Olympus Corp

TSE:7733

Earnings Call Transcript 2021-Q3

[Chikashi Takeda, executive]

Hello, everyone. I am Chikashi Takeda, speaking as the Chief Financial Officer of Olympus Corporation. I would like to thank you for your participation in this conference for the consolidated financial results for the third quarter of fiscal 2021.

So I am going to make reference to the prepared materials to start my presentation, which means that I would like to first ask you to go to Slide #3. This slide highlights our financial results for the third quarter of fiscal 2021. In a continuation of the second quarter trend for the recovery, revenue returned to growth in the third quarter and -- driven by strong performance in ESD and a continuing recovery in other divisions.

Operating profit improved significantly, thanks to a decline in SG&A expenses due to constraints and activities from COVID-19 and thorough cost control, in addition to an increase in revenue. The operating margin was around 13% for the 9 months period and around 18% in the third quarter alone.

Moving on to full year forecasts. Both revenue and the operating profit were revised upward due to the third quarter results, which were better than expected. Net profit is expected to return to positive.

In the fourth quarter, we expect gradual revenue growth and we continue with our efforts to control SG&A expenses and implement investments and measures for further improvement of operating profit margin in the next fiscal year and beyond.

So let me now explain the consolidated financial results and provide a business review for the third quarter. Please then go to Slide #5. This is an overview of the consolidated financial results. Consolidated revenue in the first 9 months period amounted to JPY 513.6 billion. Although the year-to-date revenue declined in a continuation of the previous quarter, revenue did increase in the third quarter. Performance was strong, particularly in the ESD. As a result, excluding FX impact, year-to-date year-on-year revenue decline improved from 13% from the -- in the first half by 6%, narrowing to 7% in the third quarter.

Please note that our calculations on the impact are based on the assumptions that we would have achieved the same level of performance as the previous year if not for COVID-19, so excluding FX impacts, other income and expenses and one-off items.

Gross profit was JPY 323.5 billion. While the rate of decline has improved, there were several factors, which raised the COGS ratio, including a decline in factory operation owing to COVID-19, and the costs for the voluntary recalls of endoscopic products and endotherapy devices. SG&A expenses totaled JPY 250.2 billion. Although restrictions on activities lessened in the third quarter, we continued to implement strict controls, resulting in a decline in SG&A expenses.

Operating profit, JPY 64.7 billion. Although operating profit is down compared with the first 9 months of the previous year, looking only at the third quarter, operating profit was JPY 34.4 billion, up 23% excluding FX impact, and OP margin improved significantly to 17.5%. As a result, the year-to-date operating profit margin improved by 3 percentage points from the first half to 12.6%, while profit from continuing operations fell JPY 11.6 billion to JPY 53.9 billion, the ratio of profit to revenue improved by 2.3 percentage points.

As for total profit for the first 9 months period, including both continuing and discontinued operations, we managed to achieve a profit of JPY 1.6 billion, despite recording a loss of approximately JPY 50 billion associated with the divestiture of the Imaging Business.

Slide 6. This graph -- this is the graph showing the status of monthly revenue. This graph shows the revenue trend by division for January to December 2020 with the previous year's as a baseline at (sic) [ of ] 100%.

Across all divisions, revenue continued to recover steadily in the third quarter. In December, revenue in all divisions surpassed that of the previous year. In particular, both ESD and SSD accomplished double-digit growth.

In ESD, it was led by strong performance in Europe and China, while in SSD, it was led by increased sales of both biological and industrial microscopes, which is in China. As for January, both ESD and TSD finished the month with positive growth year-on-year according to preliminary data just for your reference. Meanwhile, SSD declined year-on-year in revenue.

Although the business environment is recovering, we will continue to monitor the situation of COVID-19 closely and operate in a way, which ensures that we can respond to any changes.

Turning now to Slide #7. Now we will look at details about each business segment. First is the Endoscopic Solutions division. Revenue in the first 9 months period, who -- was JPY 294.5 billion, excluding FX impact, and this represents a 5% decline. In the third quarter alone, we grew 6%, excluding FX impact.

In Europe, in particular, we accomplished a double-digit growth, driving the entire division.

The growth trend from the second quarter continued into the third quarter, driven by the U.K., and where the government has been strengthening its health care system and in Eastern Europe, where we were able to win bids for some large projects.

Operating profit for the 9 months period mirrored the revenue recovery to reach JPY 76.8 billion. OP margin improved to 26.8%, excluding FX impact. In the third quarter, operating profit increased 11%, excluding FX impact, due to revenue recovery and SG&A streamlining. And the OP margin rose by 2.7% from the previous quarter to 30.9%.

Please go to Slide #8 for the results of the Therapeutic Solutions division. Revenue for the 9 months period JPY 146.1 billion, adjusting out the FX impact, and this represents a 9% decline. In the third quarter, the number of procedures continued on the recovery trend. And we achieved growth in Europe, Japan, China and APAC, resulting in 1% in growth, excluding FX impact.

Operating profit for the 9 months period was JPY 20.3 billion due to recovery of revenue and cost streamlining despite the costs associated with the voluntary recall of endotherapy devices in the third quarter. OP margin improved to 14.6%, excluding FX impact.

Please also note that the decrease in SG&A expenses includes the effect of no longer recording the amortization of intangible assets from Gyrus, which had been booked until last fiscal year. In the third quarter, operating profit increased significantly by 40%, excluding FX impact, due to revenue recovery to the previous year level and the continued SG&A streamlining. The operating profit margin was 18.4%, easily surpassing the previous year level.

Please turn to Slide #9 for Scientific Solutions division. Revenue for the 9 months period, JPY 66.9 billion, ex FX impact, and this represents an 11% decline. In the third quarter, we saw improvement in the budget execution at research institutes, universities and hospitals, resulting in strong sales of biological microscopes in China and Japan. Additionally, sales of industrial microscopes were strong due to demand from 5G-related electronic components and semiconductor sectors. And as a result, the division achieved 1% growth, excluding FX impact. Operating profit for the 9 months period was JPY 3 billion due mainly to lower revenue and the decline in the operating levels at manufacturing bases.

In the third quarter, operating profit grew 7%, excluding FX impact, and due to revenue being recovered to the previous year's level, SG&A streamlining and an improvement in other income and expenses. OP margin was 10.3%.

Slide #10, our financial position as of December 31, 2020. Goodwill increased due to the acquisitions we undertook, including that of Veran Medical Technologies. Additionally, in the -- light of the impact of COVID-19, we have maintained a high level of on-hand liquidity through long-term bonds and borrowings in the first half of the fiscal year. The equity ratio was 32.1%, which is down 4.4% percentage points from the end of the previous fiscal year due to an increase in interest-bearing debt.

Turning to Slide 11 for the status of cash flows. Cash flow from operating activities, JPY 89 billion. As explained, the recovery trend continues. And due to the upturn in revenue and SG&A streamlining, the cash flow is also trending higher.

Cash flow from investing activities declined with multiple M&As. Also, please note that cash flow from investing activities do include time deposits totaling JPY 40 billion. Therefore, actual free cash flow is JPY 14 billion, which is minus JPY 26 billion and adding further to that, JPY 40 billion.

Cash flow from financing activities rose JPY 80.9 billion to JPY 52 billion due to long-term borrowings and the issuance of corporate bonds. As a result, cash and cash equivalents as of end December 2020, stood at JPY 187.7 billion.

Next, I would like to provide details regarding our full year forecasts for fiscal 2021. Please turn to Slide 13. Although we are currently seeing the resurgence of cases worldwide, we expect gradual revenue growth toward the end of the fiscal year. We upwardly revised the full year revenue forecast by JPY 23 billion to JPY 720 billion in light of the strong performance in Q3.

Full year SG&A expenses were revised downward by JPY 12 billion compared to the November forecast. But in Q4 alone, SG&A expenses are expected to go up, while they will be in the same level as in the previous year, more or less.

We assume that activities will become more active in Q4 and beyond. In addition, we plan to invest in reinforcing the operating base such as our IT infrastructure and QA/RA functions, and improving profitability in the next fiscal year and beyond. Approximately JPY 12 billion is included in other expenses related to the career support for the external opportunities.

As a result, we upwardly revised operating profit to JPY 79.5 billion, with OPM at approximately 11% in light of the strong performance in Q3 and continued SG&A streamlining.

Net profit is expected to turn positive at JPY 8.5 billion with these revisions. We expect year-end dividend for fiscal 2021 to be JPY 10 per share, unchanged from the November forecast.

Please turn to Slide 14, forecasts by business segment. Revenue and operating profit of ESD and SSD were revised upward in light of the Q3 results. With regard to TSD, operating profit was revised upward in light of significant profit increase in Q3.

In terms of Elimination and Corporate, we revised to include the expenses related to the implementation of the career support for external opportunities, while controlling SG&A expenses. We have also revised upward both revenue and operating profit for Others, which reflects the Q3 results as well as the revenue of FH ORTHO, which we acquired.

Lastly, I would like to highlight some of the initiatives to transform into a truly global medtech company. Please turn to Slide 16, the progress of our corporate reforms to date.

First, we completed the divestiture of the Imaging Business. Moving forward, we will focus our management resources on the medical field to accelerate growth. During Q3, we carried out multiple M&As. Each of these is in line with our strategy and is expected to contribute to future growth. Details will be on the following slides.

We also announced the implementation of the career support for the external opportunities targeting our employees in Japan. While supporting those employees who wish to find new opportunities outside the company, we are pursuing the recruitment and assignment of the right people in the right positions to promote reforms suitable for a global medtech company.

Additionally, as we announced in November, we will integrate our domestic sales function to enhance sales capabilities. We plan to implement a company split on October 1.

Please turn to Slide 17, the product pipeline for ESD. There are some changes from what we shared in Q2. Changes are underlined. We have progress in our flagship surgical endoscopy system, VISERA ELITE II. In November, we launched a 3D system for VISERA ELITE II in the U.S., and plan to launch an IR observation system in Q4. We also launched the 3D system for VISERA ELITE II in China in November. In addition, while we had previously communicated an early 2021 time frame for the release of EVIS X1 in the U.S., it is taking more time to get an approval than we expected and the schedule has been revised.

At this point, we are aiming to launch in the first half of 2022.

Please turn to Slide 18. To pursue new opportunities in the field of surgical endoscopy, on February 10, we completed the acquisition of the Netherlands-based medical device manufacturer Quest Photonic Devices B.V., making it a wholly owned subsidiary.

Technology has evolved in the area of surgical imaging, and the fluorescence imaging market has expanded in recent years. Fluorescence imaging is a technology that combines near-infrared light and the fluorescent dye to illuminate fluorescent dye flowing in the bloodstream by shining light at a specific wavelength, allowing subcellular blood vessels to be visualized.

The market for florescence imaging has expanded for both open and laparoscopic surgeries due to the high demand for reconstructive and minimally invasive surgeries. The market is expected to grow significantly at CAGR of 12% from 2018 to 2027. Acquiring Quest will enable us to add the fluorescence-guided surgery imaging system, Spectrum, to our product lineup, making it possible to provide a range of open surgery equipment Olympus previously did not have.

We will also be able to use the advanced fluorescence imaging technologies and expertise of Quest for the development of other Olympus products. Additionally, Quest is actively promoting joint R&D with various biotechnology companies for the new technology of molecular imaging, which will give us a foothold in this technology in the future. Looking ahead, we will continue to provide devices that support safer and more accurate surgeries by utilizing new technologies, such as fluorescence imaging as well as our traditional endoscopic imaging technologies.

Slide 19, the pipeline for TSD. Changes from Q2 include the acquisition of Veran Medical Technologies on December 29. Veran adds an electromagnetic navigation system and single-use bronchoscopes to the product portfolio. These products and Spiration Valve System and others will expand our respiratory product portfolio for the early diagnosis and minimally invasive treatment.

Please turn to Slide 20. We have expanded our product pipeline in TSD as well through acquisitions. The acquisition of Veran Medical Technologies, a leading provider of advanced medical devices specializing in interventional pulmonology, was finalized in December. We aim to contribute to the early diagnosis of lung cancer by expanding our portfolio and leveraging our strong endoscopy market position in respiratory area. Low-dose CT is widely used for lung cancer screening in high-risk individuals.

Biopsy of suspicious lesions is an immediate next step for definitive diagnosis. Conducting bioscopy (sic) [ biopsy ] of lesion is an immediate next step for definitive diagnosis by inserting devices to target area to collect tissues and cells from peripheral areas in the lung.

Veran Medical Technologies has technological advantages to deliver testing devices to the peripheral areas. Electromagnetic navigation system by Veran give supports to HCPs in delivering bronchoscopes and devices to narrowly diverged peripheral areas in the lung by enabling viewing 3D vision of bronchial during procedures, and is compatible with Olympus' bronchoscopes.

In addition, the distribution agreement with Hunan Vathin Medical includes especially -- specialty single-use bronchoscopes, which will expand portfolio in the United States, that will address a broader range of procedures and complement Olympus' current bronchoscopic offering.

Please turn to Slide 21. I would like to go into our approaches on reusable and single-use endoscopes. There is still high needs for reusable endoscopes that balance cost and technology such as advanced observation performance, insertability into the body and operability treatment. On the other hand, the single-use endoscopes market is growing, especially in areas where there is a clear need and the value of single-use endoscopes. Specifically, areas requiring fine yet durable endoscopes and areas requiring easy preparation, such as in emergency rooms as well as areas requiring high-level infection control. We recognize that in these areas, we can provide the unique value of single-use endoscopes. By expanding our range of single-use endoscopes, we can further cement our overwhelming position as a leading company in every situation using endoscopy.

As the market leader in endoscopes, we will continue to build a comprehensive portfolio of reusable and single-use endoscopes to provide optimal solutions addressing customer needs driven by the complex clinical demands.

That concludes my presentation. Thank you for your attention.

Now we are ready to start the Q&A session.

[Chikashi Takeda, executive]

Let me start with the first person with a question.

[Unknown Analyst]

So my question has to do with the second half performance. So in particular, focusing on Q3, the performance I'm looking at or -- and the level of adjusting from the -- excluding income -- the operating income and expenses, something the -- in the neighborhood of [ JPY 388 million ] in the Q3 period. And for the final quarter to [ JPY 80 billion ] or thereabout. So let me first address this -- the Q3 actual performance. In comparison having -- with your internal on the business plan, how was it? It -- what was the difference between the actual and what you planned for? And the final quarter, ESD, TSD, the sales -- the increase trend will continue into the final quarter, but at the same time, the operating profitability probably will slow down a little bit into the final quarter. So I wonder what's the total from the plans that you have, so as -- the activities? What about delivery risk because of the coronavirus pandemic?

[Chikashi Takeda, executive]

Well, thank you. Thank you very much for your question. But let me just make sure that I understand the purpose of your question. So the first part of your question, so is it correct for me to understand that you want to know the background behind the expected or the projected -- a little bit is lower the operation in the final quarter in comparison with the third quarter?

[Unknown Analyst]

Yes, I'm interested in that. But in actuality, I am more keen to learn from here, how you consider the actual versus the internal plan that you had for Q3.

[Chikashi Takeda, executive]

Okay. I understand that. So the third quarter, the performance in actuality, I would honestly say that the actual performance reported and that turned out to be rather substantially higher than our internal of the plan. And of course, there were some factors at play, such as from Europe with U.K. and/or in European -- the Eastern European countries and the local government support -- I mean, the -- for the local -- the country markets, the government support into the foster, the Medicare system. So they had the additional budget allocated to that. And more than what we would have expected, given the -- that the trend into orders to the Olympus.

China, December is the final month for the budget year. And whereas we had thought that all that -- had the budget would go to counter the coronavirus, that actually developed into orders into Olympus. So there was really quite encouraging indeed, so much so that a single month of the sales performance from China in December turned out to be a very positive surprise to us. And at the same time, expenses, SG&A expenses, during the October-December period, ended up to be much lower than what was budgeted for because of the constraints. So that those were all of the factors at play behind the very strong performance that we confirmed for Q3.

Q4, our expectation is that gradual -- the continuation here of a gradual increase and revenue will be there. Particularly in reference to the ESD, whose performance was so very strong in the third quarter. For the capital goods to sell, the growth will continue for their -- on the ESD's sales in the final quarter. So the -- that -- the JPY 230 million -- or JPY 23 billion refers to that.

Expenses, it is typical that in any given business year, the final quarter, it shows a spike in the -- of expenses because the money has to be spent to duly close the books for the fiscal period.

In the situation for -- so this -- the final quarter because of the modern -- the highest actual performance than expected. The additional provision results is resulting to be necessary to pay out bonuses. And not to mention the strengthening of the QA/RA and also the strengthening and augmentation of the IT infrastructure, which as -- we have been discussing over time.

And also, have the -- there's the big initiative called GBS, which stands for global business services, which is the concept of the -- turning to the entities or the parties outside of the company to offer routine tasks. So upfront expenditure investments are necessary. However, in order to set the base for the GBS regime, part of which that will come about in the final quarter this year. So the SG&A for the final quarter in this fiscal period. On top of net -- the low rate and the baseline of SG&A, we had to accumulate the extra expenses that we schedule on the -- would be necessary. This will result in the same level of SG&A as it was last year.

[Unknown Analyst]

Okay. So let me ask a follow-up question. The third quarter, 3 months, the overperformance -- outperformance by how much? Would it be like JPY 150 million?

[Chikashi Takeda, executive]

So let me make sure, you would like me to confirm with you the magnitude of the outperformance over and above what you forecast back in November by how much?

We are outperforming the November -- the forecast by 10% for revenue. And the actual operating profit was double the forecast from November.

[Unknown Analyst]

So other question. Thank you very much for sharing with us, in the form of notification, the candidate -- candidates for the Board of Directors in the coming fiscal period. So I noticed that some of the candidate members that are nominated or -- they're scheduled to take -- to come to the Board to -- once again, continuing from this year, but they have the other responsibilities. Are you sure that they will be able to accept your request?

[Chikashi Takeda, executive]

You mean -- if I may, are you thinking of someone like the -- Rob Hale?

[Unknown Analyst]

Yes. And to be very specific, like Mr. Hale.

[Chikashi Takeda, executive]

Yes. And our expectation is that once it is approved, they're going through the internal process. Mr. Hale will in the -- be back to the Board and making due contributions that we expect for him to be able to do.

So let's move on to the next person.

[Unknown Analyst]

So I understand that I -- we are allowed to ask basically one question. So I am looking at the presentation material, on Pages 7 and 8 or the Page 4 of the financial data you have there for the period. As you say, the third quarter performance was so very good. And Japan and China -- Japan, local currency basis, 16% in -- but that on a year-on-year basis. But last year, in the third quarter, there was a negative effect in the -- of the hike of consumption tax. Then -- so in comparison that through the third quarter and this quarter, I can explain -- I can accept how they're more robust performance for this year. But speaking of Japan, more recently, Japanese government kind of passed JPY 4.3 trillion to the third supplementary budget, basically earmarked there for coronavirus, the measures. But do you think that some benefits would accrue to your business such as with endoscope? And how about China? Are you sure that their performance -- strong performance will continue?

[Chikashi Takeda, executive]

Okay. Thank you very much for that question. Well, all in all, the continuation of the trend of recovery, and that is for sure what we expect and what we count on. Japan, what you explained about, what happened in the third quarter last year, where had -- there had been -- under the less-minute demand in the prior year led to the increase of the consumption tax rate in Japan. So in comparison to [ that ] performance, the -- how this year's and the Q3, the stronger performance and it may stand out. But although, on -- the Q3 performance in Japan from the worse was much stronger than in Q3 last year, it's not so much to say -- not ready to say they have -- robustness wasn't the same magnitude that we observed in the regions such as in Europe with the government support and so on. But government support and subsidies, that's sort of a tailwind. It tends to flow more modestly than other measures. And we do expect the continuation of some benefits accrued.

China, December 2020, was absolutely superb. Into January 2021, we have to remember of Lunar New Year, a celebration period for them. But preliminary on -- in the reporting that we receive, it tends to point to the positive picture. And in some areas within China, the -- for the purpose of the more effective infection control, there is now extra budget available there to purchase the respiratory systems. And that's sort of the fact. This should give us the following. China, all in all, stable growth.

[Unknown Analyst]

Okay. But what about the treasury, the budget, a supplementary budget in Japan? Do you think that some of that, it would benefit the endoscope business because endoscope and endoscopy, they can be, perhaps, an opportunity to be a form of remote medicine? Do you think that, that's fair?

[Chikashi Takeda, executive]

If you -- it may be so, but I do not see the sure signs of that, not yet in any case.

Let us move on to the next person with questions.

[Unknown Analyst]

My question is asked. To confirm my understanding of one-off items for the period under concern is correct, your JPY 5 billion in the IMD divestiture; JPY 6 billion for the voluntary recalls of endoscopes; and then the JPY 12 billion for the career support for the external opportunity and fees, JPY 1 billion; these are all one-off charges that I understand, which would total up to JPY 23 billion or JPY 24 billion, is that correct? And if I were have not -- to add them all back in, on that basis, the operating profit would be in the neighborhood of the JPY 100 billion. So that wouldn't be the operating margin of 14 point -- 15%. So that 14%, 15% OP margin, when thinking of the -- your target of reaching 20% or above by March '23, this still leaves you with a gap of 5% to 6%. How would you fill that?

[Chikashi Takeda, executive]

Thank you for the question. So all of the one-off items that you listed up are indeed the items unique to the third quarter this fiscal year. But at the same time, there are many other -- the initiatives and activities the -- undertaken, such as the GBS. GBS, that's the global business -- the service program. As we are to set the base and infrastructure for that sort of service regime, it does require upfront investments. Upfront investments and -- will continue to come about, so please understand that. And among -- that's only one example of the various programs and initiatives that are underway at Olympus. So there are going to be those items.

And for March 2023, that's a target of 20%. We have to be mindful of the lingering effect in the -- of the COVID-19. And we have been running multiple patents of simulations. And I must say, we are not ready to say anything definitive, yes or not. If yes, at what level? I am not ready to quote any of that yet. But my short expectation is that a lot of programs and initiatives, which have been undertaken, will bear fruits, adding to that some additional initiatives as well as we expect.

[Unknown Analyst]

So I also remember the meeting that Mr. Takeuchi, your CEO, had time with us towards the end of last year. Among others, Mr. Takeuchi pointed out that reduction of -- from the procurement-related costs, of the view the -- contribute to the further improvement of the OP margin. So up until now, basically, you have been making some reference to SG&A expenses. And that will continue, but at the same time, procurement improvement, would you -- can you confirm that, that's there?

[Chikashi Takeda, executive]

Procurement operations, we have to consider the unit -- the costs on the per -- the components. And then also in the realm of procurement, there's a category such as indirect materials. So I recognize that all in all, there are specific items that the procurement and the operation has identified. These are combining them all -- really, combining kind of multiple initiatives and projects, then we will get to the 20% target.

[Unknown Analyst]

This is an urgent question. That great support for external opportunity, 950 persons that you targeted and the provision at JPY 12 billion. Now I understand how the period is open to continue this through next week. But can you give us any sense as to the applicants by business unit?

[Chikashi Takeda, executive]

Well, sorry, I know -- obviously, we have a sense internally, but allow me to refrain from answering that question. I honored it, thank you.

Moving on to the next person with questions. Are you ready to ask your question or questions?

[Unknown Analyst]

Yes, I am. So my one question today would refer to SG&A expenses. I'm looking at Page 13 of your presentation material, we're -- you share the full year and the forecast. Back in November, you forecast the JPY 366 billion OPM, and it is now adjusted down to JPY 354 billion. So it's relevant to talk about the extra expenses needed for that current support for external opportunity. So how did that come about? JPY 366 billion down to JPY 354 billion, so this reduction by JPY 12 billion from the forecast in November, so what is included there?

I also take note of the fact that R&D SG&A expense in the full year forecast have -- is now reduced by JPY 5.5 billion, and the rest of it have come from other SG&A expenses at JPY 6.5 billion. So JPY 6.5 billion of SG&A expenses reduced other than from R&D, from where and how? Are these just one-off items as you expect them to be? Or is the overall SG&A baseline will have been reduced into that lower level? And when speaking of R&D and the full year, I understand the forecast having been reduced by JPY 5.5 billion, what nature of the reduction that are we talking about? Is it the timing effect? Or again, the improvement of the baseline in the R&D operations for SG&A?

[Chikashi Takeda, executive]

Generally speaking, we expect expenses to go down generally. Of course, there are some ups and downs, if you take a closer look. For example, marketing and sales and more precisely, travel expenses would be the items. Due to COVID-19, the activities have been restricted and that has resulted in smaller figures. As for R&D expenses, there are delays in the projects, which are the main reason. So here again, we are talking about the restricted activities. And many projects have been pushed back, which are translated into the difference in the figures that we see.

[Unknown Analyst]

So a follow-up question. That would mean that the savings that we -- or you have achieved up to the third quarter, what happens when things return to normal? You cannot clearly state that even when things return to normal, you can expect savings due to the efforts made by Olympus as well as improved efficiency of R&D expenses. You can't say that. In other words, should we expect that for FY '22 when things return to normal, SG&A expenses, R&D expenses, these will return to the average level as well?

[Chikashi Takeda, executive]

Well, I talked about COVID-19 impacts, but there are various details in the background. For example, we have made major revisions to our travel policy. And we expected the benefit from that, but because all the travels have been canceled, that has become invisible. Now we will be putting together the business plans for next fiscal year, FY '22. And of course, we do not expect the expense level to go back to what they used to be. We are expecting savings.

[Unknown Analyst]

So other than travel policy revisions, any other factors that gives us the confidence that SG&A expenses, R&D expenses will go down next year?

[Chikashi Takeda, executive]

For R&D, we are prioritizing the themes, which is, of course, the efforts that we always make, but we want to accelerate that effort.

Next questioner, please.

[Unknown Analyst]

I hope you can hear me?

[Chikashi Takeda, executive]

Yes.

[Unknown Analyst]

My question is whether there have been any one-off effects on revenues. For October-December, I did not expect ESD to go down much, but I was really surprised with this impressive growth. Because already previous year, in the third quarter, you benefited from the developments in U.K. and Russia. And you achieved a 12% growth on top of that. You said that major wins were there for East Europe as well as a surge in China in December, what could be described as a budget flush. So I wonder why Q3 results were so strong. I also wonder why your customers are investing so much on the colonoscopy screening.

[Chikashi Takeda, executive]

In U.K., within the government policy to reinforce the public hospitals, there were demand for reinforcing, updating and replacing the facilities, resulting in our increased orders. And as for Russia, although I didn't talk about that in my presentation, although it's more on a subdued tone, the government is pushing for the oncology early detection. And that has contributed to our results. And in East Europe, as you said, we won major deals more so than we had expected.

So which are one-off and which are non-one-off, it's difficult to clearly distinguish the 2. But looking at the results for the first 9 months, the government support, the government policies obviously benefited us.

[Unknown Analyst]

I have a follow-up question on GBS, which has been mentioned several times. What specifically is going to happen in relation to GBS? I understand that routine work is going to be outsourced, but that would mean that you're going to incur outsourcing expenses. You also talk about front-loaded expenses. So can you talk about the details of GBS? Some of the functions or the work that is distributed in multiple entities are going to be concentrated. And with that, you expect some savings. Is that the story? And also, I understand that you plan to establish similar functions in Asia and U.S. as well, which would entail some cost. Correct?

[Chikashi Takeda, executive]

GBS stands for global business services, and the initiative started in Europe, the HR, General affairs and accounting routine work to be outsourced. When I say outsourced, one is to use the BPO providers. So for the real routine work, we will be utilizing BPO provider located in places where the personnel cost is low. Labor cost is low. And then there are some nonroutine work, which exists in almost all entities. And we are going to integrate that within the company, we call that captive, which is to be delegated. And of course, that will be concentrated -- consolidated again where the labor cost is low.

So basically, we're talking about the saving on the personnel cost, personnel expenses. And of course, for this, we need to integrate the processes, which should translate into reduction in overall workload, which, in turn, will translate into further savings in the personnel cost.

And in Poland, we do have such entity for Europe. And under GBS, we are to have the initiative on a global scale. And so there are some front-loaded expenses. And also, for some time, things will be run in parallel, which means double the personnel expenses. And so for the second half of this fiscal year and some part of next fiscal year, there would be the front-loaded expenses recognized.

[Unknown Analyst]

I see. I've been following this Polish entity for some time, so I understand that some would be outsourced and overall, you expect saving in personnel costs. But in terms of the timing of expenses recognized or charged for Asia and U.S., would it be for Q4 or some in the next fiscal year as well?

[Chikashi Takeda, executive]

Are you asking about the time frame for the net positive?

[Unknown Analyst]

Yes.

[Chikashi Takeda, executive]

Well, we're still trying to figure that out. Maybe not in FY '22 because everything is going to start all at once. That is to expect a net positive.

[Unknown Analyst]

Are you expecting additional expenses going forward?

[Chikashi Takeda, executive]

Well, once things start running, we should benefit from the saving on personnel expense on a sustained manner.

[Unknown Analyst]

About expenses in relation to setting up such entities in Asia and the U.S., would that be for this fiscal year?

[Chikashi Takeda, executive]

It will be from this fiscal year to next fiscal year.

Next questioner, please.

[Unknown Analyst]

The approval for EVIS X1 in the U.S., do I understand correctly that you now expect the first half of 2022, meaning a delay by 1 year?

[Chikashi Takeda, executive]

Yes, that is our current expectation.

[Unknown Analyst]

I see. In the area of surgical endoscopy, there were cases in the past where the launch in the U.S. was far behind Europe and Japan. Does this mean that you have a problem with the filing process? Or is it related to the duodenoscope issue? And are there any risks for further delays? Maybe partly it's related to COVID-19, but can you elaborate on that?

[Chikashi Takeda, executive]

You mentioned surgical endoscopy issue, that it would be VISERA, so the situation is different.

[Unknown Analyst]

You said situation is different. What do you mean by that?

[Chikashi Takeda, executive]

For EVIS X1 series, there is EDOF-enabled scope. And there is a technical issue that emerged in relation to that scope. And the R&D people are making every effort to resolve that issue. And for the FDA approval, this would be one conditions -- one of the conditions that need to be resolved. So this EDOF issue is a major reason. And based on that, we are assuming that this is going to affect the approval process in the U.S.

[Unknown Analyst]

A follow-up question. You already have launched this in Europe and Japan, and I think there is a very strong demand for EDOF amongst the Japanese doctors. Would they be affected?

[Chikashi Takeda, executive]

Well, we have to be mindful of the safety implications. And so for those that have already been shipped in Japan, Europe and Asia, for the doctors who will be using this new scope have -- for those doctors, we have issued relevant instruction for use.

We are getting closer to the scheduled end time, so the next question would be the last question.

[Unknown Analyst]

I have one question. In different countries, the government provided subsidies in 2020 in relation to COVID-19, which really benefited you. Now for 2021, with the implication of COVID-19 becoming more visible and with the vaccines becoming available, could be that -- could it be that for January-March period, you cannot really expect much growth?

[Chikashi Takeda, executive]

Yes, for January-March period. In fact, we are expecting more moderate growth compared to the previous quarters.

[Unknown Analyst]

Do you expect this to continue into April-June quarter as well?

[Chikashi Takeda, executive]

Well, it's very difficult to project government policies, government decisions. But should things recover -- in other words, the end to the subsidies would mean the market is recovering, economy is recovering. And therefore, we can -- we don't necessarily have to rely on the government subsidies for growth.

[Unknown Analyst]

But that would mean that the customers who have placed orders, thanks to the government subsidies, may stop ordering, which might mean dip in demand going forward. Is there that risk?

[Chikashi Takeda, executive]

Well, maybe, that is to a certain extent. But of course, there are groups of customers who don't fall under that category. And we are going to launch new products. And therefore, when things return to normal, we can expect normal growth pattern.

I want to -- I would like to make one additional comment regarding the launch schedule of X1 in the U.S. I'd like to add one comment. I said that there is a technical issue, but we are already in the final phase of resolving this issue. And so this should be resolved in the nearest future, just for your information.

That concludes Q&A session.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]