Olympus' (OCPNF) Management on Q4 2020 Results - Earnings Call Transcript
by SA Transcripts, https://seekingalpha.com/author/sa-transcriptsOlympus Corporation (OTC:OCPNF) Q4 2020 Earnings Conference Call May 29, 2020 8:00 AM ET
Company Participants
Chikashi Takeda – Chief Financial Officer
Akihiro Taguchi – Chief Technology Officer
Conference Call Participants
Chikashi Takeda
Greetings, I am Chikashi Takeda. And I was appointed Chief Financial Officer back in April 2020. I may say that I am very excited to have active dialogues with outside stakeholders, particularly in the capital market, going forward.
First of all, I would like to express my sincere condolences for those who have passed away from COVID-19 and to express my heartfelt sympathies to those affected. We are continuing to provide stable supplies of products and services in order to fulfill our responsibilities as a medical device manufacturer, while giving due consideration to employees’ safety and social responsibility.
Now, I would like to thank you indeed to all of you for participating in this conference call for the consolidated financial results for Fiscal 2020. I will begin with a summary of financial results.
Slide 3, highlighting our consolidated financial results for fiscal 2020. Compared to the previous year, although revenue growth slowed down in Q4, particularly in March, when COVID-19 spread around the world, we finished the year with both revenue and profit increased. Consolidated revenue grew 4% excluding FX impact.
Mainstay Medical business achieved record high revenue for three consecutive years. Operating profit significantly increased as a result of drastic SG&A reduction. Compared to the forecasts, both revenue and operating profit missed the targets. This is due mainly to the slowdown in revenue growth in Q4 triggered by COVID-19, which we could not have anticipated back in February, when we revised the forecasts. I will now explain our consolidated financial results and business review for fiscal 2020.
Please turn to Slide 5. Consolidated revenue amounted to ¥797.4 billion, driven by Medical, which achieved record high revenue for three consecutive years. Consolidated revenue grew 4% excluding FX impact. Gross profit amounted to ¥499.6 billion. COGS ratio increased due mainly to one-time duodenoscope-related expenses of ¥10.4 billion. But gross profit increased 2% excluding FX impact.
SG&A expenses decreased by ¥32.5 billion to ¥405 billion as a result of companywide efforts in SG&A streamlining. Operating profit amounted to ¥83.5 billion, significantly up 232% excluding FX impact, due to reduced other expenses in addition to reduced SG&A expenses.
Profit attributable to owners of parent increased by ¥43.5 billion to ¥51.7 billion. EPS increased significantly to ¥39 including the effect of reducing total number of issued and outstanding shares due to the repurchase our own shares. We were negatively impacted by COVID-19 in Q4, particularly in March.
For your reference, this slide provides figures after adjusting foreign exchange and COVID-19 impacts. Excluding these, we achieved 5% increase in revenue and 259% increase in operating profit, so please check. Slide number 6. This slide shows factors which affected full-year consolidated operating profit with a waterfall chart, so for your reference.
Slide number 7, I will provide the details of our efforts to improve SG&A efficiency. When we announced “Transform Olympus” in January 2019, we listed improvement of operating margin as a key task in becoming a truly global medtech company.
As the first step, we set a goal to contain SG&A expenses to the levels of fiscal 2018. We have launched projects for all businesses and functions, picked up themes, and implemented improvement measures one after another. As a result, we are seeing some progress. We reduced R&D expenses by ¥16 billion year-on-year, as our R&D activities proceeded steadily to enable us to capitalize more R&D expenditures. Another reason was that we thoroughly reviewed long-term R&D projects based on profitability. In addition, we reduced sales promotion expenses by ¥5 billion by re-examining our sales promotion activities; T&E expenses by ¥3.9 billion by proactively using web-based meetings and drastically reducing business trips in and outside Japan. All five executive officers including CEO Takeuchi have been closely involved in projects by attending relevant meetings to check the progresses and make quick decisions as needed. We certainly will continue to work towards achieving the goals set in the corporate strategies.
Slide 8. Comparing the results with the forecasts announced back in February. We finished with both revenue and operating profit below the February forecasts. Profit attributable to owners of parent was down 19% compared to the forecasts due to unachieved operating profit and the partial reversal of deferred tax asset. According to our estimates, COVID-19 pushed down revenue and operating profit by approximately ¥13 billion and ¥8 billion, respectively. Missing targets can be explained largely by the impact of COVID-19.
Slide 9. I will go into the details about the results of each segment. Let’s begin with the Endoscopic Solutions Division. Revenue increased 2% to ¥425.7 billion due to overseas, particularly in China and Russia, where a government-led cancer prevention project is underway. Excluding FX impact, full-year revenue was up 5%. In Q4 alone, revenue was flat year-on-year excluding FX impact, despite COVID-19.
The duodenoscope related expenses of ¥10.4 billion that I explained little bit earlier were charged to this division. Operating profit increased 30% to ¥109.4 billion excluding FX impact due to increased revenue, improved SG&A efficiency and decreased one-time expenses, even after posting duodenoscope related expenses in COGS. The operating margin stood at 25.7%.
Moving on to Slide 10, Therapeutic Solutions Division. Revenue amounted to ¥216.1 billion as a result of steady progress in the field of GI-Endotherapy, in which sales of products that meet market needs in each region have been increasing. Growth was 4% excluding FX impact. In Q4 alone, revenue was down, driven by North America and China, where the number of procedures declined due to COVID-19. Operating profit increased 26% to ¥26.2 billion excluding FX impact due to increased revenue and decreased one-time expenses. Operating margin stood at 12.1%.
Slide 11. I will review the performance of Medical business in China. Recently, the Chinese market has continued to show double-digit growth. Particularly in FY2020, growth rate was accelerated to 22%. Growth slowed down in Q4 due to COVID-19, but we are currently seeing signs of recovery. We believe that the Chinese market still has great potential to grow over the medium to long term and its growth trend remains unchanged. We will continue to capture growth opportunities steadily in this market.
Now, Slide 12. Scientific Solutions Division. Revenue amounted to ¥105.2 billion and increased 4% excluding FX impact. In Q4 alone, revenue declined as deliveries were postponed in some areas due to COVID-19. However, full-year revenue grew as biological microscopes performed well in all regions and sales increased including industrial videoscopes and non-destructive testing equipment. Operating profit achieved record-high, which showed a considerable year-on-year increase of 37% to ¥10 billion excluding FX impact due to revenue growth, coupled with efficient SG&A expense control.
Slide 13, the Imaging division. Revenue amounted to ¥43.6 billion and declined 8% excluding the foreign exchange impact. Operating loss was reduced to ¥10.4 billion, an improvement by ¥8.1 billion excluding the foreign exchange impact due to the absence of expenses for the restructuring of manufacturing base recorded in the previous fiscal year, coupled with improved SG&A efficiency. While we saw a solid start of new product “OM-D E-M1 Mark III” introduced in the fourth quarter, operating profitability was not improved as planned due partially to our being unable to perform usual sales promotion activities in the fourth quarter, because of COVID-19 amid a tough competitive environment.
Slide 14, our financial position as of March 31, 2020. Assets and liabilities both increased due to the impact of adopting new lease standards under IFRS. Bonds and loans increased as we issued commercial papers and corporate bonds that coupled with increased operating cash flow, led to an increase in cash balance. Inventories increased by ¥14 billion. This was mainly because sales did not grow as planned due to COVID-19. Total equity stood at ¥372 billion, down from the end of the previous fiscal year, as a result of a share buyback conducted in August 2019. The equity ratio was 36.5%, down 10.8 points from the end of the previous fiscal year.
Slide 15 highlights the status of cash flows. Cash flow from operating activities increased by ¥66.6 billion year-on-year to ¥133.5 billion against the backdrop of steady progress in business, mainly in Medical. Cash flow from investing activities amounted to minus ¥62.4 billion, down by ¥2.1 billion year-on-year due primarily to an increase in capitalized R&D expenses. Free cash flow amounted to ¥71.1 billion. Cash flows from financing activities amounted to minus ¥19.5 billion due to the share buyback and the repayment of loans, while we issued commercial papers and corporate bonds. As a result, cash and cash equivalents at the end of the fiscal year, stood at ¥162.7 billion. Next, the impact of COVID-19 and the schedule of upcoming investor events.
Slide 17, the impact of COVID-19 in the period from January to March. The graph on the left side shows year-on-year revenue comparison of each division with the previous year set at 100%. Revenue kept moving down gradually after February when COVID-19 started spread – started to spread around the world. In March, when the outbreak became a pandemic, revenue fell short of the previous year. The status of each division is shown on the right.
In Medical, the number of procedures declined as academic societies of each country, recommended to postpone or suspend GI endoscopies and surgeries depending on urgency. We also kept hospital visits to a minimum to prevent the spread of infection. As a result, sales promotion activities were restricted. In SSD, deliveries were postponed in some areas. The good news is that we began to see the signs of recovery in electric components and semiconductors in China after March.
In IMD, many stores were closed, and business talks and events were canceled around the world from February, precluding us from carrying out planned sales promotion activities. Although not included here, we donated our own products, such as laryngoscopes and biological microscopes, to support the medical frontline. We will continue to provide support where possible. In April, there were no significant changes in terms of market trend or our activities in each business segment. Revenue in April decreased approximately 10% in ESD, 30% in TSD, 20% in SSD, and 60% in IMD year-on-year. New order intake is on a downward trend year-on-year, due to continued restrictions on sales activities, and the situation is even tougher in May. We will continue to monitor this situation and take flexible measures as needed.
Slide 18 lists our outlook for fiscal 2021. We are currently revising our plans for fiscal 2021 and scheduled to disclose it at another conference. Here, let me share our outlook and assumptions. We assume that the impact of COVID-19 will gradually settle down by the end of second quarter and for China, it could happen three months earlier. We also assume that hospital operations will be gradually normalized and we can resume usual activities in the third quarter, but we expect the full demand recovery to take time in all divisions, particularly in IMD, which deals in consumer products.
Our plans will be based on these assumptions, but considering the possibility of unexpected risks including the second wave of infection, we will update the plans according to the situation. There should be changes in the way we work and customer needs. We will reconsider our businesses and operation models centered on digitalization to fit the coming new normal. For example, we have already started a new marketing initiatives in SSD by using online demonstrations and sales promotions.
Slide 19. Assuming the possibility of the prolonged impact of COVID-19, cash management has become increasingly important to maintain stable business operations. As the first step, we have issued commercial paper additionally amounting to ¥80 billion to secure liquidity. As a result, consolidated cash balance as of the end of April stood at approximately ¥210 billion, an increase of ¥47 billion from the end of March, meaning that we have liquidity on hand equivalent to about three months’ worth of sales.
Moreover, starting from this April, we have implemented the global cash pooling for centralized and efficient cash management within the Olympus Group. This will enable us to quickly supply cash from a region having excess cash to another region having a shortage, thereby establishing more efficient and flexible cash management system in an unexpected situation like now.
Slide 20. Under the current uncertainties, we have implemented the initial and the urgent cost control in April. We froze and reviewed the hiring plan, examined the start timing and priorities of new projects to postpone if needed. We will continue to review costs depending on the situation.
Slide 21. Even though the current situation still precludes us from carrying out business activities as planned, we have successfully launched the strategic product in endoscopic solutions division, which we believe will lead our growth in the future. We released EVIS X1, a next-gen endoscopy system, in Europe and some areas of Asia on April 23rd. The system adopts the new technologies to improve the quality of detecting, diagnosing and treating diseases by endoscope and aims to increase examination efficiency. It is also our first globally unified platform. In our efforts to spur further innovation, we are engaging in the development of next-generation technology incorporating artificial intelligence. With this system and other new technologies, we aim to support endoscopists worldwide and improve the quality of endoscopic diagnosis and treatment. In other regions, we will introduce the system in respective markets as we obtain the approval from the regulatory authorities.
Next, the last slide. Slide 22 shows the schedule of our upcoming investor events. We will hold another session hosted by CEO Takeuchi on June 24th to provide fiscal 2021 forecasts. And as we have announced earlier, we have postponed our General Meeting of shareholders on July 30th. Following the postponement, the record date for voting rights for the meeting and year-end dividend has been changed from March 31st to May 31st. We deeply apologize to our shareholders for the inconvenience and appreciate your understanding regarding this matter.
This concludes my presentation. Thank you for your kind attention. Now we are ready to have Q&A session. If you have a question, this is your opportunity to ask them.
Question-and-Answer Session
Q - Unidentified Analyst
Thank you very much indeed for your presentation and thank you for allowing me to ask questions. Question number one, in Page 17, thank you very much for describing revenue decrease and then impact of COVID-19 Mr. Takeda, you talked about revenue decrease in the month of April 10% and drop in the ESD and 30% drop in TSD. And if possible, March, April, May period for ESD, TSD or if it is more convenient to combine both in the form of the medical in total, would you be able to describe situation by region? That’s my question number one.
Chikashi Takeda
Thank you for that question. Indeed, there is variability among regions. To say in particular that TSD in Americas, that’s the division and region to know which they showed quite noticeable or the big drop year-on-year. And also TSD in Europe maybe the magnitude of the downward trend is not as noticeable as in Americas, but still big enough. Now in that our horizon is still very opaque. I would like to say a little bit about China. I don’t know, I may even venture to say that we are starting to see some incipient signs of recovery or at least to say that in comparison with other regions, the impact there has been a little bit less. I don’t know on the – we should say that it’s a sign of turnaround or not, honestly speaking, I don’t know.
Unidentified Analyst
Okay. That’s enough. Thank you. You said in the TSD in Americas is the hardest hit followed him by TSD in Europe. You even went on to say that China even possibly showing the initial signs of the recovery. But ESD in regions such as in Japan, Europe and Americas, not much difference among these three and also according to the graph and the page, the month of March, 10% down. Would you say that March and April, those two months was basically the same in terms of the overall trend? However, what about expectations for April, May and June? You’re talking about new order taking activities have hadn’t to be halted.
Chikashi Takeda
I would just say that May and beyond, the magnitude of the domain may become more visible. My answer in comparison with TSD for the ESD business, to read a tendency and the trend is a little bit more on the challenging. I’d say that not really relying on their own [indiscernible] calculator. I would say that basically Japan, Americas and Europe more or less the same or the similar situations. In April, in Japan, actually the negative probably stood out more than in other regions.
Unidentified Analyst
Thank you. My second question is about IMD. At the end of December, the inventory was ¥18.6 billion, which of course you quoted on the occasion of last presentation. What was the end March inventory for the Imaging business? And similarly for the period between March through June and be it the industry statistics or listening to your competitors, the April, June period may be as harsh as 60%, 70% or even 80% magnitude of drop.
Now, whatever the percentages and the situation is going to be severe, given your scale of an Imaging business, there is entire control, I wonder whether that you can do enough to observe that impact?
Chikashi Takeda
My answer, March end inventory for the Imaging business was ¥19.3 billion. So that means that that ¥19.3 billion at the end of March was slightly bigger than December. For instance, on the four mirrorless cameras, maybe not much of the movement constant from December, however the compact cameras inventory increase was there. And would you clarify your second question once again for my sake?
Unidentified Analyst
That’s right. Yes. So it seems that on the March 2020, that was a tough year with losses and the new fiscal peer review certainly is likely to be quite severe and given your size of Imaging business and in that you have been making all the efforts already. What extra room for meeting the further savings or the improvements? I wonder what additional room if I may, you have in your Imaging business to observe a severity?
Chikashi Takeda
Thank you. My answer would be that simply put, if we stay with the current operating model or the business model in all regions as we conduct the Imaging business operations, now then sooner or later, we’re going to hit the limit of what we are able to do. And therefore zero based review so-called, where we are going to operate and how those on the possibilities for change would be needed. And unless we do something like that, it will be difficult to break through in the current situation.
Unidentified Analyst
Thank you very much. My last question to you, back in November, you announced your new corporate strategy, and this is the outsider’s view after all. But to accomplish that operating margin 20%, what concrete roadmap or the concrete actions you had in mind, at least back then we could not see from outside. And then came COVID-19 and now you’re postponing the new fiscal year, the plant and its presentation. So March, April through May, at least from the outsider perspectives, April 1 have not come across any major specific actions that the Olympus to put it together, be it as related to HR or the organization.
And I can certainly – they understand that the – because of the new coronavirus, to read the future is becoming way more challenging. Would you say that any improvements that you can make would happen, not in the first half of this fiscal year, but accelerating the two year benefits in the second half of this year?
Chikashi Takeda
Well, my answer – well, thank you very much for the question. To be very honest with you, this is the totally unprecedented situation. We certainly, no one would have expected having the dissoluble situation. So ever since the second half of the month of March, COVID-19 became the preoccupying kind of issue, they saw their all attention had to do first go there. There’s a production efficiency in the plant.
And other specific action plans that we had written down, it had to be slowdown. So of course, there are some differences here and there, but by and large there has been, had a sense of delay. At the same time though, the executive level strategic discussions they have been going over very, very actively, five executive officers through remote accessing means. So we’ve been having meetings so frequently. So I’d say that if and when we come up with some – the substantial or the measures sort of the actions that we are confident to disclose. I’m sure that we’ll make a timely disclosure and you would take note of that and you will listen from us. You’ll hear from us. Thank you very much.
Unidentified Analyst
Thank you.
Unidentified Analyst
Thank you very much for giving me this opportunity to ask questions. I also have three questions. The first question having to do with the impacts from COVID-19, sorry, everyone asks you about that, ESD and TSD business divisions. Recently had procedure or the case procedures, we all acknowledge that but what about the expected speed of recovery? What faster or more modest speed of recovery?
It seems that the TSD is the business area where with the recovery, the case procedures and then the revenue recovery may come faster than in ESD where the hospitals, the income situation, would have to first improve enough and so that hop stores and the hospitals are ready to make capital investments. So I wonder if you have any observation that you can share with us. So this is the so-called post-COVID period.
Chikashi Takeda
Thank you very much for that question. We really have been having difficulty of closing down on the plan, after what the situation is so liquid, it keeps them moving. And on one hand, we are so eager to finalize the new fiscal year business plans. We’ve been gathering data and in the coming months, we are scheduled to have rounds of discussion among executive officers. So I would say that we should be able to draw some sort of scenario which we should be able to hopefully share as we hold the FY2021 focus meeting on June 24.
Unidentified Analyst
I understand the situation. Thank you very much to ask a little bit relating to that. Therefore ESD new model launch in Europe and other parts of Asia. But in the U.S., the previous model is still in the market. So about ESD business, if hospitals on the appetite to protests or to make up investment is slow to come about. And then ultimately, there may even be the risk of an impairment, losses for the inventory of the scopes that you have on your balance sheet.
Chikashi Takeda
Well, my answer is that not for now, we do not have any such expectation or assumption as of now.
Unidentified Analyst
Okay. Understood. Then my second question has to do with SG&A expenses. They have enclosed the year in comparison have the initial plan or the budget, the magnitude of reduction, and it was bigger significantly so. However, on the Q4 alone, the SG&A decrease was ¥6.3 billion year-on-year. At the same time, you said there was ¥6 billion all on the capitalization. And so if we are there to focus on the pure SG&A expense on the portion, we will maybe the hardly any SG&A expense reduction in the January-March quarter. So I wonder whether my reading is correct.
Chikashi Takeda
Okay. Thank you for the question. I’m looking through some data right now as I speak. But for instances, through the third quarter outsourcing expenses were save down cumulatively, but into the final quarter, some rather unexpected regulatory, legal sort of the activities, initiatives became necessary, meaning that additional expenses had to be incurred. So by that merge, which happened unexpectedly in the final quarter, the speed of SG&A efficiency, they had to be slowed down, at least was affected negatively. Now R&D expense capitalization. In the final quarter, yes, the capitalization of R&D expenses was the biggest of all quarters in the year.
So excluding R&D capitalization in the final quarter, G&A expense reduction was hardly any. So you said that there was some sort of one-time expenses. So that would explain that. My answer is yes. So there was unexpected expenses, which came about in the final quarter and they slowed down.
Unidentified Analyst
Okay, accepted. And then my third and the final question, I am looking at Page 8, I think it is. The focus versus the actual, other income and expenses, back in February, you said minus ¥7 billion and the actual was minus ¥11.1 billion, there are some noticeable differences between the two. So what happened outside of your plan so one-off, any lingering effect and going forward?
Chikashi Takeda
Thank you for that question. There’s some points I believe that I can discuss. For instance, duodenoscope related discontinuation, the decision which resulted in the impairment net reduction. And also in Japan R&D, the fixed assets impairment so those would be one-off but at the same time, I’d say as long as we conduct – we carry out business operations. These are the sort of situations that we would come across from time to time. And also Transform Olympus related expenses as you know, we have been relying on the help of experts, the outside consultant. There’s some expense, which actually had to be booked was not included in the February forecast. So that also on the post-op other expenses in actual.
Unidentified Analyst
Okay. Would it be possible for you to quote by how much, for instance, Transform Olympus related. Back in February, I think you said ¥3 billion. So how much more did you have to spend?
Chikashi Takeda
My answer is to describe our situation. We are bound by the contractual obligation with counterparty. So I must refrain if I’m quoting anything specific.
Unidentified Analyst
Okay. Then Page number 6, the details of major other expenses for FY2020, three bullet points. Which one once when they were outside of your plan?
Chikashi Takeda
Well, of the three, the second and the third bullet points and the first one part of that, being outside of the plan.
Unidentified Analyst
Okay. I understand what you’re saying. Thank you very much for that clarification.
Chikashi Takeda
Thank you.
Unidentified Analyst
Thank you. I have three questions. First is on the situation for April. You said that for ESD, the revenue was about 10% down year-on-year, and compared to TSD in other medical equipment business, ESD obviously, saw a decline more moderate maybe; it’s going to get worse in May. But could you give us the reason why the drop the decline was rather moderate in April? Was it because of the type of the endoscopes, the surgical endoscopes are being the rigid scope? I wonder if there is a special reason why the sales decline was more moderate. Could you explain that?
Akihiro Taguchi
This is Taguchi, CTO. I would like to answer your question. For ESD, for April, as mentioned earlier, about 10% down year-on-year, we were able to keep it to that level. This is directly related to the nature of the products under ESD, because we are talking about the capital product. So, basically we are selling based on the inquiries made previously, as was mentioned earlier, most probably for May, we expect further decline, because the activities to secure inquiries had been almost suspended for the last several months. So, we expect the result to be more tough in May.
Fortunately for April, the inquiries secured during the period when the impact of COVID-19 was more moderate benefited. Now, TSD, it’s consumables. So, they are indirect relation to the number of procedures, fewer the procedures, lower the revenue. So, without time lag, the COVID-19 impact was felt.
Unidentified Analyst
I see. Follow-up question, you have the lease contracts as well, so it’s not just the revenue coming from the sale of units, you have other types of businesses as well. Was that the reason for the moderate decline as well repairs, service maintenance, I think that they generate certain revenue as well? Was that the reason – a part of the reason why the level of decline was more moderate? That’s my guess. Am I correct?
Akihiro Taguchi
I think that’s a very good point. What we call the run rate business within ESD, we have the capital sale business plus the lease-based businesses, maintenance contracts, consumables, for example, disinfectants. Sale from all these are included and we have been trying to promote the increase in the proportion of that type of business. And that proportion varies from region to region. But in Japan, for example, they account for 30%, 40%. And that part was not much affected and will not be much affected, I think. But the number of procedures affecting the consumables, that is being felt. The lease contracts part no change. And the proportion of lease contracts and maintenance contracts, again, the proportion varies from region to region. It’s Japan and the U.S. of course, where the lease contract accounts for the largest proportion. In other regions, the proportion is still very low, and increasing that I think would be one way forward.
Unidentified Analyst
I see. Thank you. My second question, your peers, I think I said that for the respiratory endoscopes, for example, that could be used for COVID-19 treatment, maybe, the size of sales, is not that large; but you do have such products. and within ESD, how much does those products account for in terms of sales revenue and during the COVID-19 pandemic, are you enjoying special demand?
Akihiro Taguchi
This is Taguchi speaking again. I will be responding to that question? The respiratory system endoscopy BF/LF series, the airway endoscopes, the revenue accounts for approximately 5% of ESD revenue overall.
Unidentified Analyst
And what is the impact of COVID-19 you asked?
Akihiro Taguchi
As you have correctly indicated? BF more so for LF and MAF, which is the handy type. And so with the monitors for intubation and phlegm suction; for those products, we have significantly increased the production volume. The size of sales are still small, but the production expansion increase is rather significant.
Unidentified Analyst
I see, thank you. My last question. You talked about new normal and the response to new normal in SSD. You talked about the online sales activities. How about in medical ESD and TSD, what are the responses in ESD, and TSD two new normal.
Akihiro Taguchi
Of course, it’s not just SSD in medical business. For example, in Europe already for the last several months, almost no hospital visits or possible and still, we did secure certain sales in Europe. Thanks to online and web-based promotion activities and the business negotiations. those are being done already in the front line. And in addition, the web-based trainings and web-based academic society meetings, we have been participating in this and we have been planning this. We have already started those activities. So, in the post COVID-19 situation, what would the new normal be? We don’t have the answer yet, we have to make further studies into that. But as was mentioned earlier, we have to clearly identify the new normal and transform the business to fit that new normal situation.
Unidentified Analyst
So, what you’re saying is that you have yet to clearly identify and envision the new normal, and you have yet to work out the details of the responses. Am I correct?
Akihiro Taguchi
Yes. One thing we can say for sure is that conventional on patient demonstrations that practice is going to have to change and the alternatives whether online or web-based, those need to be enhanced and strengthened.
Unidentified Analyst
I see. Thank you.
Unidentified Analyst
Thank you. hope you can hear me.
Chikashi Takeda
Yes.
Unidentified Analyst
My first question, it’s been discussed extensively already, but looking at the revenue for ESD for April, down only by 10% year-on-year is astonishing, because JGES, ASGE, and I think it’s the same for European Society as well. Since middle of March, the guidance is not to perform any screening endoscopy and thus that must be hurting the endoscopy area. And I think it’s particularly tough in the U.S. or ASC’s account for about 60% of a screening endoscopy. And since their revenue is going down, means it’s hurting their pocket as well. You talked about these contracts, VPP, CPP, cost per procedure. I think they account for about 25% in the U.S., North America and only about 10% in Japan or Europe. So that alone would not explain why the year-on-year decline was only 10%. So, could you elaborate on that by region? I wouldn’t be surprised frankly, to see the decline of 50% in may or June. So, can you please explain why only 10%, why not 50% and I guess it’s – it will be the question for Taguchi.
Akihiro Taguchi
Thank you. Taguchi speaking. Overall, 10% down in ESD, April revenue, true. U.S. saw a decline – year-on-year decline, but in Europe and China in particular, it was a year-on-year increase in April and Europe, about the same year-on-year if you just look at the results for April and overall down by around 10%. that was for April. So, as you indicated the non-urgent endoscopy like screening endoscopy, all being postponed, it’s not just the U.S., Europe and Japan, all endoscopy societies are issuing such guidance and that is having an impact. But relatively speaking, the decline in procedures are affecting not really the capital product business, but the consumables business that is as far as April is concerned. True. The U.S. suffered the most in April.
If you break down ESD, I think services are included and I think all of the services are included in ESD, not TSD and that part no change and what would remain would be GI endoscopy and surgical endoscopy and a GI endoscopy, maybe no change and maybe, larger impact on the surgical endoscopes, because no surgeries are being performed. Well, if you just look at the U.S., that’s not necessarily the case. GI endoscopes, if you just look at April or since the COVID-19 impact, meaning the fourth quarter included GI endoscopes suffered quite a bit. Of course, surgical endoscopes suffered as well. But it’s not the surgical endoscopes were less affected.
Unidentified Analyst
How about for may, you can’t give us how much decline you expect in may for ESD and TSD.
Chikashi Takeda
this is Takeda speaking. We do have the preliminary results on a management basis, but they are too rough to be shared with you here. But as was mentioned earlier in a nutshell, we expect may to be more tough. That’s all we can say for now.
Unidentified Analyst
I see. Thank you. My second question going forward, when can we expect the screening endoscopy to resume? My very personal assumption is that other medical devices companies in Japan like a catheter or a blood test; maybe, they can expect earlier resumption, whereas in your case, the GI endoscopy, patients will cough when the endoscopes are inserted. And so there is a great risk of infection. So, I’m afraid the upper GI endoscopy would be rather difficult. And I guess it’s the same for the lower GI endoscopy as well. So, I thought it’s going to take maybe three – six months before the procedures would resume. But then you said that it’s really coming back in China. So, where is it that I’m wrong? What are the factors for the resumption? Are the procedures themselves changing?
Chikashi Takeda
you are correct. The COVID-19 infection risk does exist for both the upper and lower GI endoscopy. That risk does exist and it is true for the screening endoscopy. But when you look at China for example, the early cure is the momentum in that country driven by the national project. And that momentum remains I think even under the impact of COVID-19 and that is helping us, but what you are saying is true. So, we’re looking at various possibilities in the area, GI endoscopy for the procedures themselves. PPE, the personal protective equipment, there is a strong request coming from the physicians for better PPEs and we are looking into that.
Unidentified Analyst
I see, thank you. My last question in the interest of time, SG&A expenses went down for the period ended March 2020. How much of that was attributable to the foreign exchange and in the balance sheet, I think the provision increased by about ¥100 billion or ¥10 billion, which business division was involved in that.
Chikashi Takeda
your first question was on the foreign exchange, right?
Unidentified Analyst
Yes. the impact of corn exchange on SG&A.
Chikashi Takeda
Yes. Thank you. The answer is around ¥10 billion and the provision.
Unidentified Analyst
An increase of ¥10 billion in balance sheet. What is it?
Chikashi Takeda
It’s the provision for the TJF buyback operation, exactly that amount.
Unidentified Analyst
TJF what, what is it?
Chikashi Takeda
The duodenoscope. We’re talking about the duodenoscope buyback. I think we talked about that at the last briefing.
Unidentified Analyst
Yes, I got it. Thank you.