Q2 2016 Olympus Corp Earnings Presentation
Nov 06, 2015 AM JST
7733.T - Olympus Corp
Q2 2016 Olympus Corp Earnings Presentation
Nov 06, 2015 / NTS GMT
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Corporate Participants
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* Hiroyuki Sasa
Olympus Corporation - President & Representative Director
* Yasuo Takeuchi
Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO
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Presentation
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Hiroyuki Sasa, Olympus Corporation - President & Representative Director [1]
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Welcome. My name is your Hiroyuki Sasa and I'm the President of Olympus Corporation. First of all, I'd like to thank you indeed for your attendance here as we discuss the Company's consolidated performance in the first half of fiscal 2016. I will begin today's presentation by giving an overview of our first-half performance, following which Mr. Takeuchi, our CFO, will go through the details and the numerics item of our performance.
Please turn to slide number two. There are three main points I would like to touch upon with regard to the Company's performance in this first half. The first is consolidated net sales showed double-digit growth and massive year-on-year increases were posted for all income figures. Accordingly, our performance during the first half of the fiscal year was most robust, exceeding all indicators.
The second point is that the impressive performance I just mentioned was driven by the medical business, which achieved its fourth consecutive year of record-breaking first half net sales and operating income. And the third point relates to the Company's full-year forecasts. While performance in the first half of the fiscal year was impressive, certain sectors of the macroeconomic environment are growing [OpEx] such as the possible slowdown on the Chinese market. So, we just adopted a conservative outlook for operating income and other income figures, choosing not to be revise full-year forecast for these indicators.
Now, please move on to slide number three. This slide shows our performance for the first-half for the fiscal year from April through the end of September. The strong performance of the medical business drove consolidated performance improvements and consolidated operating income rose 30% to JPY50.1 billion, setting a new post-Lehman crisis record for first-half operating income. Ordinary income and net income showed even higher growth rates due to the benefits of large rise in operating income, combined with a reduction in other expenses as a result and both indicators greatly exceeded our targets.
Next, I would like to explain the reason behind a strong performance of our mainstay medical business, after which we'll discuss the imaging business with its net earnings, improvement initiatives.
Moving onto slide number four, medical businesses first. In the first half for the current fiscal period, JPY297.9 billion of net sales with double-digit sales growth accomplished in all three fields of this business.
Looking at targets, the actual performances of surgical devices fell slightly below targets. However, these targets were set quite high to begin with and we managed to achieve from the very high off of our targets as performance of endoscopes/endotherapy devices compensated for deficiencies and surgical device and performance. The main point I would like to make includes the continued impressive sales of endoscopes, which were launched three years ago as well as the growth of endotherapy devices sales on the global scale.
The endoscopes sales increased in all regions due to the effects of accelerated sale promotion initiatives, which first have endoscope sales and they're growing 18% year-on-year and claiming 2% above our target. Endotherapy devices, we fell due to the benefits of sales system strengthening measures, which has been implemented since couple of years ago and saw that performance increases in North America, Europe and also in Asia.
Slide number five, this slide indeed tells the effects of the business structure reforms being implemented in the imaging business. Yen depreciation, now placed in downward pressure in operating income, that returned JPY1.6 billion. We were able to excel from this decrease however and thus the imaging business managed to net a record operating income on the first-half basis for the first time in six years, representing a massive improvement from the operating loss of JPY3.7 billion posted in the first half of fiscal 2015.
All in all, the income improvement was in due have led to management resource reallocation and business structure reforms are quite robust, reducing product lineups and the cutting inventory costs, which all now gave operating income increase of JPY2.1 billion. Operating income received a JPY1.3 billion boost from the increase of mirrorless cameras, which achieved, thanks to our improved product lineup. Second half of 2016, [S&A] expense reductions will move on and to accomplish the breakeven on the full-year basis as we expect.
Slide number six, this slide displays our full-year consolidated financial results forecasts. As said before, we chose not to revise our full-year forecast for operating income and other income figures, adopting a conservative outlook in the light of opaqueness of certain sectors of macro-economy, in particular Chinese market. Our full-year forecast in this projection, the operating income will exceed JPY100 billion for the first time in eight years and that net income will reach a record high of JPY56 billion, showing a substantial improvement from the net loss posted to one year earlier.
Moving onto slide number seven, operating environment for the medical business during the second half of this year. Even recently Chinese economic concern, we're still on the look to the stable and steady growth to be realized acceleration with sales promotion initiatives. In Japan, better execution among medical institution, primarily national and public institutions, has been sluggish. However, endoscope upgrades and the value per procedure program are expected to accelerate, because this program is beneficial.
At the same time, we plan to launch new strategic product in the surgical device field, such as 4K endoscopes and new instruments for Thunderbeat. Really high-single digit growth continuing in the second half of this year, similar to what we accomplished in the second quarter. In North America, meanwhile, we anticipate steady growth, fueled by steady endoscope replacement demand as far as the rising demand from that use in the operating rooms. Elsewhere, stagnant demand is expected to be seen in certain parts of Europe, Russia for example, but we do anticipate the continuation of strong sales as seen to understand to it in key European countries as we saw in the first half.
Concern for the Chinese economic slowdown, ongoing anti-corruption activities we're into attention. Nonetheless, we are receiving a solid number of sales inquiries. We will promote the new GI and surgical endoscope products launched in 2014 as far as the Thunderbeat, which was released into the Chinese market in the second half of this fiscal year. We thereby aim to realize the same level offsetting growth witnessed in the first half of this year.
In closing, I would like to mention that we are in the process of developing a new five-year medium-term management plan, which is slated to begin in April next year. The current mid-term plan launched when we instituted the new management team in April 2012, primarily focused on recovering trust and rebuilding our business portfolio, this plan was successfully implemented, steady improvements in the Company's performance, finance as far as the overall in the constitution.
And the new plan, if you take a forward-looking approach, placing sustainable growth as the top priority, also have to clarify further our policies for allocating management resources in the medical field.
This concludes my portion of the presentation. Thank you. To continue here is our CFO, Mr. Takeuchi.
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [2]
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Thank you and greetings to everyone. I am going to focus on the numerics of our performance, second quarter consolidated financial results and I would like to also give you the overview by the segment of business.
Please move onto slide number 11. In the first half of fiscal 2016, consolidated net sales increased 12% year-on-year to JPY395.8 billion and the consolidated operating income rose 30% to JPY50.1 billion. Rising consolidated operating income attributable to the continuing strong performance of the medical business as well as the benefits of yen depreciation.
Operating margin was 12.7%, which is the highest ever for the first half of any given fiscal year. This record high margin was result of the substantially higher profitability stemming from the improvement in the ratio of gross profit to net sales of 3 percentage points; improvement in the ratio of [1 percentage] point increase in the ratio of SG&A expenses to net sales, which is reported on the strategic investments conducted in the medical business.
Ordinary income increased 47% year-on-year to JPY43.5 billion due to lower interest-bearing debts and an improved balance of other income and expenses. Similarly net income rose 60% to JPY35.8 billion, reflecting the Company's strong business earnings as well as net worth push from the recording of deferred tax assets.
Slide number 12; looking at our performance by segment. The medical business posted record-breaking first-half net sales and operating income, continuing to drive from corporate performance in total. The Scientific Solutions business and Imaging business also show higher sales in income, a particularly noteworthy accomplishment coming from the Imaging business, recording first-half operating income for the first time in six years, which represented a massive improvement over the operating loss of JPY3.7 billion posted in the first half of fiscal 2015.
This accomplishment can also be attributed to the benefits of higher mirrorless cameras sales recorded. Thanks to an improved product line-up as well as the cost reductions, which resulted from business structural reforms.
Let's move onto slide 13. Next, we'll take a closer look at the medical business. Sales were up in all fields, including a mainstay gastrointestinal endoscope field as well as the strategic area surgical devices and endotherapy devices. As a result, double-digit growth was posted for both debt sales, which rose 16% year-on-year to JPY297.9 billion and operating income was up by 24% to JPY67.9 billion. Domestic sales of the GI endoscopes rose 5%. The reason behind this was that -- or those sluggish budget execution among medical institutions, primarily national and public institutions, was seen in the first quarter. This improved substantially in the second quarter.
In addition, EXERA III and other products sold well in overseas markets, including North America and Europe. Due to these factors, overall sales in the GI endoscope field show a massive 18% year-on-year increase. In the surgical device field, the measures to strengthen overseas sales systems instituted in fiscal 2015 started bearing results and Visera Elite enjoyed robust sales in North America, Europe and China, while Thunderbeat experienced favorable sales in North America and Europe. Overall sales in this field was up by 14%.
The benefits of sales systems strengthening measures continue to be felt in the endotherapy device field. It also posted a 14% increase in sales. The graph on the right side shows the performance of the medical business in the second quarter from July to September 2015. In particular, I would like you to notice to impressive 5 percentage point increase in operating margin, which reached 27%.
Please take a look at slide 14. I would like to move on to the Scientific Solutions business. Net sales in this business rose 4% year-on-year to JPY48.5 billion and operating income was JPY3.3 billion, 2.6 times higher than in the first half of fiscal 2015. In the life science field, budget execution among domestic research facilities remains limited and sales were unchanged year-on-year as a result. Sales in the industrial field meanwhile were up. This increase can be attributed to favorable sales of industrial microscopes to the China compliance market used for smartphones and other items, primarily in Japan, as well as growth in sales of industrial endoscopes to automotive markets in Japan and overseas.
The substantial increase in operating income was the result of the benefits of higher sales of industrial microscopes, industrial endoscopes and other products in the industrial field and the cost reductions realized by properly adjusting production and sales plans.
Next, we will look at slide 15; we'll now discuss the Imaging business. Imaging business posted a 10% year-on-year increase in net sales to JPY41.5 billion and was successful in recording operating income. Sales of mirrorless cameras were up 22% to JPY26.8 billion and sales volumes rose 21% to roughly 280,000 units owing to impressive sales of OM-D and PEN series cameras centered on Japan and Europe.
Yen depreciation led to a negative foreign exchange impact against this business. However, this downside was outweighed by the benefits of higher mirrorless camera sales and reductions in advertising promotion expenses, R&D expenditures and other SG&A expenses. As a result, the Imaging business was able to record operating income a massive improvement of JPY3.8 billion. Extraordinary loss of approximately JPY800 million was recorded in the first half of fiscal 2016 in relation to business structure reforms.
Now, please turn to slide 16. This slide shows net sales by region. On a consolidated basis, net sales were up in all regions due to the contributions from the strong performance of the medical business. The graph on the right side of this slide shows net sales by region in the medical business. Sales were up in all regions in this business. Sales in North America showed massive increase of 27%, following impressive sales of mainstay EXERA III GI endoscope, Evis Lucera Elite surgical endoscope, which began benefiting from strengthened sales systems, and Thunderbeat energy device.
Let us move on to slide 17. This slide details the Company's consolidated balance sheet. There were not any significant changes to the overall structure of the Company's balance sheet. Interest-bearing debt at September 30, 2015, decreased JPY38 billion from March 31, 2015 to JPY316.1 billion due to the repayment of debt that were due. Meanwhile, the equity ratio rose 4 percentage points to 36.9% due to the accumulation of net income. With regard to concerns related to digital camera inventories, effective production control and favorable sales of mirrorless cameras led to JPY4.8 billion decrease in inventories from March 31, 2015 to JPY18.9 billion.
In addition property, plant and equipment increased JPY11 billion, following product capacity increases implemented at the three Tohoku factories, which is a primary manufacturing basis for the medical business.
Please look at slide 18. This slide provides information on cash flows. Net cash provided by operating activities roughly doubled year-on-year to [JPY54.9 billion] due to cash flows generated by strong performing medical business and the companies or the businesses as well as a decrease in inventories that accompanied the reduction of digital camera inventories. Net cash used in investing activities amounted to JPY27.5 billion, and it's primarily consisted with capital expenditures for such purposes is increasing stocks for demo products as well as loan products to customers when providing repairs for their products and due to the expansion of medical businesses.
Capital expenditures were also conducted to boost of production capacity of the Tohoku factories, which are some of the principle manufacturing basis for the medical business. Free cash flow came to a positive JPY27.4 billion, 1.8 times higher than in the first half of fiscal 2015. Net cash in financing activities totaled JPY43.1 billion with outflows primarily being for the purpose of repaying interest-paying debt.
Next, I would like to explain a full-year forecast for fiscal 2016. Let's us look at slide 20. As the President also said earlier, we are taking a cautious approach toward the operating environment in the second half of fiscal 2016, particularly with regard to the possibility of economic slowdown in the Chinese market and we have therefore chosen not to revise initial forecast for operating income and other income figures. Our full-year forecast is going to go up 7% year-on-year to JPY816 billion. We have revised this operated by JPY6 billion, reflecting the increase in sales in the Imaging business in the first half. Operating income is to JPY100 billion, up 10%. Ordinary income JPY86 billion, up 18%. Net income, JPY56 billion, which is improvement from fiscal 2015's net loss.
We'll now move on to slide 21. We have here the forecast for segment performance. The medical business is anticipated to continue driving consolidated performance with substantial increases in both net sales and operating income on a full-year basis as well. First-half sales of mirrorless cameras rose to a greater extent than initial forecasted and we have revised our full-year net sales forecast for the Imaging business reflect this. However, we have decided to maintain a cautious stance toward the operating environment in the second half and we have chose not to implement any significant revisions to forecast for the second half net sales and operating income. In the second half, we will continue to invest business structure reforms to strengthen our business foundation.
Lastly, I would like to talk about dividends. As you have been informed, we will not issue any term dividend for fiscal 2016 and we plan to issue a year-end dividend of JPY17 per share. Looking ahead, but considering the balance between the Medical business and shareholder return, we will discuss about how to gradually bring our dividend to the level that is expected from shareholders, while we are compelling our next mid-term plan.
The Company's management is united in its quest to maximize shareholder value, which we intend to accomplish primarily through steady growth of the Medical business. I'd like to thank our shareholders for their ongoing support.
With that, I would like to end my presentation. Thank you for your attention.
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Questions and Answers
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Operator [1]
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So, now, we would like to move on to Q&A discussion session. So, let us start with the first person with questions.
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Unidentified Participant [2]
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Thank you. I have two questions regarding your Medical business. In the first half previous year, you had about JPY250 billion at net sales on the local currency basis and in this first half, about 8% upward push, which is about JPY20 billion. You did talk about ForEx situations and changes. So, I understand that adjusting out the currency effect in this first half, the Medical business, the increased [JPY2 billion or JPY3 billion hadn't reversed and there were JPY2 billion or JPY3 billion hadn't] reversed. I'm just wondering how I should interpret all of these numbers. Is it correct to say that the net profit growth was not as proportionate at large as indeed topline growth? Is that because of strategic investments? Would you please explain, please, if so it is going to continue into the second half?
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Hiroyuki Sasa, Olympus Corporation - President & Representative Director [3]
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Let me answer. This is Sasa speaking. As you know, Medical business, particularly in the case of the surgical device field, we'd be making cost strategic investments. There was impacts on the topline and also on our endotherapy devices. However, that has been increasing duly. Mindful of the intention of your question, effectiveness of those investments, yes or no? Yes is the answer, but at the same time, we have to be mindful of out of factors such as maybe cost of goods sold.
We still feel that there is quite a room for improvement and more full-fledged on the profit -- on the benefit that will come in the period ahead. Of course, we understand that we have been making lots of strategic investments, particularly in the field sales and system reinforcement, but we had to do lots of the training and the other -- the expenses. So, the bigger profit contribution to come ahead.
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Unidentified Participant [4]
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I understand. Then when will you say that the benefits will continue to accrue, you said steadily and gradually from the first half into the second half of this year or it's not so much in this year, but rather into next fiscal year?
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Hiroyuki Sasa, Olympus Corporation - President & Representative Director [5]
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To answer, this is Sasa continuing to answer. Well, I answer first and then frankly speaking, my sense probably is slightly different than yours so called from what Mr. Takeuchi, the officer in charge of the Medical business has in mind. You say steady and gradual, that's an ambiguous expression, but in the case of endotherapy device field, let's say, we decide to make an investment, we disburse the money and we take about one or two years before the benefit is starting to accrue and if we apply that way of thinking, then it will be in the second half of that current fiscal year rather than first half and more so into the next fiscal year.
I would like to ask Mr. Takeuchi to offer his comment.
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [6]
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Thank you, I will do so. This is Takeuchi speaking. Basically, Mr. Sasa, our President, answered your question starting from when and by how much. It's very difficult to say, because on one hand, we are already starting to enjoy the benefits [little by little] already, but the 100% of the good effects maybe starting next fiscal year.
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Unidentified Participant [7]
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Thank you.
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Operator [8]
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Okay. So, let's move onto the next person with questions.
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Unidentified Participant [9]
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Thank you for giving me the floor. My first question relates to the last one. Comparing the first quarter and the second quarter, the situations didn't vary after all and the second quarter performance had very noteworthy profits booked. How should I interpret these dynamic changes?
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Hiroyuki Sasa, Olympus Corporation - President & Representative Director [10]
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To answer, this is Mr. Sasa speaking. In the second quarter, from the standpoint of portfolio and the product portfolio, gastrointestinal endoscopes [measured] particularly well and the same goes for the sales of endotherapy devices in the second quarter, namely on the more profitable goods and products where it's sold. They quite favorably sell in the second quarter, which pushed up the margin and profitability.
What do you think, Mr. Takeuchi?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [11]
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Takeuchi speaking. In addition to what you just said, Mr. Sasa, in the Medical business, this tends to have the more concentration of the activities and profits generated towards the latter half of the set period. So, the second quarter rather than the first half and the final quarter rather than the third quarter, therefore the better high expectable margin of profitability. And for the rest of it, I feel basically the same as Mr. Sasa.
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Unidentified Participant [12]
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The question continuing, on the year-on-year basis, I guess SG&A, the expenditure and there is a trend of SG&A and the benefits occurring over time in the first quarter this year and I thought that SG&A expenses year-on-year was about JPY10 billion higher? How was it in the second quarter on a year-on-year basis SG&A?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [13]
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Takeuchi answering. Do you want to know how much in absolute amount of maybe -- some amount we spent in the area of SG&A in the second quarter? If so, sorry, I don't have that data right of hand, but maybe instead I can answer it in the following [way]. How about SG&A ratio percentage? Percentage points second -- the quarter of our improvement, they ride in the first quarter in terms of expenses, which can be explained (inaudible) and product mix that more led towards the -- more on the profitable on the categories of products and be it gastrointestinal endoscopes or endotherapy devices.
And also for the first quarter, I'd say that there is sort of the effect of seasonality, if I may, in the first quarter and that tends to be more concentrated in disbursement of expenses rather than in second quarter seasonality. Please do not think that our SG&A expenses this year (inaudible) in the first half -- first quarter to second quarter, that was particularly higher on the year-on-year basis into a nutshell.
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Unidentified Participant [14]
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I see, I understand. Then still on the -- on the current outlook, given the first-half performance shows that in second half, do you see if anything on the decline in profitability or profit contributions from the Medical business. That does not sound right.
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [15]
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Let me answer that, Takeuchi answering. I know what you're trying to get at. The basic landscape is as we explained in the sense of conservatism, if I may, as we look to the second half of this year. To be very frank with you, the actual performance in the first half of the current fiscal year exceeded our initial expectation. Then you would right away ask, why don't we think that good momentum could carry forward to the rest of the year? The answer is that of course we would try to do our very best, but as we kept on saying on the uncertainty of the Chinese economy and frankly speaking, we do not believe that Chinese economy can recover in the second half of this year. Of course, we continue to receive inquiries from potential customers in China, but the flow of money in China that is what I'm talking about.
And also, the rest of corporations in Japan, the first half operational results were quite good as we expected and as we wished for. However, in the first quarter, the situation was not as good as in the second quarter. In the event, we were able to cover somewhat the slowness in the first quarter particularly on the CapEx and sort of on the decision making by national or the public hospitals very difficult to come about and which was offset (inaudible) by the favorable sales of disposable goods in the order consumables.
There are different reasons. They are trying to cut down the medical expenditure, NHI prices or the expected the federal rising consumption tax rate in Japan. So, it is not as though we can sit and relax and so we decided to be conservative in our projection.
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Unidentified Participant [16]
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I understand. To continue with my question, the surgical business operation, I'm looking at the page nine of the financial data, it seems that in the second quarter, had rate of growth on the year-on-year basis, 2% on local currency basis. Considering how excellent the overall medical business performance was, how would you explain this particular situation having to do with the surgical device field in the second quarter?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [17]
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So you're looking at in the financial data book, that is correct. And I'm looking at page 9 of that showing that in the second quarter this year, in the current fiscal year, the surgical field, no more than 2% growth on the local currency basis. Do you want to know about North American situations? No, not necessary, so, globally.
Okay, I understand. So let me answer, this is Takeuchi answering this question. We say surgical business, but this can be broadly categorized into two different types. The first category, the endoscopes and the 3D endoscopes and 4K cameras. And the second category is the energy devices such as the THUNDERBEAT. One thing that I'd say is that whereas if we are to say the surgical field, the overall performance has been curtailed a little bit that had to do with the particular projects in the energy on the field, not THUNDERBEAT, but the PK devices which recently came and they form the legacy generous whose performance and sales dipped down very much by how much, let's say, about 50% of what it was one year ago.
Of course, that decline or the dip has been tried and to be covered by the more robust measures of THUNDERBEAT and other devices but we were not able to do that adequately. So why, I think this is something that I explained to you previously. PK device in the gynecology field, these devices will be typically used and therefore, laparoscopic hysterectomy uterine polyp morcellation. And for this procedure, laparoscope, the procedure requiring the use of the device called morcellator, infusing a morcellator cutting up on the uterus into pieces and break up and the dispersing and they broken up the tumor in smaller pieces and that resulted in the FDA's warning letter some time ago, and about 30% in the hysterectomy has to do with in this procedure and that was this inherent risk, PK devices and since that became the target of attention, the device sales started to slow down very much.
By the way, we have been able to develop a successful on the new device product, which would prevent the break up and dispersion of this mode of tissue. In due course, we'll get the FDA approval, but not yet.
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Unidentified Participant [18]
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Understand, but you explained that to us before and this basically has to do with North America. What about the rest of the world?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [19]
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With the exception of Europe, all other regions were down. It did manage growth, for instance in Japan. Last year's performance was superb, very good and a very proportion effect coming out of that and particularly in the domestic market in Japan in the imagining devices, the public hospitals and the slowness in the disbursement due to budget money but we are hoping (inaudible) entry into the market of the new 4K cameras in the second half and the other 3D endoscopes and other products and we will be [and we tried] and it will be promoted to the market very much in the second half of this year. But we are fully intent on continuing efforts and it has been persisting in Japan. Thank you.
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Unidentified Participant [20]
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Sorry to take up so much of floor time but one more. Looking at others, this is the overall book of the Company, the second quarter negative number that was bigger than in the first quarter. At the first quarter, in total that might be bigger and minus than what you budgeted for. I understand that there is a way of allocation of corporate ammunition, the way of location of management resources by about JPY2 billion but still Handa that does not answer the remaining portion, several billion yen more. Where did you spend that money for and how would it be in the second half?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [21]
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I, Takeuchi, will answer that question. But before doing that, I would like to go back to the earlier question, having to do with the SG&A expense change and therefore, from the first to the second quarter, JPY10 billion year-on-year increase and that is correct but that was modest constant between the first and the second quarters. It is not as long we spend more in the area of SG&A in the second quarter than the first quarter, it was modest constant.
Now, answering that question that you just asked, elimination of corporate JPY1 billion or so, but other than that, where on the expenditure areas including but not limiting mainly due to compliance operations and all sort of legal. And also may I remind you that we changed our organizational structure to the matrix type and with the establishment of the matrix type corporate structure, bearing of expenses, that dynamics have changed from the previous organizational setup.
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Unidentified Participant [22]
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I'm going to start my question on the medical business profitability margin. As you explained, in the April-September period, 1.5 percentage point improvement so that on a cumulative basis over the six months period, 22.8%. In the second quarter, 27%, having improved year-on-year by 4.6%. I understand you keep saying that this a good effect of the improvement of the product mix more towards endoscopes and the ET devices. Does it mean that endoscopes, there is a typical margin of something like 30%, particularly so because you said the SG&A expenses did not vary so much from the first to the second quarter. So GI scopes 30% in margin?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [23]
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Takeuchi answering that question. I do not want to say whether it is exactly 30% or not, but that is true that GI scopes do typically enjoy good margin.
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Unidentified Participant [24]
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Thank you for confirming that but the crux of my question follows. In the second half of this fiscal year and for the GI scopes, the profit contribution, profit grows zero. Is that because you started with the full year budget under expectation that first half having been so good, so netting that out, the second half is zero?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [25]
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To answer, this is Takeuchi answering once again. If you take a look at this table, it says zero for the second half but the exchange rates, they do fluctuate and different in the second half from the first half. But on the local currency basis for the GI scopes, we do expect that there is going to be the continuation of 7% to 8% on net profit growth.
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Unidentified Participant [26]
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Are you saying that on a volume basis 7% or 8% on the growth. It was in the first half that we're continuing to the second half?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [27]
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Yes, but on a local currency basis.
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Unidentified Participant [28]
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And I'm a person who has always been saying that the China is decelerating and I think as mentioned that in slide as well. So is that general speaking type of thing?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [29]
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Well, China is actually decelerating, but if you look at the medical companies, the patients aren't declining but I think the China's market is favorable for the medical companies. I think maybe the cameras will not be good in the China market.
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Unidentified Participant [30]
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But I think is that your conservative because you have a general sense that the China is decelerating, but you said inquires aren't declining. Is that true?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [31]
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In China, what will be the most impacted business, in this context would be the so-called capital type products that will be the (inaudible) endoscope, so that's a capital goods. So this budget for capital related products not only for us, but for other companies as well, they are quite impacted. However, with the disposable products, those types of disposables that companies like Ethicon or Covidien is selling, those disposables, those type of products in the situation that China is facing, is not impacted that much.
So for instance, our ET products or energy devices, these disposable products actually is growing very steadily by in terms of size of the business. If you consider the whole China business overall, the ET or the surgical disposable business is still small. So basically, we will be impacted by the endoscope capital product.
So that is the reason why we will be impacted by China business. So the inquiries for the capital product, is it declining, to be accurate, there are inquiries but the execution of the budget doesn't happen that easily. Another point is that because we do not sell directly into the China market, we use distributors. So, within the distributors, there are some cash flow issues. I think that's the second reason. Maybe that this is a financing issue, well, yes financing and I think, I presume this is related to anti-corruption movement.
So in terms of the large size capital goods, there's a lot of procedures they have to go through to buy those things, to get the approvement, I guess anti-corruption movement that it is in China. Thank you.
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Unidentified Participant [32]
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I will ask again about China, so with the endoscope Asia-Oceania figures, if you look at the second quarter, with local currency basis, it's 11%. So surgical business, I think it's decelerating, but how should I interpret these figures?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [33]
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Well, in terms of the growth ratio, from that perspective, I have to say that China actually is growing. But compared to the initial target, we will have not been able to go to that level. I think that would be the accurate expression that we should be using.
In the first place China up to now has been growing by 20% to 25% and initially we thought that China will grow about this level for this year as well compared to this target. Unfortunately, the growth is not 20%, it's rather half of that growth rate. But year-over-year, it's still growing.
So compared to the other Asian-Oceania countries including China that is this Asia region, what we're focusing most is the GI endoscopes and they have the most highest ratio with the GI endoscope business. So that said, they are growing overall. We are saying about Chinese business being bad, but actually it's still growing. Not as high as 20% to 25% but about half of that level, it's still growing.
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Unidentified Participant [34]
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So I have to ask again. Forgive me for asking again but in Asia-Oceania, it isn't the case that China isn't growing at all but the other markets are growing lot, so the total figure looks like this. It isn't in the case, correct?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [35]
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That's correct. We'll simply put, China actually is growing at the same level as the overall Asia-Oceanic level. If you look at other markets in this region, for example, the absolute volume is still small. So the impact is not that much, but there is still, there are a number of tough markets, for instance, Thailand and India. Currently, they are tough markets.
So to give you a general picture, China and other Asian region markets in terms of the growth rate is not such a major difference between the growth rates. So as we have already announced, they are growing about 13%, 14% year-over-year in the second quarter. So that has been the growth rate. But as we have announced, if you look at the current situation, we do have inquiries and we have not revised the initial target down.
So in that context, if you consider the market environment, there is risk. That is the message that we want to send.
And on top of that, so Asia, the ratio at Asia, I guess the overall sales is about 15% and out of which, China is about 9%. So that is size of the China business. For example, this fiscal year, even if the situation first half continues to the full year, and if you consider what type of impact this will have in our profit, in substance, it's limited.
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Unidentified Participant [36]
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And one more question. This is about the 4K endoscopes, I think you have received a vibration in Japan and Europe. Do you have any updates on the 4K endoscopes?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [37]
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So we have just released this or announced this in Japan and Europe. So we've just announced this and I think going forward, this will relate to direct sales. But I think the first reaction that we have gotten was very good. Well, some customers actually came to us and they wanted to buy this immediately right after the release. So for medical equipment, this is a very rare thing to happen. I think we had a good response.
However, this is a medical equipment and the price is quite expensive. So this is a type of thing that you have to allocate budget and the clients, hospitals will have request for the budget. So the actual sales, I think you have to wait until actual sales are generated. So because of the time, we have two more hands up and these will be the two last questions that we are going to take.
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Unidentified Participant [38]
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Thank you very much for your presentation. So, in terms of the improvement of the profitability, so Mr. Ogawa is charge of in the imaging and scientific solutions. In the first half, you saw an improvement of profitability for the Imaging business. For the second quarter, the improvement of the gross margin year-over-year or quarter-on-quarter, how much did you see an improvement? But that said, the second quarter is still, you're still loss making. And the second half, it will be less than the second quarter number doubled by two. So how confident are you to be breakeven on this business?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [39]
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With the imaging business, the topline growth, I think this is a substantial achievement and we saw a strong growth in Japan and Europe. If you look into the second quarter, it wasn't that strong. The reason behind this is that OM-D E-M10 Mark II, the new product that we were planning to launch in September, but as soon as we have launched this product, the quality issues came up. So we immediately stopped selling this. So the initial contribution that we have expected from this new product has not been seen. But on the other hand, in terms of the cost for launching this product, we have already spent that. So that has been the reason why this has been a downward pressure in P&L.
November, we have decided to relaunch this product and we had just gone into that procedure. In Japan, we actually have had very good responses and I think that we like to catch up in terms of the improvement of the profitability. So we want to improve our COGS ratio and in terms of manufacturing, in very detailed areas we're trying to reduce the cost but unfortunately the overall market for the digital camera is facing tough times, so whether it be material costs or device manufacturing costs.
So basically, in terms of procurement costs, it's very tough. To be able to improve the profitability, we are focusing more on the improvement of the SG&A costs. So the focus has been the reduction we have actually the advertising and promotional costs. And I think there has been a contribution.
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Unidentified Participant [40]
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So in terms of numbers, I think maybe you have stopped disclosing them, so the SG&A ratio, the gross margin on the quarter-on-quarter basis, how has this changed? If you don't have those numbers, it's okay, but we would like to hear that?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [41]
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Well, basically Mr. Ogawa has explained this but in terms of the cost ratio year-over-year. It has worsened a bit. But basically, it has been the same. It's is not that bad. In terms of the SG&A ratio, it has improved a lot by 20 percentage points against sales that is.
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Unidentified Participant [42]
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The second question, this is where for the scientific solutions. Well, in the first half, you have exceeded expectations. In the second half, maybe you are being conservative but how have the profitability improvement measures has shown and how are you going to see this contributing to your second half results?
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Hiroyuki Sasa, Olympus Corporation - President & Representative Director [43]
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Well, in terms of the scientific solutions business, the biological microscopes is biggest sales in our business. For the industrial microscopes and endoscopes and the non-destructive testing devices, those type of products are growing.
What we're worried about is that of biological microscopes, the sales has gone down year-over-year. This is because in terms of the national budget on a global basis, the execution of the budget hasn't being seen, so this is leading to the situation. In terms of the industrial products, whether it be for smartphone or automotive industries, the equipments related to these industries is showing robust results. So that has been sales situations.
And going to the profitability for the biological microscopes, this is produced in Japan and in terms of manufacturing cost, we are looking at one -- device procurement cost one by one. And in terms of the cost, it has been improved a lot.
In terms of industrial related products, it's not the case that the cost has improved, both have changed that much. Basically, it is in line with the sales growth, but we have seen a lot of positive impact coming from the ForEx. So on a real basis, it hasn't that much. So that's the reason why we are taking a bit of a cautious stance. So the business size is small but the assumption of the second half, I think you have more specific things that you have to look out to complete the medical business.
In the last couple of years, we have not being able to generate sales against the mid-term targets that we have and we have reviewed this dramatically and we have started to focused more to improve the profitability and we have started to change this business to be closer to the customers. And in terms of the structure reform, we have done this in the United States and this is ongoing in Europe. This impact I think it will be difficult to see within this fiscal year. So this would be contributing more. We want this to contribute more to be next fiscal year in terms of structure reform. Thank you.
So this will be the last question that we will be taking.
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Unidentified Participant [44]
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I would like to ask about the digital camera well. But I think basically you have answered my question about how the trend has changed for digital cameras. But I would like to ask about what are you going to do going forward about the digital camera business?
Why is ask is that a point just to recall, how are they going to do the business as Sansui I think they are going to withdraw from the business. I think the market overall is in a tough situation. So if you look at the recent or the most current operation and what are going to do about this in the mid-term?
And in terms of inventory, I think have been able to reduce that a lot. So think that is the reason why the second quarter to be business was tough, because you have reduced the manufacturing but looking into the second half, maybe the sales target is conservative, but based on that sales, in terms of the inventory months, I do not think that it has gone low enough. So including the manufacturing strategy, what would your idea would be about the digital camera business?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [45]
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Our digital camera business, first to talk about the market, I think we'll have a big impact on the business as well. If you look at the figures on the shipment basis, so the SLRs is still declining on a volume basis that is but the ASP has been going up, so that has been supporting the decline of the SLR. With mirrorless, in terms of volume has been stable and a bit of the upward push been coming from going ASP going up.
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Unidentified Participant [46]
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What is going to happen going forward?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [47]
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I think we have to be cautious. So the reason why we have been able to increase the sales dramatically in the first half is that, at the end of last fiscal year, we came out with OM-D E-M5 Mark II, this is the midrange product. It means that we have the three models in this brand, M1, M5 and M10. This means that we now have a product line that answers to the needs of the customers and I think that was the major factor to be appreciated by the customers. And we have been focusing a lot on professional lenses. And because of this, I think we have been able to be appreciated to be a more higher end product line.
But going forward, we still think that the situation would be tough. So, a top priority will be to continue to reduce inventory. If you look at the current inventory situation, we think that we have not still been able to bring it to the optimal level. So if we continue at this pace, I think by the end of this fiscal year, I think we'll be able to bring the inventory level to an adequate level.
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Unidentified Participant [48]
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If you look at other companies and what is going to happen going forward?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [49]
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So what has been the big impact for us is that we used to be a brand that had more than 80% of the exposure to the compact cameras. But we have been able to see at the ratios that SLR ratio is higher than the compact camera ratios. We are closer to Canon and Nikon, although it's smaller than in size. It means that we have been focusing on the type of the products that will appeal to the customers and including to the pro efficient lenses, so small, light and water proof and dust proof. Even though the size will be smaller, I think we'll be able to operate a business in a stable manner as long as we go forward with the reform and that will be our initiative in this business.
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Unidentified Participant [50]
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Well, inventory, how much is inventory currently?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [51]
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Basically, it's about three months.
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Unidentified Participant [52]
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So maybe if we can improve that by 10%?
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Yasuo Takeuchi, Olympus Corporation - Director, Senior Executive Managing Officer, Head of Corporate Management Office & CFO [53]
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That is what we are anticipating.
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Operator [54]
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So this ends our Q&A session. So this ends our presentation. Thank you so much for attending despite your busy schedule.
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