Olympus Corporation (7733) Earnings Call Transcript & Summary

Hello, everyone. I am Yasuo Takeuchi, CEO of Olympus Corporation. I am privileged to be invited again to present our story at this conference. We are excited to share our plans with you as we look to a new horizon. Here is the agenda for today. As you know, in 2019, Olympus embarked on an ambitious transformation journey. We are now focused on our Medical Business, and as our recent results show, we are making steady progress towards achieving the KPIs we outlined in our corporate strategy, but the industry arena of which we were now a part is also undergoing the rapid change. Macro shifts and micro developments are combining to create a highly dynamic and more globalized health care industry than ever before. Those who recognize and embrace these changes will be well placed to lead and make a real difference for patients and health care professionals. Of course, change is not new to Olympus. As an organization that is over 100 years old, we manifest a long history of successful adaptation and focused renewal. Today, I will take you through our efforts and subsequent results and recently updated midterm Medical Business direction. I have always felt the need to bring clarity or to have a north star to our path forward so that all of our stakeholders have a better perspective to how we ensure sustainable growth as a medtech company. By the conclusion of today's presentation, I hope you will have a clear view of how Olympus will stay true to its purpose of making people's lives healthier, safer and more fulfilling, longer into the future. Before we look ahead, I'd first like to summarize the steps we have taken and what we have achieved since 2019 by briefly revisiting our actions, our performance and our outlook. At Olympus, a key element of our success is that we continuously challenge ourselves. When we reviewed our aspiration to you in 2019, we set some tough targets. Achieving those goals enables us to deliver solutions that benefit all facets of the health care industry from patients and health care professionals who care for them to the payers and the infrastructure that support the system. We set an ambitious time line to achieve over 20% operating margin by 2023, with the understanding that this journey would be a process, not a moment. Achieving an operating margin over 20% in a short period of time will significantly change the awareness of the colleagues and corporate culture and bring out the potential of Olympus as a whole by fiscal year 2023. Let me be clear, 2023 is not the end goal. It is a milestone on our continuing journey. We are now setting ourselves up to compete to grow. While there remains much to do, we have made substantial progress in a relatively short time. One of our key initiatives was portfolio management. We transferred the imaging business in January 2021 and some businesses in the U.S. and Japan. We acquired 5 medical companies since 2020 to grow our medical business. Through various initiatives shown in the slide, I am confident that Olympus is steadily transforming into what we want to be a leading global medtech company. As I mentioned earlier, we have implemented a number of important initiatives in a short time period. As a result, despite COVID-19, we have been able to significantly improve our operating margin and are right on track to achieve over 20% in fiscal year 2023. Here is an update regarding our capital allocation policy, taking advantage of our robust platform centered on GI endoscopes. In the medical business, I believe we can continue to generate a stable free cash flow. First of all, business investment is the top priority in capital allocation. I believe our shareholders expect Olympus to make the business investments that can create a unique added value and also increase shareholder value. In line with our corporate strategy, we will continue to promote the business investment and M&A centered on the Medical Business, especially in our 3 focus areas. We pay dividends stably and aim to increase them gradually. After securing sufficient liquidity on hand for working capital and investment, we will consider flexible buyback of the treasury stock if there are surplus funds. To summarize, our focus and the result has brought us to where we are today, standing on a solid foundation that will enable us to extend our offerings to lead in the areas where we can generate the most impact and to achieve our global ambition. Our contribution to improving the lives of the patients around the world is already significant with our solutions to treating over 100 diseases and conditions. Our solutions support physicians treating and patients suffering from 4 out of the 5 most common cancers, lung, stomach, colon and prostate. However, we can and must do more. This snapshot provides a sobering view of the aging population and the rise of the new cancer cases. For example, the estimated number of the new cancer cases is expected to grow substantially from approximately 19 million cases in 2020 to over 30 million cases by 2040. The need for effective medical solution is growing rapidly and we as an industry must act. At the same time, new technologies offer great promise in terms of raising the standard of care. Data and analytics have the potential to unlock enormous value by improving patient care and experience, reducing the care burden for the professionals and driving costs down. Alongside these drivers is a definitive shift across the industry around the expectations for patient care. There is an emerging need to create solutions and optimize procedures to enhance the care pathway. For health care professionals, this drives better performance, increased efficiency in resource allocation, lowers costs and has the potential to deliver the new insights from the data accrued. For patients, the benefits are clear: more personalized care, faster service, lower costs and ultimately better outcomes. This is another area where the challenges present us with exciting to opportunities extend our offerings, collaborate with partners and ultimately shape a better health care system. These benefits for the HCPs and patients means simply that it is incumbent on leaders in our arena who look beyond optimizing device performance and think more expansively about how their capabilities can be better leveraged to enhance patient care. As we move forward from today, our strategy is to improve patient outcome by elevating the standard of care in targeted disease states. Significant opportunity exists to address unmet needs and elevate standard of care in areas where Olympus has an existing right to win. Important unmet needs are common across target disease states, including the need for the earlier patient engagement, for better care along the patient pathway and for the application of the data-driven and advanced technological solutions. This opportunity landscape represents a significant shift in the direction toward the pathway and procedure focus while next-generation products will also play an important role. The initial implications of this strategy are clear. We will focus on area where we can win, where Olympus can truly elevate the standard of care and ultimately improve patient outcomes. We will seek new opportunities to expand our participation at multiple stages of the patient pathway. Adapting a care pathway-focused approach offers us the opportunity to take a leading role in shaping the future of health care. This will require enabling operational adjustments that allow us to meet our aims globally and at the pace. Now I'd like to take you through the next chapter and share with you the details of our 3 principles. First, we must focus on our strengths in areas where we can have the greatest impact on health care, patient lives and where we will be most successful against our competition. As you can see in the slide, Olympus is a clear leader in areas of gastroenterology, urology and respiratory. This is where we are having the greatest impact today, but it is also where we have new growth opportunities. These are the areas where we will focus our investment and resources to achieve profitable and sustainable growth and make the biggest difference in the care pathway journey. As a result, we plan to maintain the market leadership in the GI endoscopy and outpace market growth in GI endotherapy, urology and respiratory. Today, I would like to talk about the growth drivers in each area. Let's talk about the GI first. So how will we drive future growth in the gastroenterology and harness the opportunity ahead? In GI, we can segment our growth opportunities into 3 categories: innovation of the new products, regional expansions and leveraging our domain knowledge to grow into areas adjacent to our existing expertise. For example, the launch of the EVIS X1, our most advanced endoscopy system, has been enthusiastically received by the customers and is contributing to growth in the regions already launched. The EVIS X1 system launches in Europe, Asia Pacific and Japan have been quite successful. So we are very confident that the new launches planned, expanding entries for the product into the U.S. and China, will be very successful as well. We are bullish on these launches and have full confidence that our efforts will yield significant additional results over the next 5 years. The next area we will focus on is urology, where Olympus is uniquely positioned with a comprehensive portfolio of products to treat some of the most common urological diseases. In urology, we will be driving growth by continuing to invest in core procedures and technology areas while expanding our reach globally. Our key focus area of the BPH, bladder cancer and stone management will be driven by our visualization solutions plus other key technologies and also through our entry into the single-use ureteroscopy market, and we will drive global market development to allow patients worldwide to benefit from the minimally invasive IT procedure while expanding our stone management portfolio beyond the core markets, powered by our revolutionary market-leading SOLTIVE SuperPulsed thulium fiber laser systems solution. Physicians and clinical evidence have shown that this is game-changing technology, and we are very proud to bring it to market. Let's move on to the respiratory. Our growth in respiratory will center on 3 core actions. First, it is incumbent upon us to leverage our innovations and clinical knowledge to maintain leadership in the core market, such as the U.S., where we will launch EVIS X1. We will also have a full portfolio of the single-use and traditional bronchoscopes as well as the new EVIS technologies that will address currently unmet needs. Second, we will expand our market presence with the platforms such as the Veran SPiN Thoracic Navigation platform and the commercialization of the Spiration Valve System in other geographies such as China. And third, we will meet so far unmet clinical needs by growing our pipeline of technologies to improve diagnostics for suspicious peripheral lesions while applying our domain expertise to adjacent areas in lung cancer screening, risk stratification and treatment. Okay. Let's move on now into the shape. The solutions we have discussed so far demonstrate our potential to realize further growth and have greater impact that if we are aiming to continue elevating the standard of care as the core of our strategy, we will also need to determine what other innovations will be required. In looking to the future, we are applying 3 lenses as we pursue our shape principle, pathway enhancement, procedure optimization and next-generation product innovation. For care pathway enhancement, the emphasis is on driving value through a comprehensive understanding and management of care pathway of diseases and to offer more personalized care. For example, we will pursue integration of improved screening and diagnostic offerings with decision-making tools at each stage across the care pathway. We will put emphasis on driving value through data and analytics solutions in high fidelity, complex procedures as hardware and software integration can enable care teams to reduce variation, avoid errors and optimize performance. And while considering next-generation product innovation, we will emphasize product differentiation to drive value creation. Here, our focus will be on devices that are designed to address unmet needs by improving upon cost, quality, ease of use and connectedness. Our goal is to help bring new care delivery models, new technologies and new business models to the forefront to better serve the health care provider and ultimately, the patient in fundamentally new ways. Our leadership in endoscopy allows us the ability to develop a portfolio of endoscopes that are right for the job. Recent market research we conducted gave a view into the most important attributes an endoscope should have from reliability and maneuverability to ergonomics, workflow features and more. Olympus will continue to align our offerings to these critical needs and best-in-class attributes to complement our reusable endoscopes portfolio with solutions that can fit the need of every specific case. This is leading us to introduce more breadth and balanced portfolio offerings such as single-use endoscopes, which give our customers access to the best tools for each procedure, site of care and individual patient needs. We recognize the growth opportunities and market demand for single-use endoscopes, and we are launching a first line of the single-use bronchoscopes now and have near future plan for single-use endoscopes in several specialty areas. Our customers tell us that there's ample room for both single-use and reusable endoscopes and that they are excited to benefit from the new features and benefits we bring with each new product launch. But our shape principle doesn't end with endoscopes. It is just the beginning. To be successful, as we focus and shape, we must continue to improve the capabilities of our organization. We must enable Olympus to fulfill its potential and compete more effectively on a global scale. Solutions that lead to earlier patient engagement, enhanced care and better use of new technologies will have notable potential for value. Continuous investments in these opportunities will be necessary if we are to pursue them effectively. And for this, we are more than ready. Business development structures and processes have been established across several locations worldwide. Key medical areas have been strengthened through a series of relevant deals and partnerships since 2020. And we are continuously exploring opportunities. And finally, last September, we announced the creation of the corporate venture capital fund, Olympus Innovation Ventures, seeded with an initial commitment of USD 50 million over 5 years. This fund will allow us to form a relationship with early-stage companies in desirable areas and help nurture partnerships with relevant and compelling entrepreneurial teams and innovators. Our shift in focus to a care pathway approach will deliver significant benefits. But to get things right, we need to extend our clinical expertise in new ways. We have already taken steps to ramp up our medical and scientific affairs function, adding significant clinical expertise across the globe. We will also continue to expand our leading educational programs and training exercises to help health care professionals increase their technical expertise, achieve excellent clinical results and ensure patient safety. We are putting structures in place to support more agile and empowered decision-making governed by the global functions rather than the regions. We are establishing global end-to-end operation for manufacturing, procurement and supply chain management. We are building a strong global R&D network that is deeply connected to our other corporate functions. We will deepen our expertise in core areas and continue to streamline our quality assurance and regulatory affairs functions. All of these actions will help us to increase productivity and improve cost efficiency in order to ground our business in the culture of excellence. Ultimately, we will operate more efficiently in a way that allows us to make future investments. To meet our aims and ensure the success of our enable principle, last September, we announced a plan to broaden our executive teams by April 2022. We will add a sixth executive officer role to guide our end-to-end operations, including procurement, manufacturing and supply chain. And we'll make the necessary reforms and vision for these functions. R&D will be handed over to a new executive officer who will head this function into the future. To conclude, let me once again recall the challenging targets that Olympus has set. These include core financial indicators of continual growth and a solid operating margin of over 20%, with expectations toward maintaining revenue growth and improving profitability through cost leverage and balance sheet efficiency after fiscal year 2024. Our strategy builds on our core strengths, addresses key value creation shifts in the industry and provides focus for our efforts for better patient outcomes and an elevated standard of care. Our ultimate goal is to make people's lives healthier, safer and more fulfilling. With a clear pathway-focused approach that is driven by demand for better treatment, we will be broadening our participation in growing markets and capturing new value. The transformation we have announced to you today will help us best align our capabilities with our goals, focus on the areas where we generate the most value for patients, achieve solid growth and fully stand by our commitments. Thank you for your time.