Hello, everybody. I am Chikashi Takeda, the CFO of Olympus Corporation. I would like to thank you all for participating for this conference. I would like to provide a review of our consolidated financial results for the first quarter of fiscal 2024, and talk about our full year forecast for fiscal 2024. Next slide, please. This slide highlights the main points for first quarter financial results for fiscal 2024. Revenue increased 8% on a consolidated basis. Growth was mainly driven by China, which recovered from the Shanghai lockdown and other factors, and APAC, which grew in all segments. By product, EVIS X1 and VISERA ELITE III were the main contributors. Both ESD and TSD achieved high single-digit growth, setting a record high in the medical business for the first quarter.
On the other hand, profit decreased due to an increase in personnel expenses for future growth and strengthening of operational infrastructure such as QA/RA, as well as upfront project-related expenses for improving efficiency, et c., coupled with the absence of a gain of approximately JPY 16.4 billion on the sales of land in Tokyo, which was recorded as other income in the previous fiscal year. FDA-related expenses amounted to several hundred million JPY in SG&A and approximately JPY 5 billion in other expenses. Those are mainly for complaint responses, medical device reporting, MDR, and process and design validation, ensuring that we comply with all applicable quality laws and regulations, and strengthening our quality assurance function. Steady progress has been made in corrective actions for FDA findings while engaging in constructive dialogue with the FDA. Adjusted operating profit, excluding other income expenses, decreased 5%, with an adjusted operating margin of 13.6%.
Profit as a sum of continuing operations and discontinued operations reached a record high of JPY 246.6 billion, due to a gain on the transfer of Scientific Solutions business Evident that was booked in the first quarter of the current fiscal year. EPS is JPY 192. Moving on to our whole year forecast for fiscal 2024. The initial forecast announced in May remains unchanged, as we still aim to achieving the budget and have taken appropriate actions despite slightly slow first quarter results. We think that the growth will be seen in the second half. Revenue is expected to reach JPY 914 billion, up 4% year-over-year, and adjusted operating profit is expected to reach JPY 182 billion, up 3% year-over-year, with an adjusted operating margin of around 20%, on par with the previous year.
Profit as a sum of continuing operations and discontinued operation is expected to reach a record high of JPY 336 billion, with EPS of JPY 273. The business environment is expected to remain uncertain to a certain extent in the second quarter and onwards. We continue to operate with a keen awareness of those risks. We also strive to maintain appropriate cost control while allocating resources to strengthen our operating infrastructure, including QA/RA, R&D, and initiatives to improve productivity.
Next page. This is an overview of our consolidated financial results. Consolidated revenue totaled JPY 207.7 billion. The medical business achieved a record high for a first quarter, up 8% year-on-year. Both ESD and TSD achieved a high single-digit growth. Gross profit was JPY 137.2 billion, with gross profit margin improving 0.7 points. The improvement was due mainly to a decrease in procurement in the semiconductor spot market and the depreciation of the Japanese yen. SG&A expenses totaled JPY 108.8 billion, with SG&A ratio worsening 2.4 points. The main factors were an increase in personal expenses for the future growth and strengthening of operational infrastructure such as QA/RA, as well as various project-related expenses to improve efficiency and others. Adjusted operating profit was JPY 28.3 billion, down JPY 1.5 billion or 5% year-on-year. Adjusted operating margin deteriorated 1.9 points at 13.6%.
Other income and expenses were negative JPY 6 billion, as we posted a gain of approximately JPY 16.4 billion on the sale of land in Tokyo in the previous fiscal year, whereas we recorded approximately JPY 5 billion as FDA-related expenses in the current fiscal year. That's the main factor for the year-on-year decline. Profit from continuing operations was JPY 13.5 billion, with EPS of JPY 11. With the completion of the transfer of discontinued operation, or Evident, in April, we recorded a gain on the transfer in the first quarter of the current fiscal year. Total profit, including both continuing operations and discontinued operation, was JPY 240.6 billion, with EPS of JPY 192. Lastly, but not the least, I would like to look back on what we have done under the new management team since this April.
When we formulated our company strategy announced in May, we established a revenue CAGR of 5%, a target some of you may have viewed as conservative. The initial quarter, however, validates the realism of our projections as we now find ourselves necessitating investments in corrective measures and the establishment of a robust framework for the quality systems following an FDA audit. Rigorous assessment and implementing corrective actions are of utmost importance to us, and these endeavors will persist throughout the fiscal year, necessitating the outlined investments. Although our endeavors have just commenced, we are steadily advancing while actively engaging in constructive discussions with the FDA. This dialogue is sustained by significant transformative initiatives aimed at enhancing our quality infrastructure, optimizing the size of our quality system, and ensuring consistent global adoption of processes across manufacturing, repair, and distribution centers.
Through this novel quality transformation program, we firmly believe that we safeguard patient safety and contribute to value creation for all stakeholders. Ultimately, this strategy will enable us to excel, fostering innovation for growth. Simultaneously, we continue to champion our four key drivers for value creation and pursuit of enduring sustainable growth: business and global expansion, strategic M&A, enhancement of care pathways, and development of an intelligent endoscopy ecosystem. Progress across all pillars is proceeding according to plan. Despite the prevailing challenges in our operating environment, we maintain our forecast, confident in our ability to realize our goals through appropriate measures. Our foreign exchange assumptions remain unchanged, and their positive impact will counterbalance the risks observed in the first quarter. We regard this situation as an opportunity to evolve into a leading global medtech company, realizing innovation for growth in alignment with our three-year plan. That concludes my presentation.
Thank you for your unwavering trust and support on this journey.
Before we go to the Q&A session, we would like to answer a question that was specifically of high interest among investors. I would like to read out the question. Against your internal plan, the first quarter start was slow. In terms of revenue and profit, how lower was it against your target, and what are the reasons behind these? First, Mr. Takeda, the CFO, will respond to this question.
Well, normally, this should be integrated into a slide or into a narration. I would like to offer my explanation about this question, which was of high interest in the investors. I do understand that this has been a high interest of the investors. Well, first of all, in terms of revenue, basically about 3% lower than our internal target was the situation. Mainly, this was due to the suspension of the shipment of the products or the lack of supply of the components. These were the main reasons, because we lost the sales opportunity due to these factors. For 1.5%-2% downward pressure in the consolidated revenue growth. Specifically for TSD, this situation was more pronounced. If you look only at TSD, it was a 3%-4% downward pressure against our growth.
The remainder will be the accuracy of the quarterly plan that we have compiled. Maybe this is related to this activity with, for instance, the U.S. EVIS X1 launch is near, so there has been a bit of a holding back of the purchase in China. In terms of the number of cases, it has improved, the inventory at the customers has been more than we have expected. Compared to the number of cases, the procedures that the shipment hasn't increased. As a result, the revenue was weak. In terms of the cost of goods, there has not been such a change. This is basically related to the change in the sales composition. In terms of SG&A, it was more by 4% against our internal target.
I think half of it is due to the timing issue, and the remaining half would be. There's a complaint within the QA/RA challenge, there's a complaint handling. There was more than we had anticipated. We have been using outsourcing. That is the reason why the cost has gone up. In terms of the amount, about JPY 2 billion more than we have anticipated. This JPY 2 billion is basically a timing issue when we had booked that cost. That's all from me.
We will now take questions.
I would like to ask about the TSD business. I see that the urology business was a little bit weak and just explain that there was some issues that you could not ship some product. Could you explain some details on that? Also, respiratory, we see some negative impact from the suspension of the product shipment, and also would like to hear the detail on this. Especially for the urology business, I see that compared to the major competitors, your growth rate looks quite sluggish in the last couple of quarters. I thought that was mainly because of the weak sales, high exposure to China and Japan. Maybe it's different now. Could you explain any fundamental reasons that your urology business has been weak in the last couple of quarters? That's my question. Thank you very much.
Thank you for your question. Well, I'd like to respond briefly and ask Gabriela to follow up for further response, for further details. First, in my presentation, I said that suspension of shipments and the parts supply disruptions are the issues that we faced. That was particularly true for urology main products, PLASMA, electrodes, and SOLTIVE. In those product areas, we felt a strong impact, especially in Europe and North America. In Australia, on the other hand, SOLTIVE was strong, which made up somewhat for the decline. That was the high-level situation for the first quarter. Gabriela, anything to add?
On the question she asked, please.
Thank you very much. This is Gabriela Kaynor. Really very little to add from what Chikashi has just explained. I think as he pointed out in the question, over the last few quarters, we have had and have commented on some of our ongoing supply constraints. I think while we are seeing some recovery from the suspension of shipments in some of these areas, we are still in the pathway to recovery on that front. I think, again, as stated over the coming months and quarters, we are continuing to work closely with our customers and supply chain teams, providers to ensure that we are continuing on the journey of recovery. We did, however, see, as Chikashi just said, strong increase in sales in our key areas of focus when we have been able to provide the shipment.
That is what is giving us confidence for the quarters to follow. Thank you.
Thank you very much. There are one follow-up for this question. One is that could you explain the reasons for this suspension of some key product? Is that related to the FDA warnings or if not? Could you explain the exact timing that you can expect the recovery of the product shipment? This suspension of the certain key product is already included into your guidance for March 2024. That's additional question. Thank you.
Gabriela can you take that also?
Sure. Thank you. Yep. Thank you. We do have several different drivers and products. We have some ongoing component and supply chain related issues that this is a recovery that unfortunately is not happening overnight as we have component, supply chain related issues that lag into our production and manufacturing facilities. We have some capacity constraints, and we're managing that very closely with our manufacturing sites to ensure that we are trying to expand our production volumes and capacity as much as feasible. We do have some contract manufacturing conditions in some of our cases. In those cases, again, we're working with our suppliers. It's not one single issue, as we've explained in the past few quarters.
It's a matter of, again, from a timing perspective, in some of these cases, it's rolling back orders that we're already providing or satisfying some of the customers. Again, across the five regions, across multiple product categories. Additionally, we have had some suspension of products from a quality perspective. Again, these are, in some cases, intermittent back orders or product suspensions. It's hard to give you a specific timing because we have this across multiple product categories. Maybe one final thing is from a ship hold perspective, we had a ship hold for our PLASMA electrodes for the first quarter of this year, which obviously created some impact. That ship hold has been lifted, and again, we are trying to supply all of our supply chain customers in different regions. Recovery on that is expected fully in the second quarter.
Okay. Thank you very much.
Thank you. This, in terms of the QA/RA related cost, in terms of the full year outlook, I would like to confirm what your outlook is about this cost. You said JPY 22 billion? About a JPY 2 billion increase you saw in the first quarter. In the full year into the fourth quarter, how much do you expect this cost would be? Besides the QA/RA related cost, the project related cost to improve efficiency, that cost has increased. How much has it increased in the first quarter? For the full year, how much cost increase are you anticipating? Thank you.
Well, first of all, in terms of the QA/RA related cost, we call it the remediation cost. In May, we have explained about the JPY 22 billion. The total cost in itself is not going to change.
However, we'll be monitoring the situation and review the ongoing situation, whether this would be over or under that cost. We are actually frequently observing the situation. Currently, our outlook isn't changed. That is what we have explained. In the first quarter, as I have explained, about JPY 5 billion is in the other expenses and a couple of hundreds of million JPY is in the SG&A. In terms of the progress, it depends on terms of the accuracy, how much we can anticipate in each quarter. It's basically on track. In the remaining three quarters, we deduct the JPY 22 billion, deducting the JPY 5 billion will be allocated for each remaining three quarters. For the SG&A, the progress is a bit lagging behind. I think basically, we're going to see a more higher allocation for SG&A cost for the remaining nine months.
Another point is that for this fiscal year, from the overall SG&A situation, before foreign exchange adjustment, I think that's the most understandable figure in terms of the absolute amount is about JPY 3 million for the full year, or JPY 2.99 million, that is, for the full year. That's the increase that we are anticipating for the full year. For this fiscal year, in the first quarter, JPY 8.5 billion, we have already booked that increase in the first quarter. If you consider the overall balance, I think in the first quarter, we are seeing more of that coming out. I guess, the full year forecast, for instance, I have talked about JPY 4 billion would be about JPY 4 billion more than we have expected. That has been an overspend of the 4%.
This JPY 2 billion out of the JPY 4 billion, this will go out in the full year. About JPY 2 billion will be the unexpected amount. What we are trying to basically achieve the JPY 2.99 billion for the full year. Does that answer your question? I have answered from a different perspective.
I would like to ask a follow-up question from a different topic. With the endoscopic USD business, with the North American business. The last year, the first quarter, I guess the local currency basis, it was flat. This year it is a negative. In the GI endoscope business in North America, especially for the system side, the interest rate is going up. I think basically you are seeing impact on the leasing side of the business. This weakness, can this be explained only through the replacement for EVIS X1, or is it that you are going to be seeing pressure for the overall CapEx for your clients in North America? Can you talk about that?
First of all, from a more high level perspective, I would like to answer your question. Currently the hospital management is becoming tougher, but in terms of the endoscope business, I think basically it is not a kind of overall pressure. I think it is kind of a limited impact. I think the simple answer is that May, EVIS X1, we have announced in the DDW, and since then, I think people have taken a wait-and-see stance. That is our analysis. I would like to ask Frank to follow up.
That is something that is to my. Correct me if I am wrong. Thanks for the question. I can confirm Chikashi's observation. I think your point about the CapEx modification or situation change in the environment in America, we do not feel that that is the major impact that leads to this flat/slightly negative GI development. It is very much related to what Takeda-san pointed out that, in a positive term, we have a very high expectation, positive high expectation of our customer base into the EVIS X1 platform. Everybody now knows that by the end of this summer, September, October timeframe, we are planning to start to launch and deliver products, and that means that I think the GI community in the United States is waiting for this.
In addition, any CapEx pressure that comes our way, we feel the impact on our side is rather softened by our big part of the leasing business. So far we are really accrediting the sales numbers from GI in America to the kind of unusual situation to show a product in May and to start shipping only in autumn. That's our reading of the situation.
That's all. Is it okay? That's all from me. Thank you.
In the first question, there was a focus on urology, the shipment suspension, and the supply chain issue of the parts were mentioned. How about respiratory? Were there similar issues? I think in your presentation you do talk about similar issues for respiratory area as well. Can you give us the backdrop as to why that is, and what are the products that are affected? In July, in your release, the laser treatment device. You did issue a press release on that in Q1. Was there an impact of that as well? Can you include that in your response as well?
Thank you for your question. Okay. Maybe I was not responding fully to question by Yoshihara-san. In respiratory area. I'll take that question first about Veran related products and respiratory scope, shipment delay, and EVIS, and barcode for the therapeutic devices. Those were the things that we saw take place one after another. I'd like to ask Gabriela to respond.
Add or maybe, Pierre, if you have anything you want to add. Maybe start with Gabriela.
Sure. Thank you. From a supply chain related, to answer your question, we have had some ongoing supply chain related issues on the respiratory side, again, since the last few quarters and dating actually since last fiscal year. It's intermittent back orders on our needle side. Not across every product category, but these are some of the areas that historically we have seen double-digit growth even in our EVIS product portfolio. These are some of the concerns and constraints that we have had over really the last year or so. We continue to work with our suppliers. Again, this is something that is manufactured internally by Olympus, but we have some material constraints and supply chain related issues. We've, I think, mentioned this in past releases.
From a overall respiratory perspective, we are also awaiting on the EVIS X1 launch, in general in some of our regions, we have continued to see some of the constraints from a capital perspective. For the last question related to the Well, from the slowdown of capital, I think that we have seen some hospitals slow down, and we've mentioned that in other reports where we've had a slowdown in Japan. We've seen this slowdown in Europe as well from a respiratory capital perspective. On the impact from a laser perspective for the scope, for the VF scopes, we have not felt a significant impact on that from a business perspective. This is something that we don't expect to continue or have an impact, a material impact to our business in the following or the quarters to follow.
Understood. Thank you very much. I'm good. Thank you.
Thank you, Gabriela.
This is a very detailed question, but first of all, you have explained your plan in terms of the underperformance of the revenue. I would like to ask about the breakdown. It is a 3% shortfall. A 1.5%-2% is from the shipment suspension to recalls, supply chain related issues. For the other part, what other reasons served for this underperformance of the revenue? China, in terms of TSD, the revenue has not increased as much as the procedures has increased. You have explained about that. Is that all? If that is the case, what is the background of this? That is the gist of my question.
Maybe my explanation was not well structured, but this 1.5%-2% downward pressure, that is from the shipment suspension, a lack of supply of components, that is a downward pressure on the growth.
The remainder, there is various reasons, but for example, I gave an example of the EVIS X1, people holding back to buy before the launch of new product. That was more than we have expected in China. There is the inventory pile-up at the customer side that was more than we have anticipated. It is not completely linked to the recovery of the procedures. Our shipment has not been linked with that recovery of the number of procedures that was seen in Q1. There is a lot of other reasons. These were the two typical examples that I gave. Okay, go ahead.
If that is the case, thank you very much for your explanation. Then I wasn't hearing you clearly. For the numerous other reasons, you are anticipating recovery, and you can catch up. What will be predictable is that the timing is that the shipment suspension is going to be resolved, is that your take?
In terms of the suspension, we are taking measures as much as possible. Depending on the product, for instance, instruction for use, it will be changed and then we can resume shipments. Some products we can do that. I think for a lot of things, we are already taking measures. Some have resumed shipment, some are ready to be shipped anytime soon. In any case, in that case, I think it is possible for us to catch up by taking these measures. The holding back of the purchase of the U.S. in the second half, the EVIS X1 will be launched, the response is very good, as Frank has said. I think we will be able to recover with this launch.
The issue related to China, of course, as soon as the inventory is sold out from the customer side, it will recover in line with the procedure growth. We want to expect the growth to be higher than the first quarter in terms of China. These are only examples, but there are the other factors. The sales and marketing people, I think they can talk about one hour about these reasons, but I just focus on some typical examples. Thank you very much.
A very brief follow-up. In terms of the suspension of the shipment, you have not been able to sell as much as you have wanted to sell, it's a kind of external factor.
By changing internal structure, we have raised the hurdle. Structurally, you're more prone to suspension of the shipment. Well, in terms of the supply of the components, it's basically, is external factor that has impacted us. In terms of the shipment suspension, there's a lot of products that we have to talk about. It's very difficult to give you a blanket answer. It will not be accurate. Maybe Pierre will be the right person to follow up on this.
Catch the question?
The specific question of.
The background of the more or those ship holds we saw in quarter one. Simply said, that's the question.
Yes. On the quality regulatory side, we're going through all of our processes, all of our products. We're making sure that not only we've always maintained a high patient safety and quality of our products, but we're also having to concentrate heavily on our compliance. We're going through all of our processes, making sure that we have all the paperwork, making sure everything is the way it's supposed to be. If we find that we have an issue on a product that doesn't meet the compliance requirements, we will stop that product until we can fix it. As Takeda said, is sometimes it's the directions for use, we need to reword it or things like that.
What we're doing is we're going through all of our products, making sure that not only do they meet the highest quality patient safety levels, but also they meet the compliance of all the regulators around the world.
Thank you very much.
Yep. Perfect. Thank you very much.
Thank you.
For the first quarter, April to June, the operating profit, just the numbers would suffice. Compared to your internal plan, how much was the difference? If possible, can you break down into ESD versus TSD? Just the numbers.
Maybe JPY 7 billion, JPY 8 billion, JPY 9 billion approximately. JPY 7 billion, JPY 8 billion, JPY 9 billion downside.
In terms of ESD versus TSD, what will be the breakdown, roughly?
Hold on. If the secretariat can give us a more detailed number, that would suffice.
I have another follow-up question. In China, the situation in China, year-on-year, CC may be 40% increase, but quarter-on-quarter on CC on a constant currency basis may be down 30%. The background is the question. For example, in China, the corruption related regulations being strengthened, more monitoring, and we understand that there's a slowdown in the auction or the bidding. Is that what you're seeing? Can you give us some qualitative differences that you see in China?
The anti-corruption case that you talked about, I think on July 21st or somewhere there, that made headlines. It's more of a recent development. Right now, at least to our business, we do not see or we're not hearing any impact being felt. We'll keep a close eye on the development, of course.
Anything to note?
Well, since we do have Frank and Gabriela online, anything to add?
Gabriela, you probably have something.
From our ESD capital business, you are completely correct that the news about these anti-corruption activities is very fresh. Quite some years back in the past, there was a similar movement in China, and at that time, we did feel some impact in our business for a certain number of months. We are at the moment evaluating very closely how much this time it will impact us, we are looking at kind of confusing numbers, right? The first quarter growth, if you just compare year-on-year, is very big in China, that is mainly due to the lockdown last year. If we now look at the coming months, as we said, we are looking very closely at these impacts.
There is not only the anti-corruption situation in China that we have to monitor carefully, there's also the situation that with the low-interest support programs, which were running last year, we obviously had some maybe business pulled forward. Therefore, we are in constant exchange with our Chinese management team to get a better grip on how this might impact us. So far, Takeda-san's point is correct. It's too early to say.
Thank you, Frank. Anything you want to say G abriela? If not, that's, of course, good.
Nothing to add on CSC.
All right, good. Thank you.
Does that answer your question?
Yes. Can you refer to the numbers as asked about?
Well, the secretariat is coming over to me.
Shibata-san, thank you for your question. I am Sakurai from the IR division. Against the internal plan, how much is the shortfall? Overall, the numbers is, as Takeda has mentioned, against the internal plan, is about a JPY 9 billion shortfall against our internal target. By division breakdown, because some are not allocated. That is all I can say at this point.
Thank you very much. In terms of the decline of the CapEx from the hospitals, in terms of the endoscopic business, I heard that's not much of an impact in Japan. In Europe, there is some impact. Can you talk about, by each region, how much this is impacting? This is already reflected to your outlook. I would like to ask about that.
Rather than me talking, Frank would be the better person to respond.
Did you get that question and answer?
Thank you for the follow-up question. Yes, the message or the answer before was mainly geared towards the situation in America, where we are also having this staggered launch approach. The region-by-region impact, I struggle to give you perfect numbers there, but I agree that we see in EMEA some slowing down in terms of the economical environment, partly from that, but also from general budget availabilities and the big spending we used to have in last year, especially in the U.K. and also in Russia, also connected partly to still the aftermath of the corona times. I think we see, at the moment in EMEA and in Japan, an environment that is not very positive, but we feel that that's what we have planned for. If we look at the other regions, like APAC or emerging regions like Latin America, we still see very strong growth.
We are, at the moment, rather struggling with this mixture of product availability or product regulatory availability, like the EVIS X1 in some regions of the world. Then some of those geopolitical risks, which are connected also to CapEx. The answers to your two questions is, we feel it's included in our estimations for the rest of the year, but to break it down into region by region and percentage impact, I don't want to speculate too much.
Does that answer your question? Thank you very much.
A follow-up question or a different question, may I?
Yes, go ahead.
Regarding the JPY 9 billion shortfall from your internal plan. JPY 2 billion QA/RA delta and JPY 2 billion, the timing of others in Q1 time lag. Do you understand that the remaining JPY 6 billion or so are due to the slowdown in sales?
Yes, that will be the breakdown.
Thank you.