Olympus Corp

TSE:7733

Earnings Call Transcript 2019-Q2

[Yasuo Takeuchi, executive]

Greetings. My name is Yasuo Takeuchi from Olympus Corporation. I would like to express our appreciation for your attendance for the presentation of our financial results for the 6 months ended September 30, 2018.

So let us begin by looking at the financial results. We will look at Slide #3. There -- these are the main highlights of the company's financial results in the 6 months period ended September 30, 2018. In the period under review, the mainstay Medical Business drove consolidated performance, achieving a new 6 months record for revenue and contributing to a 3% year-on-year increase in consolidated revenue.

Operating profit, however, was down year-on-year. Factors behind this decrease included, as mentioned in the Q1 results briefing, the settlement to institutional investors in relation to securities litigations as well as expenses associated with the ceased operation of a Chinese manufacturing subsidiary. On top, the -- as a new factor in the second quarter, we recorded a provision of JPY 9.7 billion as deemed necessary based on the status of the investigations by U.S. Department of Justice in relation to duodenoscopes manufactured and sold by Olympus.

Moreover, our full year forecast for fiscal 2019 has been revised out of consideration for the aforementioned provision recorded in the Medical Business as well as on the -- for trends in the business performance of the Imaging Business.

I would now like to look at our 6 months financial results to September 30, 2018 in a little more detail. So please go to Slide #5. This slide displays our consolidated performance for the 6 months ended September 30, 2018. The mainstay Medical Business drove consolidated performance in the 6 months until September 30, 2018, leading consolidated revenue to increase 3% year-on-year to JPY 381.8 billion.

Operating profit came to JPY 3.0 billion as a result of the settlement pertaining to securities litigations and provision-related litigations involving a Chinese manufacturing subsidiary recorded in the first quarter and the provision of JPY 9.7 billion associated with duodenoscope-related investigations by the U.S. DoJ recorded in the second quarter.

Loss before tax of JPY 2.8 billion was recorded following a decline in finance -- of finance income, stemming from foreign exchange losses and loss attributable to owners of parent amounting to JPY 5.5 billion accordingly.

Looking at Slide #6. With this slide, I will explain the factors which influenced operating profit during 6 months ended September end 2018, beginning from the left. Higher sales in the Medical Business and Scientific Solutions Business had the combined effect of boosting operating profit by JPY 8.9 billion.

Next, a rise in the cost of sales ratio dragged profit down by JPY 2.4 billion. The main reason behind this rise was lower selling prices in the Imaging Business as a result of the very harsh competition as well as factors pertaining to the product mix in the Medical Business.

Higher selling, general and administrative expenses lowered profit by JPY 8.3 billion. The higher expenses were largely a result of an increase in staff members, following the reinforcement of functional organizations in the Medical Business as well as a rise in R&D expenditures associated with the next-generation gastrointestinal endoscopy systems.

In addition, other factors decreased profit by JPY 32.9 billion. These other factors primarily included securities litigation settlement, a provision associated with duodenoscope-related investigations by U.S. DoJ, a provision pertaining to litigations involving a Chinese manufacturing subsidiary and expenses attributable to the ceased operations at a certain Chinese manufacturing subsidiary.

Combined with the impacts of foreign exchange influences, these factors resulted in operating profit of JPY 3 billion.

Turning to Slide #7. On this slide, you will see segment performance. The Medical Business drove in consolidated performance with the record-breaking 6 months revenue. Moreover, operating profit in this business was relatively unchanged year-on-year, despite the recording of a provision associated with duodenoscope-related investigations by the U.S. DoJ.

The Scientific Solutions Business posted increases in revenue and operating profit due to a favorable market in the industrial field, lower revenue in the Imaging Business coupled with the expenses associated with the ceasing of operation at a Chinese manufacturing subsidiary led this business into a record operating loss.

The others business saw a revenue decline, while operating loss increased as a result of the conclusion of external sales of lens units for compact cameras. Adjustments under elimination and corporate include the securities litigation settlement, provision pertaining to litigations involving a Chinese manufacturing subsidiary.

Slide 8. The performance of individual segments in more detail. First, the Medical Business. Higher revenue in the gastrointestinal endoscopes, surgical device and endotherapy device fields drove a 6% year-on-year increase in revenue, which totaled JPY 305.6 billion during the 6 months. Performance by region will be discussed on the next slide. Operating profit decreased 1% to JPY 54.7 billion, and operating margin was 17.9%, down 1.2 percentage points.

We are currently under investigation by the U.S. DoJ with regards to our duodenoscopes, as has been mentioned previously. In the second quarter, we recorded a provision of JPY 9.7 billion deemed necessary based on the status of these investigations, resulting in the year-on-year decline in the operating profit for the 6 months period. When we exclude the impact of this provision, double-digit growth was achieved in the 6 months and second quarter operating profit.

Starting with this earnings report, we are disclosing other income and expenses by segment to more clearly illustrate the actual financial condition of our business.

Slide 9. The growth rates of each field in the Medical Business by region excluding the impacts of foreign exchange. In the GI endoscope field, negative growth was posted in Japan due to mainstay products being in the later stages of their product cycles and ongoing difficulty in securing budgets among public and national hospitals. We aim to compensate for this negative growth through the sale of new products scheduled to be launched during the second half and promotions of the intranasal endoscopes and the colonoscope released during last fiscal year.

In North America and Europe, performance was strong, owing to the enhancement of sales promotions and sales measures related to maintenance services and others. Operations in Asia and Oceania, meanwhile, continue to enjoy strong growth, centered on China. Surgical device operations in Japan and Europe enjoy robust performance for the mainstay VISERA ELITE II system and for energy devices.

In North America, large contributions to growth came in the form of substantial increase in system integration product sales, thanks to the benefits of the acquisition of Image Stream Medical Inc.

Positive growth was achieved for endotherapy devices. Performance was particularly strong in North America, where we witnessed growth in the sales of the competitive products matching the market needs.

Slide 10, the Scientific Solutions. Revenue for the first 6 months was up 6% year-on-year to JPY 47.3 billion and operating profit jumped 123% to JPY 2.8 billion. Biological microscopes experienced solid sales centered on North America and China. As for the industrial products, impressive sales were posted for industrial microscopes and nondestructive testing equipment amid favorable market conditions for semiconductors, electronic components, automobiles and other industrial products. The higher revenue of biological microscopes and industrial products contributed to a large increase in operating profit.

Slide 11, the Imaging Business. Revenue totaled JPY 25.7 billion, down 16% year-on-year, along with operating loss of JPY 9.2 billion during the first 6 months.

Revenue from mirrorless cameras was down 19% due to intensified competition as well as restrictions in our ability to supply products, most notably interchangeable lenses stemming from the reorganization of production bases.

Operating loss of JPY 9.2 billion was recorded due to the expenses associated with the ceasing of operations at a Chinese manufacturing subsidiary, which totaled JPY 5.2 billion. These expenses do not include the impact of the business such as sales decline due to restriction -- restrictions in our ability to supply products stemming from the production base reorganization.

Slide 12, details of our financial positions at the end of September. Total assets decreased due to the repayment of debt and the equity ratio rose 1.8 percentage points from the end of March to 47%. Inventories were up JPY 12.8 billion from the end of March, largely coming from inventories of products to be shipped at the end of the fiscal year.

Slide 13, information on our cash flows. Impacted by the payment of securities litigation settlement, net cash provided by operating activities during the 6 months amounted to JPY 27.4 billion. Net cash used in investing activities was JPY 31.4 billion.

Major outflows included payments of purchases of demo products, loaners and other property, plant and equipment in the Medical Business as well as the acquisition of the urinary tract stone treatment device operations from Cybersonics, Inc. to strengthen our urology business. Free cash flow was negative JPY 4 billion.

I'd now like to discuss our full year performance forecast for fiscal year 2019. Please look at Slide 15. In our full year performance forecast, we have instituted downward revisions to old profit figures out of consideration of the DoJ-related provision as well as the performance trends in the Imaging Business facing intense competition.

As for our foreign exchange rate assumptions, we now project foreign exchange rates of JPY 108 to the dollar and JPY 130 to the euro, respectively, on a full year average basis.

We have no plans to issue an interim dividend, but we intend to issue a year-end dividend of JPY 30 per share.

Please turn to Slide 16. Here are our forecasts for segment performance. The forecast for operating profit in the Medical Business has been reduced by JPY 8 billion to account for the DoJ-related provision. There has been no change to the forecast for revenue and operating profit in the Scientific Solutions Business.

As for the Imaging Business, the forecast for revenue and operating profit were lowered by JPY 10 billion and JPY 6 billion, respectively.

Lastly, I'd like to take -- talk about some recent topics of interest. On Slide 18, you will see 4 topics pertaining to specific business segments.

The first topic is our investment in LPixel Inc. LPixel is an AI venture company spun off from the University of Tokyo with image analysis capabilities in life science such as the medical, pharmaceutical and agricultural fields. Olympus is in joint research with this company for some time. Through the investment, we aim to further enhance the development of AI technologies for supporting endoscopic and microscopic diagnostic imaging. We also plan to discuss a new cooperative framework for future business alliances.

The second topic is also an investment. This one is in Israeli medical equipment company, Medi-Tate Ltd. Medi-Tate is a medical equipment manufacturer with research and development, manufacturing and sales of therapeutic devices for benign prostatic hyperplasia, which occurs in approximately 40% of senior citizens, and we, therefore, anticipate that instances will increase going forward. By utilizing Medi-Tate's technology, we look to expand our portfolio of therapeutic devices and accelerate our urology business.

As for the third topic, we have joint research in AI-based pathology diagnostic support software in Scientific Solutions. The evolution of screening equipment is contributing to the earlier detection of cancer and other diseases, which, in turn, is increasing the demand for pathology diagnosis. However, the hospitals are lacking pathologists. One solution to this problem is AI-based pathology diagnosis that take advantage of the diagnostic imaging.

In this field, Olympus participated in a joint research project with Kure Medical Center and Chugoku Cancer Center utilizing its proprietary developed deep learning technologies. Olympus boasts of a large share of the market for microscopes for pathology research applications. And we plan to advance research and development on AI-based pathology diagnostic support software with the aim of reducing the burden on pathologists.

The fourth topic is the recognition of production bases -- reorganization of production bases in Imaging Business. Fiscal 2019 is proving to be a difficult year for Imaging Business due in part to the production base reorganization expenses as well as the intensification of competition. Nonetheless, we have been making smooth progress in the consolidation of digital camera production into the Vietnamese manufacturing subsidiary. We look to establish a structure that can maintain profitability.

In closing, performance in the first half suffered due to the securities litigation settlement, the provision associated with the U.S. DoJ's investigations and fierce competition in the Imaging Business. Nonetheless, we, at management, feel that the securities litigation settlement and the DoJ-related provision represent a large step forward for Olympus, as they gave a much clearer idea to unclear issues which company has held in the past.

In terms of our business, the mainstay Medical Business continued to drive consolidated performance by setting a new record for 6 months revenue and achieving double-digit growth in operating profit. When excluding the impact of the DoJ investigation provision, all major projects were in the later stages of the product cycles.

Going forward, we will pursue high growth in the second half of the periods of the 16CSP by launching new products in all fields and accelerating our strategies on a global scale. At the same time, the management of Olympus will unite our efforts so that the company can live up to the expectations of our stakeholders. We look forward to your support as we tackle the challenges to come.

This concludes today's presentation. Thank you for your attention.

So now we are going to open the floor for questions and answers.

[Yasuo Takeuchi, executive]

We are now ready to take the first set of questions.

[Unknown Analyst]

My question number one to you today. So I heard that things have been moving on, so that you have been able to taking care of various matters and issues. But as to the subject of legal risks, this is something that I asked previously in the beginning of the fiscal year. But I would like to get the situation updated on the sort of securities litigation, [ how it's pursued, ] DoJ provision, the roughly JPY 10 billion. What about on the several litigations? What is the status? And those, I understand that there was the litigation issue in China, which you took care of in the accounting matter. Anything else?

[Yasuo Takeuchi, executive]

Well, thank you very much for the question. And as to all legal risks which surfaced and became eminent, our view is that by now, we have been able to take care of those risks in an accounting manner. You pointed out the DoJ investigation. Thank you very much for pointing that out to us. But investigation actually is still continuing. So I cannot go into any further concrete in details. But at the same time, it's already been 3 years since the start-up from the -- of this investigation by the Department of Justice. And yet up until now, we really lacked any convincing grounds to take accounting actions. But by now, we are in the thought that we are able to see the clearer picture going forward. And with the clearance and the proof of the CPA, we decided to book a provision. Of course, investigation itself is still ongoing, so no payment has been made yet.

[Unknown Analyst]

Okay. What about the several litigations again involving the duodenoscope? My basic understanding is that you have the insurance coverage for that.

[Yasuo Takeuchi, executive]

Yes. Thank you very much for that question as well. [ Almost all ] from the several litigations are the so-called product liability and the claims in the United States. Some 50-plus claims have been brought to the attention of the court. And with exceptions from those cases which have been resolved already or withdrawn, there are some 40 or so that are still outstanding on the litigations ongoing. And basically, the product liability insurance coverage is there and that is the view that the company has. But at the same time, these litigations have been brought to the attention of the courts in various states in various cases and details. So it's not to say that we are 100% sure about the insurance coverage.

[Unknown Analyst]

Okay. I understand the situation. My second question has to do with the operating profit in the Medical Business in Q2, so that's on the July-September 3 months period. Thank you very much for revealing that other income and expenses line. And I understand what happened. So you decided to book a reserve in provision and they're pushing down the operating profit. And otherwise, the business and the operations were smooth enough. But at the same time, I sort of remember that 1 year ago, in Q2 last year, you did have some of the items to have the extraordinary treatments, be it legal matters or the subsidiary in India. So JPY 7.8 billion was the amount and I saw that for Q2 FY 2019. So what happened? Would you be willing to go into a little bit more on the substantial details about your Medical Business?

[Yasuo Takeuchi, executive]

Thank you. Well, basically aside from the provision that we decided to take in Q2, no changes have been made to our approach. There is some minor miscellaneous effects related to the adjustments. But as we started this fiscal year, we had a certain view, which still holds today. For instance, in the U.S., the Medical Business continues to be quite favorable, endoscopes have been sold very well. And GI, the endoscope business indeed has been supporting overall on the Medical -- on the business operation. And also, I say that the system integration or the surgical business, long at last have started, [ leading ] to perform in the more convincing kind of sense. And you're talking about U.S. operation where the VISERA ELITE II is yet to be launched. This is something we're not going to have any contribution coming from that either. So all in all, these situations are, that the momentum is favorable as expected.

[Unknown Analyst]

Okay. Then what about Japan because you had a transnasal scope which had very large expectation even before the launch. But on the gastrointestinal endoscope business, in terms of Japan domestic, declined by some 10%, if I remember. So does that mean that your share of the market was taken away by someone like Fuji?

[Akihiro Taguchi, executive]

Okay. Let me take up that question. My name is Taguchi, in charge of Medical Business. The conclusionary statement first. We, at Olympus Corporation, do not feel that our share and position has been eroded by any others. Under Mr. Takeuchi's presentation, he did point out that here in Japan, national and public hospitals just have not been spending on the budgeted money and that is very much so. And the execution of the budgeted money has been very, very slow in the Japanese medical community, particularly in national and public hospitals. This is one factor. Another factor is that all of those GI endoscope and the systems, which are mainstay endoscope and products in the market, in Japan, they have been there for 6 years already. Meaning that the current generation endoscope and the system is in the latter half of the product cycle. So what we are doing kind of is to make sure that those users is still -- who are still using the previous and the generation model systems is to be convinced and to have them convert leading to the client generation, the so-called the convert program that we have been executing to the market. You know why? Because we do not want others to take those accounts away from us. So, therefore, a company like Olympus and our Medical Business is rather aggressive on the sales program and there is more noticeable discount. And so that has been pushing down the actual selling prices resulting on the negative year-on-year revenue performance. But that does not mean that our share in the market has been taken away by anyone else.

[Unknown Analyst]

I understand your case. Okay. Then going to the next question, which is on Page 18 of your presentation. On the current topics, very intriguing. LPixel, this is certainly a very known name in diagnostic imaging. But at the same time, I understand that your more current models of endoscopes, they do have the CAD capability. So have you been using this technology already? And now you have the different stage of relationship with LPixel. And also, I understand that you also have another partner namely ai4gi. So what is going on? So I would like to know more about that. And also on the Israeli, the Medi-Tate, very interesting. And at the same time, there's another name, Essential Medical, maybe the name of the firm has been changed because of the M&A, but anyway, they had UroLift. What's the difference between Medi-Tate's technology and UroLift?

[Yasuo Takeuchi, executive]

Okay. On the LPixel first, we have been working kind of with LPixel for some time through joint on the research activities. If you were at the IR Day event, our CTO, Mr. Ogawa, talked about the CAD using AI isn't different from the one that I [ will be ] pointing out today. Because that the CAD for -- with AI is our proprietary technological solution. And at the same time, it is also true that we have yet another partner, namely ai4gi. Please understand, and we say AI is a buzzword these days, but in the GI domain depending on whether it's the gastric, duodenum, colon or the small intestines, the intelligence which has to be learned by the computer is all very different. And also, the intended applications of the AI, is it for detection or the screening or is it for classification ex diagnosis, everything is all very different. Meaning that as we have the wide range of opportunities and necessities, it is not to expect feasibly that one company alone will be able to cover them all. So the collaboration will make more sense with the partnerships. So we now have relationships with LPixel and, of course, another partner, ai4gi as well. The second question referred to Medi-Tate. So they have the product which has been developed and is worked on very aggressively on "iTind." ITind is for the minimally invasive treatment of BPH, benign prostate hyperplasia. As was pointed out in the presentation, as you get older and is male, about 40% of the older male population is certain to suffer from BPH. As you're diagnosed to have BPH, the first treatment option would be to use prescription medication, namely alpha blocker. And then as it becomes more advanced, then up until now, it has been the surgical intervention, the TUR procedure. In the case of the Olympus and the product name, it is TURis. It's the scope plus device under the solution.

[Unknown Analyst]

Now iTind that we now have access to, what is it after all?

[Yasuo Takeuchi, executive]

So it is for those BPH patients who have passed the stage of prescription medication treatment and yet, they do not have to undergo through the surgical intervention yet. So something less invasive than surgical option and yet, they're more aggressive than prescription medication. And it is true, as you point out, that there is another party -- there is another product named UroLift. That product has gone to the market ahead of the iTind. So in a sense, both the product solutions are targeting the same sort of that market segment, but there are differences between the 2. ITind, that we have to accumulate a clinical data evidence from this point onward. And so I cannot say I'm 100% decisively, but the difference between the 2 is that with UroLift, the device would be implanted permanently into the prostate and there is a sheer difference between the UroLift approach and iTind because iTind has to go through the implanting the device once, but after a while, it can be completely removed. Again, have [ the AI, ] would have to repeat. And we still have to accumulate clinical evidence. Let us move on to another person who has questions.

[Unknown Analyst]

My first question has to do with JPY 9.7 billion provision relating to the DoJ investigation. So the first question, straightforwardly, would it suffice? Because I remember that 3 years ago, with the Anti-Kickback Statute, you once booked and you had a provision of JPY 53.9 billion, which was added further some 6 months later by JPY 15.6 billion. And so even today, you talked about JPY 9.7 billion. What do you think? Is that going to be enough?

[Yasuo Takeuchi, executive]

My answer, I understand first of all, where you are coming from and you know the history of our corporation 3 years ago and provisioning and the steps that we took in reference to Anti-Kickback Statute. So I understand what you're saying. However, please do understand that DoJ investigation is still continuing. So I cannot go into any further specifics or details. Please allow me to refrain from doing that.

[Unknown Analyst]

By the way, what about the FDA situation? I'm talking about the issuance of that warning letter handed by FDA, in receipt of which you have been proceeding leading to the culture study and the other studies. What are your expectations towards the end of the year?

[Yasuo Takeuchi, executive]

Yes. Culture study and Human Factor Study. Human Factor Study has been completed already. The culture study, we are just trying our very best to meet the target deadline, which is at the end of this year.

[Unknown Analyst]

My second question is Medical Business operating margin. I'm looking at Slide 8 for July-September quarter, 3 months period. In the previous year, there was other income and expenses of minus JPY 0.7 billion and this year, minus JPY 7.8 billion. So when we add those back, I understand that the operating margin year-on-year has little changed. You said that endoscopes are doing very well in the U.S. but declining in Japan now. So my question is, what is the year-on-year difference in gross profits? And what about the SG&A expenses year-on-year change?

[Yasuo Takeuchi, executive]

Are you asking about the July-September period?

[Unknown Analyst]

Yes. The 3 months.

[Yasuo Takeuchi, executive]

Basically, SG&A expenses, well, actually, as you have correctly pointed out, the operating margin, excluding the special factors remained unchanged, almost unchanged year-on-year. Between the gross profit and SG&A changes, there was little change year-on-year. As has been pointed out, in Japan gross profit rate has declined year-on-year, but in North America and China, gross profit rates has improved over -- during the 3 months period.

[Unknown Analyst]

I see. So to understand correctly, that this trend will remain unchanged until the launch of the next-generation products?

[Yasuo Takeuchi, executive]

No major change. Of course, the question remains as to how much the ASP in the Japanese market will decline. There are some uncertainties. But no major change, we do not expect. As far as SG&A expenses, especially regarding the R&D expenses, we do not expect a big increase in the second half as it did in the past. For the last 2, 3 years, we have seen big increase in SG&A expenses in the second half. But I think for this year, we can contain that.

[Unknown Analyst]

I see. My last question is about the next-generation GI endoscope products, the launch timing. I know you can't comment on this. But looking at the historical trend, there has been a gap in the timing of the launches between the Japanese market and overseas market, which was not discussed much. Historically, the products will be launched overseas first and then about 1 year later launched in Japan. Should I assume that this will be the same for the products to be launched next year as well? In other words, launch next year and the launch in Japan would be during the fiscal year ending March 2021?

[Yasuo Takeuchi, executive]

Well, because this is about the next-generation products, I really cannot comment on this launch schedule. Now historically, there has been a difference in the timing of launches between overseas market and Japan. This was simply related to the approval schedule. In other words, MDR in Europe versus PMDA in Japan, FDA in U.S. and CFDA in China, the approval requirements vary. And that resulted in difference in the timing of the launches. As for the next-generation products, this factor of approval timing is there. I can't give you the details, but it's not likely that they will all be launched at the same time in all regions. Having said that, it has been relatively easy in Europe, but with the new MDR in place, we'll have to diligently respond to the requirements.

[Unknown Analyst]

I have several questions. I'm looking at the financial data supplement, Page 4, growth rate of Medical Business on constant currency basis. For endoscopes, surgical, for both for the first quarter and the second quarter, I see quick -- rapid decline, particularly in Japan. Is this because the budget execution at national and public hospitals are sluggish? And so you're not losing the market share and so you expect the recovery. Am I correct?

[Yasuo Takeuchi, executive]

That is correct.

[Unknown Analyst]

Is it already beginning to recover?

[Yasuo Takeuchi, executive]

No. We have yet to see a major recovery.

[Unknown Analyst]

I see. Looking at endoscopes in North America, Europe, particularly in Asia and Oceania, on the constant currency basis, I see a major improvement, especially for Asia and Oceania 8% growth in the first quarter, 14% in the second quarter, 12% in total. Are you expecting this momentum to continue?

[Yasuo Takeuchi, executive]

Yes, in particular for Asia and Oceania, Asia, in particular, the total is as you described. But when you just look at China, the growth rate actually is over 20% for GI endoscopes. And we believe that this potential will be sustained for the time being.

[Unknown Analyst]

So China is currently still in that strong momentum.

[Yasuo Takeuchi, executive]

Yes, that is correct.

[Unknown Analyst]

My last question is about the inventories of JPY 12.8 billion. You said this is due to the build of inventories of the products to be shipped at the end of the fiscal year. And so this -- there's no cause for worry. Can you give us the breakdown between segments, Imaging and Medical Business?

[Yasuo Takeuchi, executive]

Well, the majority is Medical, which is not surprising given the size of the business. But we do see some increase in inventory in the Imaging Business as well in relation to the reorganization of production bases. Next person, please.

[Unknown Analyst]

I have 2 questions. First is on Imaging Business. The loss posted in the second quarter of minus JPY 3.4 billion. Can you give us the details of that loss? Is it mostly a temporary factor?

[Yasuo Takeuchi, executive]

Since you asked about the temporary factor, I suppose you really want to know what the real picture is excluding this temporary or onetime factors. For this period, as you know, there haven't been major product releases. And in addition, apparently, our competitors in the single-lens reflex cameras are shifting their emphasis to mirrorless cameras. So all the players are now converging in the mirrorless camera segment. So the competition is getting more fierce. So this is like a double blow or a triple blow to us -- affecting us, even excluding the onetime factors as the state of the business, we are suffering from the operating loss. In the second half of this fiscal year, we are scheduled to launch new products. And we have great expectation in the effect of this new product launches. And looking at the nature of our mirrorless cameras, while competitors are using the full-size frame for the imaging frame, whereas Olympus using smaller micro 4/3 frame, so we will take advantage of this strength to really promote the lightweight and portability features of our products. So we will be making a more focused marketing promotions to promote the products as a system to meet the needs of the customers. That's our strategy. And in terms of the reform of our production structure, the consolidation of product -- production in Vietnam, as I said earlier, is proceeding very smoothly. The plant in Vietnam is beginning to operate as the fully consolidated production base. In addition to this integration effect, we are expecting benefit from the fact that the personnel costs in Vietnam is less than 1/2 of that in China. So we are expecting that kind of effect as well.

[Unknown Analyst]

So question for clarification. This operating loss of JPY 3.4 billion, no valuation loss or anything of that nature included or not?

[Yasuo Takeuchi, executive]

Well, other income and losses are solely the economic compensation that we paid to the employees of our Chinese plant, which ceased operation. As for other impacts, for example, with lower productivity, we could not deliver the products on a timely manner, which resulted in lower sales, that did happen and that is reflected in our profit and loss. But it's very difficult to say exactly what that impact was in terms of the value. Some has been identified and captured. As -- in addition to that JPY 5.2 billion other income and loss, we believe the impact amounted to around -- over JPY 1 billion.

[Unknown Analyst]

So with this consolidation at the Vietnamese plant and other structural change, what do you think would be the break-even point? The point I'm trying to ask is, with sales not growing, should there be a concern that you will continue to incur losses to the tunes of billions of yen going forward?

[Yasuo Takeuchi, executive]

Well, that's a very difficult question to answer. As for the next fiscal year, at minimum, we will aim at breakeven.

[Unknown Analyst]

So conceptually, you are expecting the revenue to be comparable to that of this year or even higher?

[Yasuo Takeuchi, executive]

In terms of revenue or sales, we're not assuming a decline. We're expecting a slight increase.

[Unknown Analyst]

I see. My next question is on the SG&A expenses overall. For the first half minus JPY 8.3 billion is what it says on Slide 6. Is this in line with your plan? I know I can't be too simplistic. But on the full year basis, you're expecting SG&A expenses to grow by around JPY 12 billion, which means that from the first to second quarters and from the first half to second half, you're expecting this growth rate in SG&A expenses to go down. Ordinarily, one would expect the SG&A expenses to increase in the second half. So can you explain how you project the SG&A expenses to be incurred going forward?

[Yasuo Takeuchi, executive]

You are right. For the fixed cost or the fixed expenses portion, that will be constant. You can't expect a big decline in the second half unless deliberate efforts are made to that effect. Amongst the variable expenses, the largest item would be R&D expenses. For the second half, as is reflected in our forecast, we are not expecting a big increase in the second half in R&D expenses.

[Unknown Analyst]

I have 2 questions. The first question is about the results for the July to September quarter. Excluding the JPY 9.7 billion impact, excluding that basis, how do you compare the results vis-à-vis the expectation? And how much gap did you have on a consolidated basis? And which segments performed well and which segments didn't perform well?

[Yasuo Takeuchi, executive]

For the entire company, we had financial results that were in line with the expectations. However, looking at different segments, the Imaging Business was in a more difficult situation than the expectation.

[Unknown Analyst]

How about the Medical Business? Did it perform better than expected?

[Yasuo Takeuchi, executive]

Well, I don't know how I can put it, but there was not a significant overperformance from the Medical Business. Generally, the Medical Business performance was in line with expectations.

[Unknown Analyst]

I think I understood. The second question regarding the concept of JPY 9.7 billion. Basically, was this incurred all in the Medical segment for the July to September quarter?

[Yasuo Takeuchi, executive]

Yes. That is correct.

[Unknown Analyst]

Okay. For the full year outlook, for the Medical Business, if you exclude JPY 9.7 billion, it seems that the Medical was a little bit higher. But didn't you change the outlook for the Medical Business, excluding JPY 9.7 billion?

[Yasuo Takeuchi, executive]

Basically, we did not change the forecast. There is a small difference in the figure, but that is purely because of the foreign exchange rate fluctuation. We have not changed forecast other than for JPY 9.7 billion.

[Unknown Analyst]

I have one question. The question is about the Imaging Business. This time around, you made a downward revision. But at the beginning of this fiscal year, because of the consolidation of the manufacturing subsidiary, you said that there would be a one-off expense of about JPY 9.5 billion and which mostly was, I think, incurred during the Q1. And there were several hundreds of millions of yen incurred during the second quarter. Have you changed any forecast for the second half for the one-off expenses? Has it been upward revised for the second quarter -- second half?

[Yasuo Takeuchi, executive]

What you said is correct. During the first quarter because of the restructuring of the manufacturing side, we were estimating JPY 7 billion -- JPY 9.5 billion. But today, we have JPY 10 billion in our forecast. There was a related question earlier, regarding the other items for the impact, if there was any other items and my response was that there was JPY 1.5 billion. The business impact actually -- is actually incurred. And you see the figures here. We only segregated the impact on business. But other than that, we have other types of impact. For example, the impact on sales and profits or production cost. For this fiscal year, the impact for those elements is likely to go up by JPY 500 million. So that is current assumption. We did make the downward revision for the Imaging Business by JPY 6 billion. Out of the JPY 6 billion, JPY 5.5 billion is for the pure business part.

[Unknown Analyst]

I understood. When you started out the fiscal year for the Imaging Business, excluding the onetime expenses, I think there was a figure. Was it JPY 2.5 billion? I think the positive JPY 2.5 billion was the plan at the beginning of the year. However, now that the progress on the top line is lower than expected and for the next fiscal year, you are expecting a slight increase year-on-year. With the ongoing pace, do you think you can achieve the break-even point with the initiatives that you already have? Or do you need additional initiatives?

[Yasuo Takeuchi, executive]

Well, in terms of the sales targets, I said that there will be a slight increase in sales next year. We would like to increase the sales year-on-year. In terms of the production cost, we're rationalizing production sites to reduce the cost, but there is some room for improvement on other cost elements. Therefore, anyways, we would like to establish a structure where we can stably generate profits, that is the part of our strategy. So that's what we would like to focus on.

[Unknown Analyst]

Well, it's been some time since I last attended your earnings call. I have a question about the legal risk for the Medical Business. It seems to be the risk is materializing in a number of cases. When it comes to the risks for the legal affairs of product safety over the last 2 or 3 years in terms of risk management, is there anything the company did in order to enhance the risk management? For example, budget allocation, staffing or delegation of authorities. Is there anything you have done?

[Yasuo Takeuchi, executive]

I think the most important area of change was the increase in the number of staff members in product safety and the compliance. There are some elements such as duodenum scopes that are inherent with our own business. But at the same time, for most of the countries, the regulatory authorities are applying more stringent regulations to these products. Therefore, to respond to such movements, we are making a significant investment.

[Unknown Analyst]

There are many Japanese companies other than Olympus who are offering similar medical equipment devices. What is your self-assessment of having so many legal cases?

[Yasuo Takeuchi, executive]

Well, it's a tough question. I mentioned duodenum scopes. Whether the number of cases that we have is high or small, I'm not sure, but mostly these are related to duodenum scopes. The regulatory authorities for medical affairs, qualities of products, they are tightening their regulations in different countries. So one is the timing issue. In fact, we have about 40 cases in the United States. These are pending cases and we're taking each one of these cases very seriously. And this is something that we have already informed to you. We have about 50 litigation cases compared with the total number of duodenum scope procedures of 2 million in the world. That's the worldwide number. So in that sense, the incidence ratio is kept at a very low level. What we can say is that the environment has changed. The current environment does require us to have a strong compliance response.

[Unknown Analyst]

I have one request for Olympus. Here is something that I heard from one of the sell-side analysts. Please correct me if I'm wrong. Right after the first quarter earnings call, it seems that Olympus has commented on the threshold for the prompt disclosure of risks -- business risks. So the threshold, I think, was JPY 10 billion. So anything lower than that would not be promptly disclosed, is that correct?

[Yasuo Takeuchi, executive]

Well, the response that we gave at that time was not limited only to litigations. But the question in general was about the prompt disclosure criteria or policy for our company. That policy can be different from a company to company and in our case, it happens to be JPY 10 billion.

[Unknown Analyst]

And JPY 10 billion is the threshold for such policy?

[Yasuo Takeuchi, executive]

Well, I would say that even if the spending or risk is only JPY 10 billion, if there are 5 cases, that means JPY 50 billion.

[Unknown Analyst]

Since the Medical Business is in a good cycle and I'd like to invest into your company because of the strong trends in the Medical Business, that's why I'd like to ask for the company's more detailed disclosure on tail risk that would make it easier for me to buy the stock.

[Yasuo Takeuchi, executive]

I understand where you're coming from and that is exactly what we're trying to do as well. The comment I made earlier was not specifically for the Medical Business. The response that we gave the last time was about the litigation in China. And we also don't make the decisions only on the amount of risk or the amount of money. We use other qualitative judgment criteria as well. I know we're trying to disclose as much information as possible. That is the basic stance.

[Unknown Analyst]

I have one question. Recently, Johnson & Johnson announced something in their earnings call. They said that for their endoscopic energy devices and endoscopic surgical staplers, there was some impact on the -- from the robotic surgery as well as from reprocessing. I assume, in your case, it's going well, but what is the possible impact from next year on?

[Yasuo Takeuchi, executive]

I also read what Johnson & Johnson said at that earnings call. But if I think about the cases for Olympus, for example, we have energy devices, instruments and therapeutic devices and if I think about what kind of impact robotic surgery can give to these products, I don't think we have the similar impact that the Johnson & Johnson is mentioning for these products. There is another comment I'd like to make that is the reprocessing. I didn't clearly understand the connection between reprocessing and the business of Johnson & Johnson. I think that what they meant was refurbishment rather than reprocessing because refurbishment of disposable products is quite extensively practiced in the United States. Therefore, they may have mentioned the possible share loss from refurbished products. I think that is the interpretation of their comments in my mind. And then the question of how about Olympus, I wouldn't say that there is absolutely no impact at all. However, rather than the share -- market share loss, what we are concerned about is the pressure on pricing, especially from the disposable therapeutic devices. There is a significant impact reported in the United States. And every time we renew the contracts with customers like the GPOs and IDNs, they always negotiate for lower prices. Clearly, therefore, there is a strong pressure on ASPs or selling prices. That is something that we're perceiving. But when it comes to whether there is a direct competition with robotic surgery or refurbished products for our products and if there is any market share loss or stalled growth because of this competition, at this moment, I don't think we have perceived any such impact.

Thank you very much. This is the end of Q&A session. Thank you very much for your attendance.