Full Year 2016 Olympus Corp Earnings Presentation

7733.T - Olympus Corp
Full Year 2016 Olympus Corp Earnings Presentation
May 02, 2016 / NTS GMT 

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Corporate Participants
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   *  Hiroyuki Sasa
      Olympus Corporation - President
   *  Yasuo Takeuchi
      Olympus Corporation - VP and CFO

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Presentation
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 Hiroyuki Sasa,  Olympus Corporation - President   [1]
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 Hello, my name is Hiroyuki Sasa, the President of Olympus Corporation. Thank you very much indeed for taking time out of your business schedules to be with us today as we discuss the Company's performance in FY 2016. I will begin today's presentation by explaining our management policies for fiscal 2017, which is the first year of 16CSP, the five-year corporate strategic plan announced the other day. After that, Chief Financial Officer, Mr. Takeuchi, will provide a detailed numeric explanation of our performance in FY 2016 as well as our full-year forecast for fiscal 2017.

 Please turn to slide 2. There are three main points I would like to touch upon today. The first point is that, as regards our financial performance for fiscal 2016, we achieved quite impressive results in terms of income. Net income in particular exceeded our target, setting a new record-high of JPY62.6 billion. In addition, return on equity or ROE, a numerical indicator, which has been positioned as an important index under 16CSP exceeded in the target of 15%, which has been set out in this plan. In other words, we effectively raised performance to the level we targeted from the perspective of capital efficiency [ratio]. The second point relates to changes expected in Olympus operating environment during FY 2017. The operating environment has grown exceptionally [harsh] since we entered 2016 and there is a rising sense of global uncertainty. In addition, the recent appreciation of the yen is expected to impact performance, especially since 80% of Olympus net sales takes place overseas. The third point relates to our management policies and performance forecast for FY2017. While we may be faced with changes in the operating environment, we intend to work towards achieving our management target and goals for FY2021, the final year of 16CSP by advancing strategic measures and conducting operating process reforms as well.

 Looking at earnings, operating income is forecast to decline year-on-year due to the impacts of the strong yen. However, when foreign exchange influences are excluded, operating income [views] show growth rate of approximately 7%. Net income meanwhile is expected to set a new record-high for the second consecutive year as a result of our efforts to rebuild the management and reform our financial position over the past four years. It is true that the current operating environment and this 2% uncertainty in overseas economic conditions and foreign exchange trends. Nonetheless, we've remained committed to achieving business goals. We were therefore steadily [put] forward with which is our medium to long-term growth strategies based on the clear understanding of actual business trends not being overly influenced by the short-term impacts that operating environment changes may have on their performance. And regard to our ability to respond to ForEx influences, looking ahead, we adopt a policy of promoting the local production and consumption. Based on this policy, we were conducting development and production overseas where we take advantage over the strengths in individual operating region and the characteristics of these regions. I would now like to focus on these points with more detailed explanations.

 Slide number 3. This graph displays the Company's operating income and net income and loss over the past nine years. As we can see, fiscal 2016 was a year in which our performance reached impressive heights since FY 2008. On a segment basis, the medical business posted an impressive performance, setting new records while earnings improved in the Imaging Business. As a result, consolidated operating income exceeded JPY100 billion for the first time in eight years. Since FY 2013, when I took over as the Head of Management, operating income has tripled. I see this accomplishment as a testament to the fact that our business portfolio reforms has been steadily contributing to higher earnings. However, while this four-year period was [net of] operating income increases, it was also the period during which we undertook the re-organization in our profitable businesses [at were] securities litigation and prioritize reaching settlements with the US Department of Justice. These efforts have resulted in the booking of extraordinary losses preventing us from realizing the type of net income improvement that one might have expected up until now.

 Nonetheless, we have made a certain degree of progress in resolving these issues. In addition, we worked to reduce interest-bearing debts and also we detect benefits from improved performance. The end result was a change in the Company's underlying constitution which transformed Olympus made into a Company capable effectively generating net income which led to the booking of the record-high net income in FY 2016.

 Slide 4. Next, I would like to talk about numeric indices which our management goals and they are set under 16CSP. In fiscal 2016, year-on-year improvements were seen for all four of these indices. ROE in particular has been defined as an important indicator under 16CSP. By transforming Olympus into a Company which we can surely generate net income, we were able to realize a substantial improvement in ROE, which became 17% in FY 2016 compared with negative 2.6% in FY 2015. This level exceeds the level of the 16CSP management goal. 16CSP was initially designed as a strategy, and targeting strong growth and we plan to continue pursuing the lofty management goal of keeping ROE constantly at the level of 15%. This goal will be accomplished by securing an appropriate level of financial soundness and then by pursuing balanced improvements in profitability and business growth while maintaining the current level of capital efficiency. Slide 5. Now, I would like to focus on our discussions on the fiscal 2017. In regard to our operating environment assumptions recent macroeconomic trends, such as slowing economic growth rate in China and other emerging countries have been presenting greater difficulty. In particular, the recent trend of yen appreciation has the potential to substantially impact Olympus performance in FY 2017. However, taking a slightly longer-term perspective to look at the five-year period of 16CSP in this entirety, we do not project any significant changes to the operating environment and directly impacting Olympus business or the trends which affect the Company such as the acceleration of population aging; birth rate declines, increase in medical needs and a growing pressure to limit medical costs. Accordingly, over the medium to long-term, we do not expect any changes in our position with regards to growth as the basis over to our actions. While we may experience short-term fluctuations in performance during FY 2017, we intend to implement initiatives aimed at accomplishing our management goals five years from now as initially planned. I believe that this chance is incredibly important for the management.

 Slide 6, this is our management policies for fiscal 2017. This fiscal year, being the start of 16CSP, will be of key importance to building the foundation for continued growth of the Company into the future. We will advance strategic measures to achieve our targets for fiscal 2021, the final year and reform operating processes to improve Olympus's corporate constitution as originally planned. To realize business growth centered on the medical business, it is crucial that we continue to efficiently push forward with efforts that pre-suppose the full utilization of management resources. For example, we will need to bolster the staff necessary for strengthening production and maintenance system in the medical business, while further enhancing quality and regulatory assurance, internal controls and compliance on a Companywide basis. Also, we must reform operating processes to improve Olympus's corporate constitution. Under 16CSP, we will secure financial soundness and then pursue balanced improvements in profitability and business growth while maintaining the current level of capital efficiency. This will require, we drastically revise operating processes throughout our businesses from overarching global perspective in order to improve operational efficiency and productivity. The results will not appear overnight, but we will begin advancing concrete measures based on clear targets this fiscal year.

 Slide 7. Our forecast for fiscal 2017. We forecast that both net sales and operating income will decrease year-on-year due to the impact of the strong yen. However, by advancing measures slated for fiscal 2017 as planned, we anticipate that net income will set a new record-high for the second consecutive year by rising to JPY65 billion. Furthermore, at constant exchange rates, net sales and operating income will grow by 6% and 7% respectively.

 During the first half of 16CSP, we intend to faithfully conduct measures to expand our businesses and strengthen Olympus' corporate constitution. During the second half, we will raise profitability to help achieve our goals, while simultaneously introducing new strategic products. We aim to steadily improve profit margins through these efforts. This fiscal year, we will make steadfast progress in the measures set forth so as to achieve growth rates and constitution reinforcements in line with the level targeted by 16CSP.

 Slide 8, strategies for specific businesses. For all businesses, we will advance the measures slated for fiscal 2017 in line with 16CSP. Medical will pursue increased sales and improved profitability based on the strategies for each business unit. Scientific Solutions will continue to implement strategies for strengthening contacts with customers this fiscal year. As for Imaging, while earnings improved in fiscal 2016, it failed to achieve profitability posting operating loss. As management, I find this mostly regrettable. Going forward, we will adopt a Company-wide perspective, setting up coordination with sales and development functions at an accelerated pace. While pursuing such coordination, we will further reduce the size of this business based on a conservative sales forecast and work to reduce expenses to match the size of the business. We will also strive to secure profitability and reduce risks. The operating environment in fiscal 2017 will likely be unpredictable. It cannot be said to be hospitable. Regardless, we are committed to taking decisive first step toward achieving our goals for fiscal 2021.

 That concludes my explanation for management policies for this fiscal year. I ask you all for your continued support. Thank you.



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 Yasuo Takeuchi,  Olympus Corporation - VP and CFO   [2]
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 I'm Yasuo Takeuchi, the CFO. I would like to provide an overview of our performance in fiscal 2016 and full-year forecasts for fiscal 2017. Slide 10, let us begin with the consolidated financial results for fiscal 2016. Net sales rose 5% year-on-year to JPY804.6 billion and operating income increased 15% to JPY104.5 billion. This is the first time operating income exceeded JPY100 billion in eight years, the last time being fiscal 2008. Operating margin was 13%, a record high, thanks to an increase in gross profit that helped us absorb higher SG&A expenses. Higher operating margin is attributable to the benefits of the yen depreciation coupled with higher ratio of sales from highly profitable medical business and reduced cost of sales ratios in all businesses. Net income improved substantially from net loss of JPY8.7 billion in fiscal 2015 to JPY60.4 billion and net income ratio was 7.8%, both breaking previous records.

 This improvement came, thanks to a decrease in interest paid due to reduction in interest-bearing debt and lower income taxes resulting from incurring additional deferred tax assets. Slide 11 results by business segment. Medical drove consolidated performance with record-breaking net sales of JPY608.9 billion and operating income of JPY140.2 billion, up 9% and 12% respectively due to the strong performance in the mainstay GI endoscope field and in the surgical device field and the endotherapy device field. In Scientific Solutions, sales declined in the industrial field due to deterioration in macroeconomic conditions that began in the second half. However, by optimizing production and sales plans, we reduced the ratio of manufacturing costs to net sales and achieved a 24% year-on-year increase in operating income, which rose to JPY8.5 billion. We failed to accomplish our goal of breaking even in the imaging as we fell short of achieving sales targets for a high-margin, high-end cameras in the fourth quarter. Nevertheless, we did realize a substantial reduction in operating loss by approximately JPY10 billion year-on-year, which signifies the positive results of the restructuring measures implemented to date to reduce cost of sales and manufacturing costs.

 Now, please turn to slide 12. This is a breakdown of net sales by region. On a consolidated basis, net sales were up in all regions as the strong performance of the medical business drove Company-wide performance. The graph on the right shows net sales by region in the medical business. You notice that the sales were up in all regions. Sales in North America showed a massive increase of 15% due to the strong performance of our mainstay gastrointestinal and surgical endoscopes as well as impressive sales of endotherapy devices and the THUNDERBEAT energy device reinforced sales system. In Asia and Oceania, despite concern about the downward pressure on growth rates from economic slowdowns in China and other emerging countries, double-digit sales growth of 13% was posted, thanks to increased sales of disposable devices such as energy devices and endotherapy devices.

 Now, please turn to slide 13. This shows the Company's consolidated balance sheet. Interest-bearing debt at the end of fiscal 2016 decreased JPY33 billion from the end of fiscal 2015 to JPY321.1 billion because of the repayment of the debt. Meanwhile, the equity ratio rose roughly 5 percentage point to 38.2%, reflecting record-breaking net income. Effective production control and favorable sales of mirrorless cameras led to a JPY9.3 billion decrease in digital camera inventories from March, 31, 2015, to JPY14.4 billion, bringing the inventory turnover period to the appropriate level of 2.5 months.

 In addition, property, plant and equipment rose JPY15.9 billion from March 31, 2015. Following the production capacity increases at the three Tohoku factories, namely Shirakawa, Aizu and Aomori plant, which serve as our primary manufacturing bases for the Medical business. Construction work of these three factories has already been completed and the Shirakawa plant commenced operations in October 2015. The full-fledged operations are expected in May 2016 for Aizu and September 2016 for Aomori.

 Next is slide 14, our cash flows. Robust operating cash flows continued to be generated with a large portion coming from the strong medical business. However, net operating cash flow in fiscal 2016 decreased JPY18.2 billion year-on-year to JPY48.6 billion as a result of Company paying approximately JPY72.5 billion in criminal penalties and simple fines in relation to the settlement with the US Department of Justice. Net cash used in investing activities increased approximately JPY13 billion year-on-year to JPY52.9 billion because of the CapEx for primary medical business manufacturing bases explained earlier. These factors resulted in a negative free cash flow of JPY4.3 billion, but as I explained, this is due in part to the payments associated with the US Department of Justice. If these one-time payments are excluded, Olympus demonstrated the capacity to generate positive free cash flow of about JPY70 billion.

 Next, I'd like to explain our full-year financial results forecast for fiscal 2017. Please turn to slide 16. Based on the recent foreign exchange trends, we have set our foreign exchange assumption for our forecast as JPY180 to the US dollars and JPY120 to euro. Based on this assumption, foreign exchange impact will reduce net sales by about JPY53 billion and lower operating income by about JPY22 billion. Therefore, we forecast fiscal 2017 net sales of JPY800 billion, relatively unchanged from fiscal 2016 and operating income of JPY90 billion, down 14% year-on-year. Although those forecast may seem rather negative, strong business performance is expected to be again centered on the medical business and consolidated net sales and operating income will increase 6% and 7% respectively, when the foreign exchange impacts are excluded. The decrease in operating income due to the strong yen will be absorbed by improved balances of other income and expenses and extraordinary income and loss, leading us to achieve record-breaking net income of JPY65 billion. In addition, earnings per share which represents the amount of net income per share is forecast to rise 4% year-on-year to JPY190.

 Please turn to slide 17. This shows our segment performance. Operating income is expected to decrease in the medical business due to the impacts of strong yen. But the segment is forecast to continue to drive consolidated performance. When foreign exchange influences are accounted for, this business is anticipated to grow in line with the projections of 16CSP. In the Imaging Business, giving top priority to achieving a position of profitability, we will step up coordination between the sales function and the development function and reduce SG&A expenses to a level that matches the scale of this business. We thereby expect to be able to secure profitability.

 Finally, I'd like to discuss our financial measures for fiscal 2017, page 18. Under 16CSP, the new corporate strategic plan announced on March 30, 2016. We had set forth clear policies for the allocation of cash flows based on which we will continue to secure financial soundness while improving capital efficiency as we strive to achieve our goals. As we advance our medium-term financial strategies in fiscal 2017, we will begin by focusing on ensuring financial soundness. In doing so, we will work to secure stable equity capital levels by utilizing internal reserves appropriated from business earnings. At the same time, we will strategically control interest-bearing debt to improve our financial account balance. For fiscal 2016, we plan to pay a year-end dividend of JPY17 per share. The year-end dividend for fiscal 2017 will be raised to JPY28 per share to reflect increases in net income and improvement of our financial position. We will continue to prioritize securing financial soundness and conducting growth investments centered on the medical business. We will then strive to gradually raise dividends to the level that meets the expectation of our shareholders, targeting the total return ratio of 30% in the future, while considering the balance in timing of such increases. 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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 Thank you. Now, let's have questions and answers. Let's start.



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Unidentified Participant   [2]
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 My first question has to do with the FY 2017 medical business topline growth. I'm looking at page 4 of the financial data for the FY 2016 where you show the yen-based financial forecast for FY 2017 in particular on the sales. I understand that and broadly speaking, 75% of the medical business sales that is in Europe and United States, I understand that overall, there is some 10% or hit on on a year-on-year basis. So I'd say that roughly speaking that this should be (inaudible) growth that the EU would need to [we went] be coming from overseas. So I'm wondering whether I am correct in the analyzing the numbers as such, and looking at page nine, local currency basis, and how the situation trend will unfold. So, all in all, I'd like to know your assumptions, either by region, by product and grouping and what are your baseline approach in coming up with these forecasts? Thank you very much.



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 Hiroyuki Sasa,  Olympus Corporation - President   [3]
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 I'm Sasa, I would like to respond to that, topline growth in medical business sales, Japan domestic 5%, basically; Europe and United States 5%, 6%, if not a bit higher; Asia is more bullish, something like 10%, hit double-digit in growth, which means that medical business as a whole, 7% year-on-year net sales growth in FY 2017 and the last part of your question, yes, to confirm and what sort of the overall assumptions do you expect that it isn't going to continue to trend up all across or does that vary by region, by product?

 Okay. I get it. Sasa continuing to answer. Therefore the gastrointestinal endoscopic area, the time has elapsed since the launch of new products, meaning that therefore FY 2017 our forecast is a bit more conservative but for on the endotherapy devices or the general surgical, the business area including energy devices, based upon the track records of a strong performance, we believe that we can continue to expect good growth. On top of that, it was rather recently that we introduced (inaudible) market of new 4K system and the product, at the initial takeup of that product by the market has been quite good. So we have very high expectation on that. If anything, we should be able to take the business away from our competitors with this particular product. Mr. Takeuchi, would you like to supplement?



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 Yasuo Takeuchi,  Olympus Corporation - VP and CFO   [4]
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 Thank you. Takeuchi speaking as the Head of the Medical business. Basically, as Mr. Sasa just explained but if anything to be added here, gastrointestinal endoscopes, I have to agree with Mr. Sasa that the certain time has elapsed since the launch of the new product. However, this varies by region. China, for instance, it was only last year that we were able to launch the product under [USDA] approval. Well, yes, of course macroeconomic conditions in China is slowing down, so it's getting to be more challenging. However, existing products or the new products. We have set out relatively high target for China general surgical field, the surgical energy devices. And there are various issues to bear as Mr. Sasa described. However, on the local on a currency basis, really it's only in the US that the double-digit growth has not been continuing. However, even in the US market, I have to explain, because in the US, the legacy [generous] PK devices and they have been in the market, whose sales have been dropping. That is the effect on the entirety of the US performance. However, looking at the products such as THUNDERBEAT and even in the US market if I may, more than 10% growth has been continuing or the more we expect the strong performance to continue. In the surgical imaging products, 3D, 4K, the new product launch last year. Well, the official launch of the new product last year, that launch that has been accompanied by various issues to overcome. For instance, Europe and the United States, if you take a look at surgical imaging product per se in the fiscal year which closed on the local currency basis, the growth was in the negative zone. Various reasons were there, the overall delay in the launch of the product, the delay in shipments and whatnot. And of course, we intend to recover and they're forming those that is lower to start.



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Unidentified Participant   [5]
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 Thank you. Okay, my second question. Looking at the Medical business forecast, JPY610 billion, JPY127 billion, the almost but slightly less than 21% of the operating profit margin. I'm sure that you have detailed conditions internally, but looking at page 1 of the financial data here, JPY53 billion, JPY22 billion FX impact to net sales and operating income. I suppose that the both products in this and the effects will be felt in Medical business. But setting aside the FX impact on purposely, I wonder how the sales and the growth now will come about, is that the better your operating margin, there always is improvement of the product mix. Outside of -- under the FX and what are the conditions, can you count on. Or at the same time do you thinking that there's going to be deferred fixed cost increases?



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 Hiroyuki Sasa,  Olympus Corporation - President   [6]
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 Thank you. Sasa answering that question. Well that exact, the point has been recognized and the issue and the better management. As you know over the mid to long-term, it is the aspiration of Olympus Corporation at large to have further the accentuation of Medical business. But in order to accomplish that, we need to have the right regime and to write the system and infrastructure until our last fiscal year and in general surgical on the field, the surgery consumables, we purposely spent money so that we can reinforce now infrastructure. However, from this point onward, starting this fiscal year, we need to have much more efficient on the sales operations, per sales person, the larger amount of sales, that is a necessity as we are to be more successful in the future and in other regards, there are things that we can do and we must do, manufacturing area I talked about what we have been doing and other areas including compliance, the QA, RA and the quality assurance regulatory affairs, these are not exceptions into the continuing needs for further refinement and so everything that we do will be accompanied by the outlay of money, so purposely and strategically, we came up with the business plan which inadvertently means that there is increase in SG&A expenses and also R&D charges. When we speak of the stronger future, we must spend time and money in the area of research and development. So please understand that all of these factors have been incorporated into a plant.



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Unidentified Participant   [7]
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 Thank you very much. My last quick question which has to do with others and also elimination and corporate, I'm looking at operating income and losses. I suppose that Takeuchi just told me -- told us, it's related to this point. According to this, 16 CSP that is burdened the area of elimination and corporate, this seemed to be rather heavy, not necessarily so in the fiscal year, which is FY 2017, so I wonder what sort of the cost increase plans that you have for this year, human resource area, the compliance regime and whatever else and also others, that's new business development and then you have the business development office, that last year, the actual did not seem to have a point on the two very heavy expenditure there and so what is your plan this year?



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 Hiroyuki Sasa,  Olympus Corporation - President   [8]
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 Sasa answering, elimination and corporate, the investments, the framework of the investments to the business development office, I think that is where you are pointing at. In actuality, we do need new and strong period to support the future operations from the Olympus Corporation in seven years or 10 years from now. In order to have the proper sustainable growth into the future, we need to invest and to explore and develop the new businesses, in the FY 2016 although we had some candidates and possibilities but as it turned out, we did not spend as much as we could have otherwise. And that is all transpired in the actual amount on under which you look at today. But please understand, it's not as though we had no clues, no ideas, no, on the possibilities, we do. But from the standpoint of feasibility and the progress and on the viability and we need to be prudent in the allocation of money.



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 Yasuo Takeuchi,  Olympus Corporation - VP and CFO   [9]
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 Thank you. And may I supplement that this is Takeuchi which is speaking. Elimination and corporate. As I listen to your question, in the opening part of your question, you said that looking at 16CSP, the total amount was planned to increase. I guess you're looking at the same amount of money to be spent in the next five years. Yes, but if you take a look at that amount as a percent of net sales, it's not expected to inflate that much and for FY 2017, exactly as you say, even on the basis of same amount, not this meaningful increase but just because of some amount, it does not show any increase in our business plan for this year does not mean that we are not going to undertake from these activities, be it quality assurance or regulatory affairs, compliance, internal control, what needs to be done will be done, operating process reform ups and downs in the necessities and their forecasts. But yes, we will continue to enter those tests. And to be very honest with you, as we were working on FY 2017, the budget and plans, [towards] the other part of the planning process the yen to the trend of the appreciation. So that affected the actual number that you are looking at. But again to repeat and emphasize [we are working].



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Unidentified Participant   [10]
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 I would like to ask some questions of you. My first question has to do with gastrointestinal endoscope sales forecast for March 2017 and what's sort of the underlying thinkings that you had? You kept talking about the expected slowdown in the rate of growth and how the time has expired since the launch of new products, looking at page -- the financial data page, therefore, the overseas and the endoscope, the sales in the FY 2017 to minus 4%, eliminating the FX effect will be modest speaking the flat performance this year but at the same time, you said that though macroeconomic conditions are slowing down in China, you still expect the growth in China increase in China. Does that mean that the negative trend in Europe and the United States will be substantially high and the reason why I asked this question has to do with the previous remark that the renewal rate with new products is not super high.



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 Hiroyuki Sasa,  Olympus Corporation - President   [11]
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 Thank you. I Sasa, I'm going to answer my question and saying that, I realized that I am going to be redundant, on the local currency basis, the gastrointestinal endoscope, its sales in FY 2017, the 4% growth including China and other emerging markets inclusive of the double-digit growth to continue and from that category of countries. Mr. Takeuchi, would you like to supplement?



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 Yasuo Takeuchi,  Olympus Corporation - VP and CFO   [12]
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 Yes, Takeuchi speaking. On top of what Mr. Sasa said, as regards the renewal rate with newly launched products, roughly speaking, in the Japanese domestic market, about 50% of the market expect actually replaced and renewed with new products, Europe and United States, 40% meaning that there should be further room and for replacement renewal. By the way and even in the Europe or the US, we never have an assumption that FY 2017 is going to be significantly lower. It's really the effect of FX.



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Unidentified Participant   [13]
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 So do I take it that the replacement rate remains unchanged at around 70%? I'm not sure I follow you, sorry, with new launch, you can't replace 100%. So is your target 70% is my question?



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 Hiroyuki Sasa,  Olympus Corporation - President   [14]
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 I see. Well, of course, it depends on the time frame. So it's hard to say, but basically, replacing 70% over five years, that has been our vision under the previous medium-term plan.



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Unidentified Participant   [15]
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 I see. My additional question on GI endoscopes, the replacement rates that we have been talking about, I suppose that would be for systems. Moreover, you're talking about endoscopes. Can you give us the breakdown of the replacement rates?



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 Hiroyuki Sasa,  Olympus Corporation - President   [16]
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 I don't have detailed figures, but what I mentioned, it's a combination of endoscopes and processors. Relatively what's more important is endoscopes, but in order to operate new scopes, of course, it depends on the generations but generally you need new processors as well. You can't use old processors to operate new endoscopes. So for new endoscope replacement, you need processors as well. So 50%, 70% that we just talked about basically it will be based on the endoscopes. Oh, sorry, for that detailed question. I have another question on Medical business. It's the new medium-term plan that you announced, you said your target was the operating margin of 25% in the final fiscal year. Now, there is a big gap compared to the forecast for fiscal 2017. I know that's due to the changes in the exchange rates. Can you give us your current projection?



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 Hiroyuki Sasa,  Olympus Corporation - President   [17]
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 The operating margin currently is around 23%. Because of the impact of the exchange rates, we are projecting a year-on-year decline for fiscal 2017. But at the constant exchange rates, it will be around 23%, which would be the same as in the previous year. Of course, with reforming the operating process, we will work on improving on the efficiency over the next five years and we will be making preparations for that this fiscal year as well, especially in the area of Medical business including the supply chain, the total operating process improvement loaner devices endoscopes and inventories would be the main part of the reform. Mr. Takeuchi, anything to add?



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 Yasuo Takeuchi,  Olympus Corporation - VP and CFO   [18]
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 No. I think you have covered almost everything. 23% was the operating margin in fiscal 2016. But on a year-on-year basis, this represented a 1 percentage point improvement or so. Of course, we have been making investments, but we have also seen improvement in productivity and these continued efforts are now showing effect and so we will continue with these efforts. Because of the changes in the exchange rates from our original assumption, we are showing that figure for fiscal 2017. But at the constant exchange rate, we don't believe this to go (technical difficulty).



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Unidentified Participant   [19]
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 I have some more questions on medical business. Until last fiscal year because of the anticorruption campaign and others, you saw some slowdown. What was the situation in the fourth quarter and what is the current situation since the beginning of this fiscal year?



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 Hiroyuki Sasa,  Olympus Corporation - President   [20]
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 In China, on a full-year basis, in fiscal 2016, yes, it proved to be rather a difficult year compared to the original forecast because of the economic slowdown and the impact of the anti-corruption campaign, we saw a difficult year. But when we look at the fourth quarter, we did see some recovery, some signs of improvement. So the question is how long this is going to last, aside from economic growth, we don't believe the impact for the anti-corruption campaign to continue forever. So we do see some recovery. In fact, the forecast or the target for fiscal 2017 is set at slightly higher level than the actual result in fiscal 2016.



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Unidentified Participant   [21]
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 I see. Are you talking about all fields in China, GI, surgical endoscopes and ET or since you have started the sale of energy devices, are you seeing growth in that particular area?



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 Hiroyuki Sasa,  Olympus Corporation - President   [22]
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 Well, I think it will be all fields, but in fiscal 2016, when you look at the details, the hardest hit was the capital equipment, large endoscope devices. So energy devices and ET, the endotherapy disposables actually saw a growth of about 20% last fiscal year. What did not grow was the capital equipment. So when I said, we do see some signs of recovery, I was talking about this capital equipment area as well. So for ET devices, of course, we were like to grow at the same rate as in the last fiscal year.



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Unidentified Participant   [23]
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 I see. I have another question. Looking at capital expenditure for this fiscal year, you are going to increase by several billions of yen year-on-year. Am I correct to assume that this was basically in the Medical business and does this include the local production, local consumption that you've talked about as well?



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 Hiroyuki Sasa,  Olympus Corporation - President   [24]
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 The answer is yes.



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Unidentified Participant   [25]
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 I see. Thank you. I have additional question. My question is on the impact for the earthquake in Kumamoto prefecture and I think this will relate to both the Imaging and Medical businesses. The way we see it's the hardest hit, which would be Sony for the first half of the processes, I understand that the wafers will be launched in the end of June, but packaging seems to take more time. And failure will be very difficult to substituted with other factories. You are beginning to see a reduction in inventories, but what's countermeasures are you thinking in response to what happened at Kumamoto in terms of allocation because you also talked about 4K, which has been ramping up. What is the current inventory and what do you think would be the impact on the full-year forecast?



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 Hiroyuki Sasa,  Olympus Corporation - President   [26]
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 The management is watching the impact of the earthquake in Kumamoto very closely and since the earthquake, we have been implementing emergency countermeasures including the business continuation plan, BCP, including services and I'm assuming that your question is more on BCP. So let me answer based on that assumption. It's not just Sony, but we are beginning to get all the information related to all the vendors, not just Sony. But we are aware that Sony is the hardest hit. We have yet to get solid, concrete information from Sony yet. Having said that, in terms of BCP, we do have a certain amount of inventories of parts necessary. So unless Sony's impact is going to last over long period of time, we don't currently are thinking of revisiting, reviewing the current plan.



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Unidentified Participant   [27]
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 Thank you. I have several questions. First is on operating margin on medical business, which has been talked about quite a bit already. I don't mean just this fiscal year, but several years like five years. By products, looking from outside, endoscopes have higher margin. And so if you increase the top line of services and disposables you should be able to see improvement in operating margin, I understand that the new endoscopes systems will be launched in the second half of 16CSP which means that you're not going to see any effect over the next two, three years. I don't know about services looks like the operating margin is different from region to region, as in any event, the recovery is not or improvement is not likely. So I'd like to ask about the energy devices. How much was it in fiscal 2016 and what's your forecast for fiscal 2017 and how are they progressing in relation to 16CSP?



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 Hiroyuki Sasa,  Olympus Corporation - President   [28]
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 By how much what do you mean?



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Unidentified Participant   [29]
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 I'm asking about sales.



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 Hiroyuki Sasa,  Olympus Corporation - President   [30]
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 I see, sales. Approximately JPY30 billion and we are aiming at double-digit growth.



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Unidentified Participant   [31]
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 If I can look at the details, you are still feeling the impact of the morcellators on PK device, correct, in fiscal 2017, that is?



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 Hiroyuki Sasa,  Olympus Corporation - President   [32]
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 Yes, we do see, feel the impact of morcellator still but if I can really get to the technical details, PK device is the device used in the ob-gyn area for hysterectomy, but the FDA has issued a guideline restricting the use of morcellators for fear that the use of morcellators would spread tumors and consequently, this put an end practically to all laparoscopic hysterectomy and so PK device and similar devices were all impacted, not just Olympus, so market itself shrunk and the device to overcome the issue has already been developed. We have developed one as well, but approval on the new device is taking more time than we had originally expected. It appears that it will be some time before the approval would be granted, we were expecting the approval a bit earlier, but unfortunately, it is proving to be time consuming. So maybe that device, new device will be launched in the second half of this fiscal year. So energy device, you are expecting same growth rate as last year in all regions, double-digit, that is, yes. And there is one good news; decline in sales of PK device in the US has hit the bottom last fiscal year. So there should be no more negative impact of PK device.



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Unidentified Participant   [33]
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 Does that mean that this impact will not be emerging in FY17, this means that the PK device is not going to grow, but it's not going to go down. Turning to endotherapy devices, you're working with [thermo] and various devices are emerging, I listened to the conference call of Boston Scientific and they're growing significantly and I like to call those as idea-driven products. For example, SpyGlass DS, it seems that you're wasting a lot of opportunities because you can develop those products. For example, looking into the biliary tract, doesn't this mean that you're taking longer time from the ideas to the commercialization or is there a lack of close collaboration between the development people and salespeople? Is this one of your challenges?



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 Hiroyuki Sasa,  Olympus Corporation - President   [34]
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 Well, grasping the needs in the market and commercializing products quickly, this is one of the challenges and especially in the area of the endotherapy devices, this could drive the growth. There are different views, but for example, right now, in Japan and China, ESD or Endoscopic Submucosal Dissection is being done. ESD, for short. So concerning the ESD device, actually together with the doctors, this device started with a medical procedure. First, there is a procedure and then we develop device. So we were the first to develop this. So it depends on which device that you are looking at. You talked about SpyGlass. SpyGlass is more technology-driven rather than procedure-driven. So for example, cholangioscope existed for a long time and making it disposable and making it less expensive was what has been done. I don't know about the Boston Scientific, but I don't think this is contributing too much in terms of their sales. That probably would have been in the future. Those are disposable but still very expensive devices and when you consider the fact that we are trying to control the medical cost on the global basis, there are different views on this.



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Unidentified Participant   [35]
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 Finally, I like to also ask the following question. For example, we see some companies coming up with disposable cystoscope. This is only a small portion of your sales, but if you look at this cholangioscope and also colposcopy will be the same story. So why is the disposable growing so much?



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 Hiroyuki Sasa,  Olympus Corporation - President   [36]
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 Well, basically, I think this is same for the Boston Scientific. They have SpyGlass and they have cholangioscope and urethroscope. So they have been expanding the application of the narrow scopes. Why is it?



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 Hiroyuki Sasa,  Olympus Corporation - President   [37]
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 Maybe the biggest reason is that the cholangioscopy and urethroscope, they are easy to break. They are the scopes which can be re-used, but repair is a major issue. So since they are easy to break, they want to make it disposable so that they can lower the running cost. And since those are disposables, you have to consider the total running cost by adding the repair and reprocessing cost. So they're trying to make it profitable, but based on the current situation, based on the price, it is not yet a profitable business. But as you mentioned, it is possible for us to do this. That is to say that in the area of technology, we are considering the disposable endoscope. But whether there is a sufficient economic value or medical value, we still don't know the answers to those questions. So, that is the reason why we have not yet done.



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Unidentified Participant   [38]
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 Thank you. I have questions on the business results. I'd like you to elaborate more on the business results. First of all, in the Medical business, I think that the sales numbers are almost the same as your plan, but operating income was higher. As for Imaging business, you try to target the flat OP, but you came up with a negative number. So I'd like to know what were the factors, were they temporary factors or do you think that the current trend in the medical business, which is upward? Do you think it would continue? Could you elaborate on those?



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 Hiroyuki Sasa,  Olympus Corporation - President   [39]
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 Starting with the Medical business, sales were almost the same as our expectations and our operating margin was higher than the expectation. This is due to the product mix from the fourth quarter. That is endotherapy device and GI-related devices, which were higher than our plan, but as for the surgical devices, it was lower than our expectations. So as a result, because of the improvement of the product mix in terms of the operating margin, operating margin improved. As for Imaging business, up until the third quarter, our forecast was to break even. But in fourth quarter, the sales of higher-margin products such as mirrorless and high value-added products were lower than our expectations, that was the major reason for the decline and at the same time, we needed to spend SG&A earlier. So because of that, it was lower than our expectation. If I may add, as a whole, we try to break even as our business plan and indeed the business systems achieved the breakeven but in imaging, the foreign exchange worked as a headwind. So there was a negative impact of JPY2 billion from the ForEx.



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Unidentified Participant   [40]
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 Thank you. The next question about the final year targets of the 16CSP, you mentioned that you will achieve those targets despite the changes in the environment. But the foreign exchange level has changed since the announcement, the yen has strengthened. About the medical business, you have already mentioned some of the measures, but could you explain some specific measures if you have taken any measures already in the medical business or some future measures, also other countermeasures against a strong yen in non-medical businesses.



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 Hiroyuki Sasa,  Olympus Corporation - President   [41]
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 Well, if you look at the total picture, our business structure and also our businesses including the global regions, the measures that we can take right now are limited, of course, in the short-term. For example, use of the expenses more efficiently, including SG&A, is one of the measures, but this will not solve the overall problem and as I mentioned earlier, we are working on the local production, local consumption and to take advantage of the characteristic of the regions. Those are something that we're trying to do in the medium to long-term. And as you know, our strengths are in GI and flexible scopes. Those are manufactured in Japan. So naturally, there is an impact of the foreign exchange rate. At the same time, in the surgical and endotherapy devices, we expect those businesses to expand, especially outside of Japan. So by growing these businesses, we like to strike a good balance. So that is the countermeasure for the Medical business, especially. Anything to add?



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 Yasuo Takeuchi,  Olympus Corporation - VP and CFO   [42]
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 I don't know if this would help, but when we created 16CSP, our assumption of the exchange rate was JPY115 to the dollar. This is a medium-term management plan. So there are no changes in the measures depending on the current exchange rate change. So in that sense, our medium-term management plan is based on the neutral currency rate. So if you are asking whether if we have taken any additional measures, because of the strength in yen in the past few months, we have not done so although this could lead to some of the challenges in the future. Thank you very much.




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