China, which is impacted by COVID-19 in the previous year, that rise was particularly large due to comparison effect. In North America, the driver was sales expansion in scope in response to the market recovery. While in Japan, it was an increase in CapEx, mainly among public and national hospitals, who received the government supplementary budget. In terms of product, in addition to the EVIS X1 system and scopes, duodenoscopes and bronchoscopes, were also contributors. Full year operating profit, JPY 104.7 billion, with an operating margin of 25.8%, excluding FX impact. It was on par with the previous year's level, thanks to sales recovery, excluding FX impact despite the voluntary recall costs for endoscopic products of around JPY 6 billion and the expenses for the career support for the external opportunity around JPY 4 billion. In the fourth quarter, operating profit increased significantly, up 61%, excluding FX impact despite the expenses associated with the career support for the external opportunity due in part to the absence of the JPY 10.4 billion in duodenoscope-related expenses in the previous year. Slide #8 for Therapeutic Solutions Division. Full year revenue, JPY 206 billion. TSD also experienced recovery from the second half. And as a result, year-on-year decline in revenue narrowed significantly to 4%, excluding FX impact. In the fourth quarter, revenue went up considerably in response to a market recovery. We achieved positive growth in all regions, with performance particularly strong in China, which is impacted by COVID-19 in the previous year. In terms of product, respiratory endotherapy products and urological products were the drivers. Full year operating profit was JPY 24.6 billion, with an operating margin of 12.6%, excluding FX impact. The operating margin improved 0.5 percentage points, excluding FX impact, thanks to lower SG&A expenses and the termination of the amortization of intangible assets by Gyrus despite a decline in gross profit caused by the lower revenue and endotherapy product, the voluntary recall cost of around JPY 2.0 billion. In the fourth quarter, operating profit increased significantly, up 26%, excluding FX impact mainly due to sales recovery despite the expenses associated with the career support for the external opportunity of around JPY 1.5 billion. Please turn to Slide 9 for the Scientific Solutions division. Full year revenue was JPY 95.9 billion. Performance got on the recovery track in the second half, and the year-on-year decline in revenue narrowed to 8%, excluding currency impact. Strong demand in biological and industrial microscopes in China partially offset weak CapEx in the aerospace sector and constraints on sales activities. In the fourth quarter, revenue increased due to robust sales of industrial microscopes and X-ray fluorescence analyzers, reflecting improved budget execution and CapEx appetite as market conditions recovered. Industrial microscope achieved positive growth driven by 5G-related electronic components and semiconductor market and solid X-ray fluorescence analyzers. Full year operating profit was JPY 4.9 billion, with an operating margin of 6.2%, excluding currency impact due mainly to lower revenue and gross profit following a decline in operating levels and manufacturing sites. In the fourth quarter, operating profit increased significantly, up 17%, excluding currency impacts owing to sales recovery and improved SG&A efficiency. Please turn to Slide 10 for our financial position as of March 31. Cash and equivalents increased due to financing for COVID-19. Goodwill and intangible assets increased due to recent acquisitions, including Veran Medical Technologies. The equity ratio was 33.4%, down 3.1 percentage points year-on-year due to an increase in interest-bearing debt. Slide 11. That is the cash flow. Operating cash flow was JPY 124.1 billion. Year-on-year decline narrowed further against the backdrop and improved profit due to business performance recovery. Investing cash flow included expenditures for multiple M&As of around JPY 45 billion and for the divestiture of Imaging Business of around JPY 28 billion. If we add back these factors, free cash flow was on a par with the previous year's level. Financing cash flow rose JPY 60.3 billion to JPY 40.8 billion due to long-term borrowings and issuance of corporate bonds. Cash and equivalents as of the end of March stood at JPY 217.5 billion, up JPY 54.8 billion. Next, our full year forecast for fiscal 2022. Please turn to Slide 13. Our full year forecast for fiscal 2022, which assume exchange rates of JPY 108 to the dollar and JPY 130 to the euro. We expect a revenue increase of 10% led by growth across all divisions due to improved market conditions and the growth of new products. SG&A expenses are expected to increase year-on-year. In addition to anticipated increase in expenses of increased activities despite creative efforts, we plan to make investments to strengthen our operating infrastructure and improve profitability. Operating profit is projected at JPY 126 billion, up around 50% year-on-year, along with operating margin of around 16% and JPY 89 billion in final profit, all representing record highs for Olympus. For fiscal '22, we plan to increase dividend by JPY 2 per share year-on-year to JPY 14 per share based on our policy of stable and ongoing dividend increase and in light of these forecasts. This is my last slide, Slide 14, forecast by business segment. ESD will continue to expand sales with a focus on EVIS X1 and expect an increase in revenue and operating profit. TSD expects significant rise in revenue and operating profit, given higher revenue driven by recovery in the number of procedures and sales contributions from acquired companies. SSD aims to achieve an operating margin of around 10% due to improved market conditions, both in China and SG&A efficiency. Elimination and Corporate expects significant improvement due to the reduced expenses related to the IMD divestiture and the career support for the external opportunity. Next, CEO, Yasuo Takeuchi, will provide a review of fiscal '21 and explains the management policy for FY '22. That concludes my presentation. Thank you.

Hello, everyone. I am Yasuo Takeuchi, CEO of Olympus Corporation. As Mr. Takeda just mentioned, in fiscal year 2021, we faced unprecedented challenges caused by COVID-19. Despite these, revenue recovered significantly towards the second half of the year, and we were able to achieve forecast which we had revised upwardly in February, both in revenue and profit. Now I would like to provide a review, but fiscal 2021 was indeed a year in which we implemented a range of measures in the quest to become a truly global medtech company. Now on to the management policy for fiscal year 2022. First, I would like to once again explain the direction Olympus is pursuing in order to transform into a truly global medtech company. Please turn to Slide #17. To start, allow me to explain our ESG initiatives. Based on our corporate philosophy, Olympus is making every effort to make people's lives healthier, safer and more fulfilling through responsible corporate activity. In the corporate strategy we announced back in November 2019, we extracted 6 important ESG areas and defined 4 initiatives or materiality item. And we have now the identified 5 materiality items for Olympus, adding "carbon neutral society and circular economy" and the environmental perspective. By working on solutions into these social issues and through our business activities, we will realize sustainable growth and develop a sustainable society. In addition, as announced in yesterday's news release, Olympus has expressed its support for the TCFD recommendations and has set the goal of achieving corporate neutrality by the year 2030. Moving forward, we will continue to concentrate on strengthening efforts to reduce CO2 emissions and highly transparent information disclosure is focused on the analysis of the risks and opportunities posed by climate change. To achieve carbon neutrality target, we will continue to promote manufacturing improvement activities and energy saving measures and also accelerate efforts to reduce CO2 emissions by gradually switching all electricity to be consumed at our business sites to renewable energy sources by 2030. Please turn to Slide 18. Next, I would like to talk once more about the strategic aspiration and performance metrics shown in our corporate strategy. At Olympus, our strategic aspiration is to develop into a globally leading medtech company, which delivers its benefits to all stakeholders through innovative value and contributes to the health of people around the world. In keeping with this thinking, we have declared that we will achieve sustainable growth, specifically an annual revenue growth rate of 5% to 6%, on par with global medtech and an operating margin of over 20%. We will continue to steadily initiate reforms towards meeting these targets. Now I would like to review fiscal year 2021, which was the first year of our corporate strategy. Please turn to Slide 20. This slide shows our recognition of the environment, which we presented in June last year while announcing the performance of our full year forecast due to COVID-19. While recognizing that the COVID-19 pandemic would bring significant value shift, we are also regarded to the long-term expansion of medical needs to be unchanged. And so fiscal year 2021 is a great chance to accelerate our transformation into a truly global medtech company for sustainable growth. Please turn to Slide 21. Based on the environmental recognition that I mentioned previously, we announced 5 measures to be implemented in fiscal year 2021 from a management perspective. As shown here, we followed through with all of these measures, making fiscal year 2021 a year in which we accelerated our transformation into a truly global medtech company for sustainable growth. Looking back on each of these measures, as part of focus in the corporate portfolio, we transferred the Imaging Business. And under structural reform of fixed cost, we implemented the Career Support for the External Opportunity here in Japan. Both of these have been long-term management issues and were extremely tough decisions for top management to make, but we undertook them based on the belief that they were unavoidable in order for Olympus to transform into performance-oriented organization and striving to become a truly global medtech company. In the first half of 2020, we also launched the long-awaited EVIS X1 GI endoscopy system in Europe, Japan and some parts of Asia. The new system has been evaluated quite favorably by physicians around the world and feel confident that it will be a driver of Olympus business performance moving forward. In terms of continued steady investment in product development for future growth, we conducted multiple M&As aimed at growth in the medical sector. We expect that enhancing synergy with the product portfolios and technologies of the companies we acquired will facilitate a sustainable growth. Lastly, regarding driving efficiency in our R&D operations, we posted some initiatives to strengthen concurrent engineering in the early phase. Starting this April, we reorganized our product-based development organization into a technology-based one in order to achieve efficient and rapid product development. Please turn to Slide 22. I would like to now review the business performance for fiscal year 2021. At the beginning of the fiscal year, forecasts were extremely difficult due to the unprecedented global pandemic that was unfolding, and we expected an extremely difficult year with significant decreases in revenue and profit. However, in the third quarter, operating performance turned to positive year-on-year growth and achieved 12% year-on-year growth in the fourth quarter. Our performance in the fourth quarter was at a level exceeding our pre-pandemic fiscal year 2019 results. And we believe this was supported by solid demand for early diagnosis and minimally invasive treatments. Now I would like to explain our management policy for fiscal year 2022. Please turn to Slide 24. Our management theme for fiscal year 2022 is to further strengthen our position as a global medtech company. We will continue and firmly establish the corporate transformation we implemented in fiscal year 2021. Please turn to Slide 25. These are the 4 key initiatives that will be undertaken this fiscal year. In FY 2021, we implemented a range of corporate reforms. This fiscal year, we will continue to move forward with those efforts. We believe that Olympus has now exited the transformation phase and has entered the phase of further strengthening itself as a global medtech company. Since Olympus developed the first practical gastrocamera around 7 decades ago, it has continued to develop products and technologies in close cooperation with physicians and has grown, thanks to its high market share in GI endoscopes. Our greatest strength is providing high added value in creation of products and solutions, underpinned by strong trust with physicians. To achieve sustained growth together with high profitability while utilizing this strength, we must pursue a more in-depth medical business strategy, in line with the approach outlined in our corporate strategy. We will steadily pursue the 4 key initiatives shown here and report to you on our progress through IR events such as earnings briefings throughout the fiscal year. Please note that our profitable growth strategy in medical business is currently being considered internally. Details will be forthcoming at the Investor Day that I will explain using the following slides. Please turn to Slide 26. Now I would like to inform you about the upcoming IR event. We will be holding Investor Day 2021 for the first time in 3 years. Details, including the time and date and content, will be provided once they have been finalized. We look forward to your participation on this event. I would like to make some closing remarks. To sum up, FY 2021, even under the difficult circumstances under the unprecedented COVID-19 pandemic, we adopted a strong resolve to ensure that corporate reforms were implemented. And we decided on and executed a number of measures during the year. FY 2022 is a very important year for linking the numerous measures undertaken in the previous year to result and firmly establishing a performance-oriented culture. With the management taking the lead, we will promote the further corporate reform with the entire company working together. I ask for your -- valued stakeholders for their continued support. That concludes my presentation. Thank you for your kind attention.

Thank you very much. Now we would like to have questions and answers session.

About the ES&D business for March 2022, the forecast. Well, to exceed, I mean, the March '20 level. But I wonder given the first half and the second half, whether it's truly unbelievable. And I understand that in the second half, it was particularly strong, particularly so in China, but the one-off factors were there. March 2021, come the U.K. NHS from the big project, supplementary budget in Japan and in the China, the one-off demand. So those were the special -- on the special factors. And as to the EVIS the technology, there has been some hiccups. But at the same time, the 190V need to be replacing the previous models. So all of those activities are going to continue. So how you forecast or how you anticipate the performance by region in March 2022 period?

I would like to respond to the questions. This is Takeda, the CFO speaking. Maybe Nacho Abia, our COO, he should like to respond as well. But first on myself. Mr. Kohtani, there are positives as well as negatives as you described them very quickly now. By region, all of those factors do -- are affected by those factors and also market enrollment, market conditions. [indiscernible] COVID-19 and its lingering impact, the degree to which COVID-19 is affecting [ the division ] is already varied from one region to next. And that the independency should be kept in mind. So all in all, how would it be for March 2022 by region? China the percent of the increase in revenue, they will be quite noticeable. And also in EMEA, the same. Or the APAC, the Asia, year-on-year, the robust growth. Whereas in Japan and U.S., the percentage of growth, for numerous reasons, may be a little bit more modest than in other regions.

Can you hear me?

Yes.

Do you want me to give some additional comments?

Yes, please.

Okay. Yes. Okay. Thank you. Hope you can hear me well. Well, essentially, just to complement a little bit, the information that Takeda-san provided, I think that our expectation is fundamentally a continued solid growth in China and Asia Pacific. But there are some factors in fiscal year '21 and '22 that make us a little bit more cautious, especially in the U.S. and Japan. First of all, we had some -- in the European region, we have a solid performance in fiscal year '21, but a big part of that was government-supported, government-funded deals in Eastern Europe and the U.K. that we don't expect to be repeated again in fiscal year '22. Additionally, in the U.S., as previously reported, we are not planning to launch EVIS X1 until the first half of fiscal year '23. So we can anticipate that the customers in the U.S. will be, maybe in some cases, delaying purchase decisions until the new platform is available. And finally, in Japan, the -- we have been -- we continuously hear concerns about the hospital budget availability due to the constraints that has been generated to COVID-19. Plus still today, we are suffering continuous cases, and I think we anticipate this will continue this year. This is what makes our considerations for fiscal year '22. But obviously, we are still under the COVID situation in many cases. And I think we have to be observing continuously the market and be ready for any updates as we feel comfortable with that. Thank you very much.

Okay. On the local currency basis, the rate of growth by region, can you share? And also listened to these, on the comments, it seems that you are on the forecast expectation at the end of March 2022 is rather conservative. Is it true?

Well, I have to refrain from disclosing any particular numbers by region. But as you heard from Nacho Abia just now, our thinking is that for the March 2022 period, the so-called FY '22, this is going to be the continuation of the close monitoring of the operation as we did so in the March '21 period so that we can give you pertinent updates. So well, just being cautious in some regions such as Japan, not necessarily we are saying that it's conservative but rather, we're just being cautious. In many case, the [indiscernible] the active performance would tell the reality. So as we gather that information, there's opportune timing, we'll make sure to give you updates.

Well, be conservative but cautious, I understood that. But about the TSD business, it's not just recovering in the [ behind ] situation from the COVID-19, but very, very the aggressive 16% growth in this scenario. I understand that it is going to be good effect of acquisition, but it would affect in the profitability necessary. This is quite aggressive in a sense. For the TSD business, you have your own products such as [indiscernible], but also the other products which you maybe broadened by acquirees. So I would like to know how you expect the situation to be for TSD by category or from the product contributions.

Okay. On a high level, what I would like to do, this is Mr. Takeda speaking, I would like to explain to you what factors are taken into consideration. First of all, the case procedures, the number of the differentiations have been already been picking up. So we'll continue to do so. And those elective procedures, which they have been waiting in the back seat, will start to commence. And the growth areas such as urology and respiratory business areas, these are the areas we're continuing from the March '21 period will perform positively to contribute. So that's a big picture. And as to the -- your question regarding the more detailed view by breaking it down into different types of products.

Something to the question that was potentially made?

Yes, Takeuchi. I can add a little bit more color on that information. I think that the TSD growth is expected to be fueled essentially for the reason you mentioned. There has been a significant demand or pent-up demand that now has been -- especially, we've seen that in Q4, and we expect this still to continue because many procedures were delayed last year. And the institution, the healthcare division has to catch up. From a product perspective, we obviously continued expected growth based on the strategic priorities that we have. I mean, from one side, in the respiratory field, we expect to significantly grow, thanks to the acquisition of Veran Medical Technologies. That will add significant revenue but also will generate synergies with the rest of the portfolio. And in urology, we've completed a very successful year with our neo lithotripsy platform with very significant growth and capturing very significant market share that will now continue through the consumable part, will continue delivering growth. And finally, in endotherapy area, which probably was the area that suffered a little bit more than others in fiscal year '21, we expect a significant recovery as the endoscopies and endoscopy procedures will come back steadily to normal level in fiscal year '22. So I think that the growth is clearly expected based on our strategic priorities. And the addition of the procedures coming back to, hopefully, normal levels fiscal year '19 -- fiscal year '20. Thank you.

Veran Medical, the technology and urology, did you say something about urology? Would you repeat that again?

Yes. In urology, my comment was that the -- we had -- we enjoyed a very positive performance on our lithotripsy platform, SOLTIVE, that was launched last year. And thanks to this launch, we generate significant sales in fiscal year '21, but most important, we make a lot of installations of the capital equipment that will continue generating consumable business in the future. So this is where we are expecting a nice contribution from our urology business in this fiscal year.

I understand you will only take one question. And therefore, I would like to focus on FY '22 ESD revenue. Kohtani-san asked a similar question earlier. So, in FY '21, there are many extraordinary factors. So I'd like to compare to FY '20 results. On a local currency basis, the sales for FY '21 compared to FY '20, only 1% or 2% growth is expected. So I'm afraid it's a rather weak forecast. What are the risks that you are assuming by region? Can you elaborate the risks by region for your forecast for FY '22?

This is Takeda. I'd like to attempt to answer that. Nothing much to add from what I've mentioned earlier. Cautious/conservative for Japan and the Americas, as Nacho also said. Compared to FY 2020, how should I put it? In terms of growth, we don't expect much contribution from these regions, whereas for China, the overall growth would be driven by the growth in revenue in China is what we are anticipating. So overall, when we put all of these together, the lower single-digit growth, single-digit percent growth is our current projection.

That would mean that why are you being bearish on Japan? The CapEx on the part of hospitals, is that the factor or for endoscopes because of the supplementary budget by the government, the demands had already incurred, and therefore, you expect a backlash lower demand? So can you explain the reasons for the bullish forecast for Japan?

Thank you. First, the market conditions; and second, the budgetary allocation in accordance with that. That's what we are focusing on. And in addition, EDOF scope shipments. Clearly, we have not yet resumed the shipment, so EDOF scope is the factor. We do not expect the shipments to resume in the first half of the fiscal year, so that's definitely not positive. I wouldn't go as far as to say negative, but it's not going to be positive.

How about the U.S.? I think you are being rather cautious on the U.S. market as well. You said that in the fiscal '23, new product launch is expected. And therefore, you expect the customers from refraining placing orders this fiscal year. Is that correct?

Yes. For the endoscope platform in the U.S. market, the current model will be in its eighth year. And looking at the system itself, we cannot expect a very aggressive investment.

How about Europe? In FY '21, especially in the second half, you enjoyed strong performance. But compared to FY '20, this fiscal year, FY '22, what is your projection compared to FY '20?

Slight increase is our expectations, says Mr. Takeda. So we are expecting an increase.

Compared to FY '20, am I correct?

Yes. EVIS X1 being launched.

Even with that, you only expect slight increase, correct?

Yes, because the EDOF scope or the scope with the EDOF function has yet to be shipped. And therefore, during the first half of the fiscal year, we cannot expect big increase in sales. We don't think that will be appropriate. On the other hand, in Europe, overall, there are several programs in certain countries. So we are taking this into considerations and expect slight increase.

The EDOF issue, would that have an implication on the sales from EVIS X1 as well? And with the launch of EVIS X1, I thought we should expect improvement in gross profit ratio. But is that not the case?

Well, EDOF was one of the key compelling features for EVIS X1. So EVIS X1 system with EDOF scope was the package that many of the facilities have been looking forward to. And so the EDOF scope shipment's suspension is affecting the EVIS X1 shipment as well, is our assumption.

Only one question to be followed by the [indiscernible]. So let me say, the Pages 5 and 6 of the presentation that you gave, the fourth quarter was quite strong, 11.9%, operating profit up, [ 2.3x ]. Now listening to other companies, it seems that the FX differentiation, the increase unrealized and the gain, it's a valuation gain. But it seems that inventory movement is such that you did not have bit of increased inventory. So all of these performance results, it's really your strength. Would you say offshore, nothing is benefiting kind of [ the formation ] of factors?

Would you rephrase that question, if I may?

No, I'm trying to ask is that in the fourth quarter, the write-off of unrealized gains had to be taken care of. But in the case of Olympus Corporation, if anything, the inventory movement that was quite positive. And I'd say that, that's because of the favorable, the good sales, no products in the inventory. So that's your strength, that you -- strength, strong being.

Well, I talked about the factors such as government-sponsored programs or the supplementary, the budget benefited the public and/or national hospitals. So if you ask me whether that's the risk trends of the company, I would be inclined to say, yes, that's how strong we are, particularly on Page #6.

December was very good. And then you said that it seemed to dip a little bit. The March is very good, I can see. Of course, they said the supplementary budget and that means to where we are today. But in the meantime, China and the U.S. in the medical infrastructure, in the [indiscernible] countries, they have been supported by the public sector, the funds. So your expectation is that what you experienced that the direction, the positive direction that you experienced in the fourth quarter will continue in the March '22 period. Is that correct? So is it okay for me to understand that this momentum that you benefited from in the final quarter will continue?

Well, there's one-off factors that would have to be adjusted in the proceeds as such. This will be reset as we start the new fiscal year. Then I say that China, Europe, a favorable growth plan will continue in the March '22 strategy period.

And then China, in particular, before the COVID-19, it grew so much, Page 5 from the presentation material and to that, and it dipped. But the Chinese [indiscernible] come to the pre-COVID-19 level, right? So is that -- does that mean there is not this repercussion out of the COVID effect, but having gone to the new higher stage in China?

Well, the net of the timing for us to make that sort of positive reassessment of the Chinese market because it's a momentary picture that we have to address one point to the next. But health care investment certainly has been quite aggressive, and that momentum has been continuing. So that benefit is reflected here.

My question, Mr. Takeuchi, you talked about the strategic goals. I'm looking at Slide [indiscernible], and you are talking about 20%, which will be in relation to the earlier targets. Under a COVID-19 [indiscernible] such that the target itself remains unchanged? The reason why I feel that this is rather challenging is because when I look at your plan for this year, you are expecting SG&A to grow larger than the sales revenue. So the cost-reduction effect, I'm afraid, is not going to be felt as far as this fiscal year is concerned. Maybe for shared office, maybe that one-time factor is going to increase the cost. Could you explain if those are the factors?

Thank you Yoshihara-san, for your question. Right. First, in November 2019, we showed the corporate strategy and the financial targets. Basically, the mindset is over a long term, of course, to become a global medtech company within 3 years. We don't think that could be achievable in 3 years and -- how should I put it? The transitioning from the Japanese precision machine manufacturer to global leading medtech company, that is the goal. That is the vision that we have. So it's been put together with this long-term mindset. But when it comes to the financial targets, for example, 20% operating margin or higher to be achieved within 3 years is what we're trying to achieve. The basic thinking there is that over a longer period of time, gradually improve is one way to do it. But back then, when we put that together, the operating margin was about 11% to 12%. And we were talking about 20%, almost doubling the rate. And we felt that our system itself needs to be changed. Some of the systems will be changed gradually. But -- and incrementally, but basically, we feel that the management will have to embark on drastic reform, drastic transform. If we try to do that over an extended period of time, we didn't think that would be the right approach. We thought that transformation efforts have to be executed over a shorter period of time. So we had the resolve to achieve 20% operating profit ratio of 20% within 3 years. I think I did explain this earlier. But in response to your question, I'd like to repeat our basic thinking. Now clearly, 20% in March 2023, 20% or higher. Are we still trying to achieve that? The answer is we haven't given up that aspiration. As the target, as was mentioned earlier, this is rather challenging. This is rather ambitious figure, for sure. But through various measures that have already been implemented as well as with the continued efforts to make sure that they gain traction through those efforts, we're not ruling out achieving that. When we put together that goal, the EDOF issue that was mentioned earlier, that was partly in relation to the quality issue. But basically, the approval standards of FDA have become more stringent. That was a major factor as well, which is in adverse wind growing to our operating performance. So that's how we see the operational operating environment. But even with those challenges, we are to overcome them and become the global leading medtech company. And so by implementing drastic measures, we want to achieve the 20% or higher operating margin at the timing that we originally had in mind.

I see. Regarding the SG&A for this fiscal year, what is the thinking behind that?

So this is Takeuchi. Let me give it a shot first. In terms of our thinking behind SG&A expenses for this fiscal year, last fiscal year, there were several measures implemented, and we are certainly going to feel the effect of those measures. At the same time, for future growth and for the enhancement of basic capability, we have to make investments for that purpose. That cannot be avoided, and we will implement them, for sure. There are many. For example, hiring a talent from outside is part of the effort and investment for infrastructure for the basic growth. That will be part of the picture as well. It's been 2 years since we embarked on Transform Olympus. Basically, for the improved efficiency, each of our employees have now gained the mindset that efficiency has to be improved. I think that mindset has taken root in our organization. And I think that mindset -- change in mindset will have the sustaining influence. And we will continue to make the investments to make Olympus a strong company. And when we put all of these together, we came up with the SG&A plan for this fiscal year that you see there.

I see. I have additional questions. I think what you were trying to say, Mr. Takeuchi, is that, well, making the savings, you need investments for growth. So when can we really feel that the SG&A expenses have really been reduced? Would it be a year from now? Or would it be 2 or 3 years from now?

Well, just focusing on SG&A and talk about the absolute amount, I don't think will be appropriate because that will be in relation to the top line figure. So I'm going to be -- I'm going to have to be rather subjective. Over the last 2 years, starting with the Transform Olympus effort, various reform initiatives efforts have been made. In terms of the absolute amount associated with this reform effort, we see a decline. To support the 20% operating profit ratio, we haven't seen the sufficient reduction in SG&A expenses to get there yet. But we are moving in the right direction is the only way that I can respond. Does that help?

Yes. So for example, quantitatively, JPY 400 billion is your projection. You can't give us the breakdown, right? How much of that is the front-loaded investment?

Takeda will take that question.

I said in my presentation and I said earlier that the operational foundation and for the future efficiency, we will be making the relevant investments, which are included in this year's SG&A. It's really hard to draw the line, clearly, as to what are the investments for different measures. For example for FY '21 revenue, maybe 1% or 2% of the revenue have been earmarked. Is it just one time? Would it continue next year as well? Is this year the peak, and with some increase next fiscal year? [indiscernible] it will lead to the next question, but we're going to think this through this fiscal year and have it reflected in next year's business line.

I see. So ESD business, the guidance for March '22, the 2022 period, please refresh my understanding. It makes me feel good that the companies, particularly outside of Japan, seem to say that the current momentum of the case procedures performed maybe dipped a little bit. But the [indiscernible] prospect for the future is strong enough, then the capital growth may -- or will continue -- continuously be invested in the projects. So listening into those others, which are typically outside of Japan, the yield tone seems a little bit conservative. Now January through March, what was the sales momentum that you experienced, what's the tone of it with the improvement? How is it today by region if possible?

Well, thank you, Mr. Koike. But Nacho Abia is the best present to respond to that question. Nacho?

Thank you, Mr. Koike, let me try to clarify your question. Indeed, in Q4, we have a good performance in ESD. But to be completely honest, I mean, some part of this performance was business that we were expecting to have in the new fiscal year, but for some reasons, were anticipated to Q4. This is especially true for some specific government-funded deals that we had in Europe with a significant amount in the last quarter of the fiscal -- of the previous fiscal year. In addition, we had observed that in many -- and this is true in both in Japan and U.S. as well that many health care systems were, I mean, holding some kind of purchases until in the previous quarters. And they release those purchase orders in the last quarter of our fiscal year. And we thought that those orders will probably come in fiscal year '22, which led us to think is that essentially, the good performance in Q4 was partially due to some anticipated recovery from our customers. That is good news, but it also means that those orders -- I mean, will not come in fiscal year '22. As has been repeatedly say, I believe that the situation with COVID-19 still is fluid, and we are not completely back to the normal situation. And this is especially true for budget, CapEx budget at the hospital level, where we're continuously hearing from customers their concerns about budgets in this year. This is the reason that maybe these numbers looks a little bit conservative or cautious. But I think that, obviously, we need to continue observing and listening from our customers. And obviously, wherever it will be an opportunity to upside these numbers, we will do. But at this point, this is the numbers that we feel comfortable. Thank you very much. Hopefully, I answered your question.

Mr. Koike, that was the answer from the company.

If possible, what about the April number or numbers? So is it on track with your reach on the trend? Or how is it so in April?

I think once again, Nacho should answer.

Also take Mr. Koike's question about the -- how did April performance look like compared to the -- what you -- what we experienced in the fourth quarter of the previous period?

April performance is in track with our expectations. I think it continue -- the trend we've seen in Q4 have continued. So we had a good month, but this is as we plan and anticipated in our budget in our estimation.

Yes, exactly as you heard from Nacho. But for myself, this is Mr. Takeuchi speaking, April or the month of April, the starting point certainly was much stronger than 1 year earlier. That's how we're starting this new fiscal year.

Okay. So that is basically in line of your expectation as you set out with the annual plan?

Well, there are differences. There's a variability in the regions, but in total, yes, that understanding would be correct.

Okay. Now for the TSD, Therapeutic Solutions division, the acquisitions contributing to urology and respiratory businesses. Now on top of that, you have this stronger other product in the GI domain. So those will be the core segment for TSD. But gynecology, the ENT and others, which are the areas where we typically have not had much in the form of Olympus Corporation? So looking to the slides today, as the medical business new strategy, I understand that you are working it out towards the second half -- towards the end of this year, the second half of this year. Now how is it likely to be maybe energy devices, energy gynecology and ENT, whatever sort of corporate actions should we assume will come from the company?

Well, thank you. As I spoke in the explanation of the management policy, the GI respiratory, and the key areas that you mentioned have been referred to in my management -- in the policy. And as we speak of the further strengthening of the medical business, what the ongoing -- the strategy as we move forward, and we will be mindful of that. What about other areas? So that's the purport of your question. I'm afraid that it's a little bit premature for me to remark on that as of today.

Okay, I understand. So I look forward having the update this weekend from here towards the end of this year or in the second half.

I have a very simple question. The gross profit for this fiscal year, we are expecting growth. Can you give us the background to it?

Takeda will take that question.

One factor is compared to FY '21, the difference in the operating rate of the manufacturing sites was an increase in revenue sales. And also during FY '21, there were several special factors, including the voluntary recalls, which were included in our COGS. And for this fiscal year, in the absence of those factors, the gross profit would go up. And of course, there's a contribution from the product mix factor as well. But the 2 factors that I mentioned are the major ones.

I see. How about the new product effect?

Regarding new products, I think that you are actually referring to EVIS X1, not yet at the level of making a great contribution difference to the gross profit. We're not factoring that in yet.

I see. Another question. Mr. Takeuchi commented earlier that for March '23, OP margin 20% or higher. You said that you are keeping that target. But previously, you said that because of COVID 19 impact, that timing might be different. And at that time, I thought maybe it's going to be pushed back by 1 year or so, whereas today, you are sticking to March '23, correct?

This is Takeuchi. Thank you for your question. Well, it's not an official decision. There is no official decision. But about a year ago, everything was so unpredictable, so uncertain. So we were rather bearish. So I might have suggested that we may revisit the timing of achieving OP margin of 20% or higher. And generally, there has not been any official decision at any point in time, changing that timing.

TSD revenue forecast, this seems quite robust. TSD's business model is more resilient against the ESD's business model. So is it correct for me to assume that the business recovery is reflected at TSD than at ESD? And also the number of procedures by region. Do you have any different readings of expectable number of cases in different regions?

So I would try to answer that first. And if necessary, I would ask Nacho Abia to supplement. First of all, March '21 fiscal, which is last year, in terms of the impact of COVID-19 for the TSD business, received that negative impact more than the ESD because of the elective surgery, which was building up. So that impact was felt more in TSD than ESD, with differences among different regions. So let me just say that that's region-by-region, so the magnitude of impact wasn't different. But this year, the March '22, it's not as though we are completely back to the pre-COVID days. But basically the centering around the U.S., elective surgery is already moving in the direction of the reduction. The elective surgeries will be performed. So therefore, for ESD, the positives and negatives that we presented, and the variable factors other than the COVID-19. That's what we explained. So that was for ESD. And in contrast for TSD, yes, our expectation for the business growth will be naturally speaking, stronger for TSD than in ESD in the March '22 period. By region, of course, there are differences. But how and what, I hesitate to phrase in any particular fashion. But all in all, I'd say that's a situation that we reached in the March '22 period.

If you can make some comment regarding the expectation of the TSD growth in FY '22 by region, that will be appreciated.

Thank you, Takeuchi-san. The expectation -- the growth in TSD across the line is solid. And one of the reasons is obviously the fact that TSD business is very natural, very much linked to the number of procedures. And while we are not yet at 2019 levels, the recovery, depending by specialty, is coming very fast. So that's number one. Number two, the second reason is obviously our investment, right? So TSD was declared in our corporate strategy 2 years ago as one of our strongest engine growth. And so we did significant investments in and bring new products to the market. So this is also reflected in the growth. When we look at regions, I think that it's pretty much a good growth across all the regions. I think that different specialties might have different growth rates in different regions. But this growth is not coming from one particular region or other, it's pretty much across the board. All regions are growing nicely in the tier business in the fiscal year '22. Thank you.

Did that I answer your question?

Yes, yes, indeed. As a follow-up, improvement of the product mix. I think you said that OP margin for the TSD will come from the product to the mix improvement, and that improvement has been stalling because of the COVID-19. Why and how? Would you talk about the product mix improvement, how it's been stalling because of COVID-19 what particular product areas?

You said something about our previous communication. I do not recall exactly how -- what communication we gave you. That product mix, too, affect the gross margin of whatever business, much less for TSD. It will be very difficult because it's all across -- across the board have an impact that we have to be mindful of. And of course, it is true that in respiratory field or some particular areas, the so-called -- the special demand has been created. So that's had an effect on the product mix for that category of the products. There have been some shifts in the gross margin, the composition. But that's about all that we can say. It should be difficult to have more detailed kind of view. Would you accept that?

Okay, that's sufficient.

ESD in the U.S. expected to be weak. For Japan, it makes sense. But when I hear at U.S. this week, I'm surprised. When you look at competition, the green manufacturer is doing very well and [indiscernible] disposables are, like Ambu and that [ red ] company are launching products. So are you expecting changes in the competitive landscape for this fiscal year, which is expected to have a larger impact than the market conditions?

Thank you for your question. Takeuchi will first take that question. And if there's anything to add, Nacho, please do so later.

For FY '21, in the U.S., ESD sales compared to the previous year, negative growth due to COVID-19 impact or attributable to the impact of COVID-19. The competitive landscape or reuse converting to single use, that is not encroaching on our market share materially. Of course, competition is there. So you win some sometimes, you lose sometimes, not limited to last year. But we don't see a material change, material impact on our performance. That is not happening. That will be my summary.

If I may complement, Takeuchi-san, I would say that in the U.S., actually, in last fiscal year, our market share as we measure it based on the new installations even grew last year. So we gained more -- we convert more accounts than the accounts that we lost to our competitors. So our market share, which is very significant in the U.S., even advanced a little bit. So the situation in, obviously, the U.S. in the business was more impacted by COVID than anything else. As regards fiscal year '22, or this new fiscal year, the -- we don't expect to lose any market share whatsoever. What we expect is the fact that our customers in the U.S., they obviously know that we have launched IPF 3 in other geographies. And knowing that, in some cases, they might wait in their purchase decisions until IPF 3 is launched in the U.S. because, obviously, they know that this will be coming and it will be coming soon. So this is the reason why we don't expect that those -- this business will disappear or will go to another competitor. This business will stay with us, but the customers may wait until the new platform because they know the new platform is coming. So this is the current situation in the IPF 3 situation or the ESD business in the U.S. Thank you.

So as Nacho just explained, he said IPF 3, and we are talking about EVIS X1. In any event, especially in the U.S. or China, in this market, Olympus has a very strong position in the market. And therefore, the current platform, which has already been in the 90 years since the launch, the customers really would go to other customers. Of course, they are -- we win, we lose sometimes, but we don't see a big churn in our customers, especially in the U.S. and China. We continue to enjoy lion's share, the dominant position.

I see. I have a follow-up question, if I may. Not just U.S., the global market. In fiscal '21, the governments' budgets have been allocated, which I think prompted the customers to place orders ahead of the original schedule. Should we expect this to have the negative impact for this year? And if so, for how long?

Thank you. As special factors, we mentioned that in FY '21, there are some of the factors that would not be repeated in FY '22. This were already mentioned earlier, and not all are in relation to the government supplementary budgets. So it's really difficult to state clearly. But when will the next supplementary budgets in relation to COVID-19 will emerge, it's very hard to predict. So in light of all those factors, for FY '22, the revenue plans have been developed. But I wonder what would be the best way to describe this. It's really hard. It's really hard to explain this, but the situation is as I have just tried to explain.

This is an add-on to the question we just had before regarding the U.S. market. So you recently announced the launch of the single-use bronchoscope H-steriScope in the U.S. It sounds like a very competitive market, but are you able to just give us some indication of how your own single-use bronchoscope will compare to these? And then also perhaps just give us some indication of what outcome you're looking for by the launch in the U.S.? Should we expect to see you as a market leader within the single-use bronchoscope segment anytime soon?

Thank you very much for your question. I believe Nacho Abia is in the best position to answer to your question.

Thank you, [ Jas ], and thank you for this question. Very happy to answer. So yes, we recently announced the launch of the bronchoscope single-use series in the market. And I would say that, overall, Olympus' strategy regarding endoscopy, in general, is to continue to be the leader in the space as we have been for many, many years. And what that means is that we will be aiming to provide to our customers the best solution that fits their needs and their patient needs. This can be reusable or single use. And I think in that sense, we will provide both solutions, and they will make the determination what is the best. Our intention is to continue leading this market. And it has been announced in the past, I mean, we have a pipeline. We're working on different products. And we will put them in the market as we feel they are needed and required in significant volume by our customers. I think that in the current single-use space, bronchoscope is one of the hot areas. It's one of the areas that has been growing significantly, thanks also because of the COVID situation. And that's the area -- that's the reason why we have decided to launch these products. These products are premium products, are indeed products with the strong features that would allow physicians to perform complicated procedures. There is other kind of bronchoscopes, which are more cheaper than those for more basic situations, but this one is a premium portfolio that we hope will be well accepted. But I think our main strategy here, and this will be true as well for other categories, will be to continue supplying to our customers what best fits with their needs. And I think this launch of the respiratory bronchoscopes, single use, is the first step in that direction. But this will continue as we have been explaining and as we continue with our plans. I hope I have clarified your question.

Yes. Thank you very much Mr. Abia-san. [Statements in English on this transcript were spoken by an interpreter present on the live call.]