Olympus Corp Ord

Hello, everyone. I am Takeda. So first of all, I would like to provide a review of our numbers. And then in the second half of the presentation, Stefan Kaufmann will talk about growth and value creation. So thank you very much for participating in this conference for the financial results for the second quarter fiscal 2024, despite your busy schedule. First, I would like to provide the review of the second quarter results and then talk about a full year forecast for fiscal 2024. And please go to slide three. This will be the highlights. revenue increased 5% on a consolidated basis. The medical business reached a record high for the second quarter and for the first six months of the fiscal year. However, Profit declined in addition to the absence of the 16.4 billion gain on the sales of land in Tokyo according to previous fiscal year. And due to the discontinuation of the manufacturing sales of electronic magnetic navigation systems by Vera Medical Technologies, this is a loss around 49.6 billion yen. and provision of approximately five billion associated with the voluntary recall of small intestine endoscopy system, etc., ESG. Other factors, including expenses, various projects to improve efficiency, as well as personal expenses for future growth and strengthening the operational infrastructure, such as QERA. Expenses related to the US FDA were approximately ¥1 billion under SCNA expenses, and approximately ¥11.9 billion incurred under other expenses. These expenses were mainly comprised of complaint handling, medical device reports, MDRs, and the validation processes and designs, and a redesign to strengthen the quality assurance function for medical devices as required by the FDA and authorities in various countries. We have been engaged in constructive dialogue with the FDA to date and have made steady progress in dealing with the issues indicated in the warning letters. So adjusted operating profit, which excludes other income and expenses, declined 16% with an adjusted operating margin of 15.2%. Regarding total profit, including both continuing and discontinuing operations, we posted a record high of 216.7 billion with EPS of 174 yen due to a gain on the transfer of scientific solutions divisions, according to the first quarter. We have revised our forecast to reflect results up until the end quarter, in addition to changes to forex assumptions from the previous forecast. Revenue will increase 9% year-over-year to 958 billion yen, with adjusted operating profit declining 1% to 174.5 billion. We forecast an adjusted operating margin of 18.2%. We project combined profit for continuing operations and discontinued operations to reach a record high of 289 billion with EPS of 238 yen. Additionally, as announced in the time disclosure today, we have decided on an additional share buyback of 80 billion yen in accordance with the capital allocation policy. In fiscal 2024, we plan a share buyback of 180 billion yen in total. In fiscal 2024, while we expect profit to decline due to various internal and external factors, we will steadily implement measures to address the specific factors that inhibit growth while continuing to implement upfront investments for sustainable growth. Our CEO, Stéphane Gaffin, will talk more about these points later. Going to slide four. I will now explain the consolidated financial results and provide a business review for the second quarter of fiscal 2024. Please go to slide 5. This is an overview of the consolidated financial results. Consolidated revenue amounted to $136.6 billion. The medical business reached a record high for the second quarter, and it was up 5% year over year. All business segments, whether it's DTSD and others, all grew. Asia and Oceania, APAC, which grew in all areas, performed well by business segment, medical service, and GI endotherapy continued strong strength. Gross profit was 288.4 billion yen, with the gross margin deteriorating by 0.4 points. Despite a decrease in procurement in the semiconductor smart market, the ratio worsened due to a provision of approximately 5 billion yen associated with the voluntary recall of small intestine endoscopy systems in ESD. SCNA expenses were $221.6 billion, with the SCNA ratio deteriorating by 3.2 points. Major factors behind this include increasing expenses related to various projects to improve efficiency, as well as rising personal expenses and future growth and strengthening of operational infrastructure, such as in QERA. Adjusted operating profit declined 12.8 billion to 66.6 billion yen, down 16% year-over-year. The adjusted operating margin deteriorated 3.8 points to 15.2%. Regarding other income and expenses, a loss of 62 billion yen was posted, a loss of about 49.6 billion due to discontinuation of manufacturing and sales of electromagnetic navigation systems by Varon Medical Technologies. and FDA-related expenses of about 11.9 billion yen were recorded. In the previous fiscal year, we recorded a gain of 14.6 billion yen, including a gain of approximately 16.3 billion on the sale of land in Tokyo. A loss of 11.5 billion from continuing operations was posted in the meantime. With completion of the transfer discontinued operation evident in April 2023, recorded a gain on the transfer in the first quarter of this fiscal year. Total profit including continuing discontinued operations amounted to 216.7 billion yen with EPS of 174 yen.

Next, I'd like to explain full year forecasts for fiscal 2024 on page 10. Sorry, could you go to page 11? Our full-year forecast for FY24, we have revised our forecast to reflect the results up to Q2 in addition to changes to FX assumption from the previous forecast. The assumed rate now is on the basis of forecast are 145 yen to the dollar and 155 to the euro. We project that the revenue will increase 9% year-on-year to 958 billion with adjusted OP declining 1% to 174.5%. billion with adjusted operating margin of 18.2%. Despite the weekend as a tailwind, we expect challenging results due to various internal external factors. We project a record profit attribute of the owners apparent at over 289 billion with EPS of 238 reflecting gain on the transfer of evident profit from continued operation is expected to reach 61 billion with EPS of 50 yen. Capital expenditure forecasts have been revised to 78 billion yen due to a review of investment items based on the results until Q2 and impact of weaker yen. Dividends of fiscal 24 is planned at 18 yen per share. unchanged from May forecast. In addition, today we announced additional share buyback of up to 80 billion yen. The EPS figures discussed today will reflect this. So we plan a share buyback of 180 billion yen for the full year. Slide 12, moving to forecast by segment. We have revised on the ESDOP forecast from the August announcement considering the delayed tenders due to the anti-corruption campaign in China and the provision for voluntary recall of small intestine endoscope system. EVA-6-1 was launched in North America, our largest market, and China from October 2023, which is expected to drive our future business expansion. We also have also revised down the TSD OP forecast, considering supply delays caused by quality responses and the parts shortages, as well as loss of approximately 49.6 billion yen related to VERA medical technologies posted in Q2. FDA-related expenses include around 9 billion yen in SG&A and 20 billion yen in other expenses for the full year. For elimination on corporate, despite the absence of gain on sale of land in Tokyo of approximately 16.4 billion yen recorded last year, the expected increase in corporate infrastructure reinforcement expenses such as IT related expenses operating result is expected to improve due to revised classification for each project this year. Lastly, discontinued operation will generate a gain on transfer of evidence, resulting in a significant increase in profit year-on-year. Slide 13, please. This slide waterfall chart shows the factors behind change in adjusted operating profit from the previous announcement. As was explained earlier, we have a difficult situation this year due to various factors, such as the lower sales provision associated with the voluntary recall of some products, expenses related to FDA response, and other factors. Because of this, adjusted operating profit is projected at 174.5 billion yen. Please refer to the appendix for the factors behind change in operating profit on the IFR space. Now, this is all for my part, so I would like to hand over to CEO Stefan Kaufmann.

Thank you very much for your explanation, Chikashi. So, hello, everyone. I'm Stefan Kaufmann. Thank you for joining this earnings call. Today, as the President and CEO of Olympus, I would like to share with you my view on our current situation and give you some insight on our actions to sustain growth and value creation for all our stakeholders, mid- and long-term. Our clear priority is the remediation of all issues outlined in the three warning letters and transforming Olympus into a best-in-class medtech company with highest focus on patient safety and quality. We are making significant progress in meeting our FDA commitments and transforming our operational approach to deliver innovative, high-quality products and solutions to the market with enhanced efficiency, paving the way for the future. As already indicated in May, when we shared our three-year strategy with you, Some of our remediation activities have a short-term impact on growth and profitability. Foreign exchange is helping us this fiscal year, but our mid-term ambition level with respect to growth and margin expansion is obviously higher than what we will be able to deliver in this year. Our shareholders' trust is important for us. Our capital allocation policy remains valid and we will this fiscal year and in the future increase value for our shareholders and improve our capital efficiency. Now I would like to provide you with some more details to the respective points mentioned so that you hopefully gain a good understanding of my leadership and direction for Olympus. Our company strategy and comprehend. We have defined three strategic priorities, patient safety and sustainability, innovation for growth, and productivity. We invest and will harvest from four strategic value pools, business and global expansion, strategic M&A, care pathway enhancement, and intelligent endoscopy ecosystem. And all of this we do in three prioritized investment areas, and focus areas, GI, urology, and respiratory. As announced in the company's strategy, we will invest approximately 60 billion yen over the next three years in strengthening QA-RA. These will be invested in both remediation and transformational activities, which cannot be clearly segregated due to the complexity and dependency of the different projects. And we have therefore consolidated remediation and transformation under one holistic program management, which we named Elevate. We believe that Elevate will be one important enabler for innovation, growth, and improved profitability through sustainable benefits such as improved lifecycle management and digitally enabled processes to reduce cost, improve effectiveness, and shorten time to develop, clear, and launch new products. Once more, the remediation of the findings that led to our three warning letters as committed to FDA is the undebatable top priority, but we will at the same time unleash Olympus' full potential. We do not want to miss out on this opportunity for fundamental change. In addition to the QAR efforts I've just described, we are also making investments and implementing initiatives in the three strategic priorities to achieve sustainable growth and value creation over the midterm. And I would like to introduce some of those examples today. As one of our remediation and transformation projects, we have strengthened our capabilities and completely revisited our structure and processes for regulatory approvals. I'm proud that we launched EVIX X1 endoscopy system as promised in the US and even earlier than planned in China. EVIX X1 is now available in all relevant markets worldwide. It will provide the company with stable growth and cash flow. in markets where we launched already a few years ago and from now on also in the US and in China. In China, the effect may delay due to the local anti-corruption efforts. So all in all, we are incredibly excited about this progress as we will be now able to cover the remaining 50% of our sales for further growth potential. In the last months, I had numerous opportunities to talk with healthcare professionals at congresses in Europe and Japan and other occasions. Their feedback is unanimously reassuring and everyone is specifically praising that we have reached the next dimension of visualization. Therefore, please let me highlight some of the specifications that give us again a unique position in the market ahead of competition. The EVSX-1 endoscopy system is our most advanced endoscopy system and introduces several easy-to-use technologies that aim to revolutionize the way gastrointestinal disorders can be detected, characterized, and treated. The imaging advancements include TXI, RDI, MBI, EDOF, and NO8 CADE. The EVSX-1 system, first launched in Europe, has seen immense success and adoption. A recent customer testimonial claimed that the imaging capabilities delivered by the EVIX-X1 platform really improve our capabilities to diagnose lesions and GI cancer at an earlier stage than was ever possible before. The EVIX-X1 provides a combination of diagnostic and therapeutic innovations to streamline and improve endoscopic procedures and scope handling. We are excited to continue to elevate the standard of care with EVIX X1. Sales growth in TSD is more impacted by remediation activities. And unfortunately, we have not yet solved all our supply chain challenges. Nevertheless, the basics are still in place. NGI endotherapy, complementary to our core GI portfolio, We have built a broad and differentiated GI endotherapy portfolio of ESCP, ESD sampling, and homesthesia solutions. Sales in U.S. grew in the first half double-digit, which demonstrates our strong competitiveness in these therapeutic areas. As you are aware, we are in closing discussions with Taewong Medical. Their product portfolio is largely complementary to ours, and we regard their metallic stand portfolio as a significant future growth driver. In respiratory, we lead market position in pulmonary and EVOS bronchoscopes. Now our investments in single-use airway management scopes in the slim EVOS scope, which are under development, are expected to re-evigorate the growth in this segment. In urology, for the upper urological tract, Olympus was the first company to launch the newest volume fiber lasers for lithotripsy. And we command the top market share in this category for both the laser systems as well as the consumable fibers. Competition has increased in this segment, and we are currently revisiting our go-to-market strategy for the U.S. In the lower urological tract, we have a similarly compelling and market-leading portfolio of solutions for the treatment of bladder cancer and BPH. We expect to see significant growth from the Plasma Plus technology system and more good news to come on the following page. Today, I'm delighted to introduce iTint, which we expect to be a mid- to long-term growth driver for audiology. iTint is a minimally invasive treatment device that contributes to early improvement of symptoms of BPH. It does not require cutting or heating of prostate tissue, does not require permanent device implementation and contributes to avoiding complications associated with other treatments. For patients, it is also a great way to maintain sexual and urinary function and recuperate at home as it does not require an uncomfortable catheter and can be inserted with a simple procedure without hospitalization. For ITINT on October 20th, 2023, The American Medical Association, CPT Committee, published its decision to establish two Category 1 CPD codes, a reimbursement code for clinics, which is expected to go into effect in January 25. Although we have already obtained reimbursement in hospital, outpatient, and ambulatory surgical center, iTINT is in high demand in the clinic or office setting due to its minimally invasive device and day treatment capability. and more patients and physicians will have access to the novel ITIN procedure. The U.S., where the CPD code applies, accounts for approximately 40% of BPH patients worldwide, and ITIN is expected to drive future growth in the urology field. Next, we will discuss our efforts to improve productivity. Since this fiscal year, we are not a conglomerate of different businesses anymore, but a pure MedTech player. Now we have the opportunity to create an operating model that puts the divisions on top of the organization with the full accountability for the global P&L and verticalize all supporting functions with an aligned set of targets and KPIs and clarity about accountability. We have already allocated targets for productivity improvements in fiscal year 25 and will in addition take a more structured approach next year to baseline the global organization, clarify value contribution and benchmark with industry peers to seek for further simplification and higher efficiency of our organization. Regarding capital allocation, the policy of investing into innovation into business and M&A remains unchanged, with business investments as the top priority. In terms of M&A, we will continue to strengthen our product portfolio through tuck-in M&A opportunities that complement and enhance our existing business and fit our portfolio in focused disease areas in GI, urology, and respiratory. As in the past, we aim to increase dividends to shareholders in a stable and gradual manner, And we'll consider share buyback when there are surplus funds available, after securing sufficient liquidity on hand for working capital and investments. We announced today that we decided on an additional share buyback of 80 billion yen. The total share buyback for fiscal year 24 is expected to be 180 billion yen. The total shareholder return ratio for fiscal year 24, including an annual dividend forecast of 18 yen per share, is expected to be 69.5%. We will proactively continue to consider share buyback in accordance with our capital allocation policy for fiscal year 25 and 26. We are committed to allocating our capital with a view to improve the capital efficiency of Olympus and optimize returns to our shareholders. This is the last slide of my presentation. As we are holding the Q2 earnings call today, it is not the right time to update our midterm target until fiscal year 26. Nevertheless, I would like to give you today at least an indication of how I expect our financial KPIs will develop in the next two years and beyond. We are facing temporary headwinds on our top line caused by our quality remediation efforts, macro political and macro economical factors, and some supply chain shortages. But we take actions to mitigate those headwinds and defend shareholder value because we believe we have a great business and the right strategy in place. In fiscal year 25, our remediation will not be finalized. I also don't expect that the macro-political and macro-economical headwinds we experienced this fiscal year will go away quickly. It's too early to say, but while I believe sales growth will be higher than this year, I don't expect a V-shaped recovery. Our EPS target is including the 1000 AUKUS share buyback, but not the one announced today. Also, foreign exchange effects are not included. So we aim to achieve an EPS growth well above the target of 8%, as we will proactively continue to consider share buyback in fiscal year 25 and fiscal year 26, in addition to the share buyback of 180 billion yen in total in fiscal year 24. Part of being a leading global meta company is having industry-leading capital efficiency, so we have room to improve our capital efficiencies. We have started already our productivity measures, but some of them will take time to fully positively impact SG&A and bottom line in fiscal year 26. With all this said, in fiscal year 26, I expect us to achieve our mid-single sales growth target and adjusted operating margin and finally meet our target of 20%. After fiscal year 26, I expect Olympus to be set up for steady margin expansion above 20% by higher sales growth on a more efficient global operating model. The three takeaways of my presentation are as follows. Number one, remediation and transformation is progressing successfully, but it's not a walk in the park. It hampers growth and profitability this year, and also it will hamper growth and profitability in fiscal year 25. Second, our business, our strategy, our business model, our technology, our customer relationship are robust, and they secure sustainable growth and value creation for all stakeholders in the future, also in challenging times. And last but not least, fiscal year 26, we will be back on track for higher sales growth and margin expansion above 20%. Thank you for your trust and your support. And this finalizes my presentation. And now we're looking forward to receiving your questions.

I'd like to go to the Q&A session. So what I want to ask most is that your performance has deteriorated, putting aside the Varan situation. So this fiscal year, I think the situation is tough. I understand that. But whether you're going to recover next fiscal year, I would like to make a discussion about that point. Well, in summary, the anti-corruption in China is going to push down your sales and the I don't remember whether it be TSD or ESD. There has been a decline in investment in Europe. And then I think for urology, I think basically there has been some short supply in terms of components. I think this has been the three major impacts on the actual demand. So going forward, next year, is it actually going to recover? I would like to hear your thoughts about that. Specifically, in terms of the decrease in investment in Europe, the U.S. companies have not mentioned about this much. I specifically want to take a deep dive about the situation in Europe.

Thanks a lot for your questions. And then I would give you an answer from my perspective and then hand over to Nacho to supplement. So, actually, what we see from our perspective is that the situation fiscal year 24 compared to what we expect in fiscal year 25 is from a macro political and macro economical environment will not change significantly. So when you look at the situation in Europe, we are affected obviously by the sanctions against Russia, which has an impact on our top line significantly. When you look at Germany, there's at the moment a reform of the hospital system, of the healthcare system, that prevents hospitals to purchase capital goods. And also the positive effect we had from the investments of NHS basically will not positively anymore impact our sales growth in UK. Then when you look at China, we believe that the anti-corruption campaign in China is has not shown so much impact year-to-date on our results, but we do expect that this will have an impact on the second half of fiscal year 24, and some of the impacts might also carry forward into the first quarter of the next year. So this is the macroeconomical environment. And then on an internal perspective, Basically, as you have seen in fiscal year 24, we have seen a couple of ship holds and a couple of recalls in relation to our remediation and transformation activities and QARA. As I said in my closing remarks, we still need one more year to finalize our remediation and transformation activities to be back to very normal operations. And I think this is the reason why I'm for fiscal year 24 without already committing final numbers, why I'm careful to create too much optimism that we have a V-shaped recovery. I'm sure we will do better than this year, but to catch up with the 5% CAGR, I don't think this will be realistic and feasible in the next year. Nacho, over to you to supplement and complement it.

Thank you, Stephan, and thank you for the question. Just to complement what Stephan said, I think that you mentioned that from an American company, I would say Limbus is a much more diversified company in terms of geographic state than most of our American companies. That provides, obviously, a larger opportunity in many occasions, but also provides higher exposure in markets like Europe or China, where our penetration has been significant over years. And the way of the business that we do there is very relevant in our total sales. So I think that from an external point of view, we see definitely a situation in Europe or in China that is early to say if it's going to improve. I personally believe that the European environment is going to continue being tough in terms of investments. I think the pressure, the inflationary pressures is putting a lot of pressure in hospital systems and we were enjoying over the last years the massive investment on NHS in the UK specifically and specifically in endoscopy where they clearly overhauled the entire almost the entire country in terms of endoscopy rooms and that forever. And obviously the German healthcare reform will have an impact as well. So I think from that point of view, the situation will continue to recommend caution on our expectations there. From an internal point of view, as Stefan just mentioned, I mean, we are just in the process of elevating through the elevate process our quality situation. And that means much more scrutiny in every single signal that we have from the market that any product can be potentially creating an issue with patients. And this is provoking a number of logistical situations. In the moment, we detect any signal of any kind. I mean, we really pause, we really look at the situation and figure out what is the best course of action. But that sometimes means that we have to... to stop the supply of products for a while, and that's provoking some logistical challenges. Obviously, this is in the process to be improved, but as Stefan just said, I mean, we still believe that some of it is going to continue in fiscal year 25. So definitely, I totally agree with Stefan that fiscal year 25 will be better, but not yet at the level that we would like to recover from fiscal year 26 and beyond. Thank you.

Yeah, so we understand now, finally. Thank you. I guess it looks like 25 is still going to be a bit challenging. I think the challenges will remain. Just my follow-up question, I guess I'm trying to understand why Europe here, because it doesn't really sound like all the other companies have talked about Europe. Is it something specific to endoscopy, or is this just weakness in general from the hospital environment? This is my final question.

The two single impacts that are specifically to endoscopy, specifically, I would say more specifically to Olympus, are the largest investments that the NHS was doing over the last three years. And in literally reform, I mean, a lot of investment in general, but specific investment in endoscopy in the country. And our exposure in Russia, I mean, our presence in Russia was very relevant before the war. And this has been deteriorated. This would be the unique situation for Olympus. Generally speaking, the health care reform in Germany, I mean, I think it's going to have an impact in the entire industry. It's slowing down. Digital investments, as we are seeing, and we are seeing this not only for Olympus. What is the impact on other companies, I cannot say, but definitely it's not only for Olympus. But Russia and the UK are the single factors that I believe are impacting more us than others.

I have a question. for TSD. Maybe you may have touched upon this, but on slide 36, supply chain QA and supply shortage 90 billion or 9 to 10 billion is recognized. Do you have any numbers specifically for the first half? What is the current situation for this problem? Especially for urology, in Q2 the numbers were very weak, as I understand. So is this problem still going on? I thought that the numbers are very weak compared with Boston, your competitor, your number was so weak. So that makes me worry. It's not maybe because of supply chain, but because of the competitive dynamics, you are getting weaker. That's my concern. But could you deny that if that's not the case? If there is a continuous problem still, do you have any sign of improvement or do you have any idea for the end of the problem?

Like with the first question, I would start and then ask Nacho to supplement and to complement. So the back order situation in TSD has two factors. One factor is related to supply shortages. The other factor is related to ship holds. And there were a couple of ship holds we had to introduce in the first six months of fiscal year 24. In total, the backorder situation in TSD is stable. So we are on a backorder level of around 40 OCU, which is high, too high. So we take further efforts to reduce. And the sales development in TSD is Indeed, it differentiates from category to category. As I mentioned, in GIET, we see remarkable growth. As I mentioned, in the U.S., we grew double-digit in the first half of the year. Specifically, the area of urology was touched by some of the ship holds, the plasma. and also SOLTIF. And as I mentioned in my presentation for SOLTIF, the competitive environment has increased and we are revisiting at the moment our go-to-market strategy. But all in all, the outlook for GIET, for urology and respiratory is that we are on a very stable foundation with a strong market position and we believe that our products are competitive. and natural over to you.

Thank you, Stefan. Just to complement this, I think that there is a different aspect that has impact in our TSD business. But as Stefan would say, I think that we have out of the three focus areas in TSD, Clearly, we have a quite stable situation, growing market share, specifically in the U.S. in our endotherapy business, which is the business which is growing this year. But we've been suffering specifically in neurology and for two very, very clear reasons, right? So we were the first one that we launched the Tulium technology, the Tulium laser technology into the market, and we enjoyed it for a while. of a unique position that we were the only one. But we knew and it was very clear that our competitors will come with that technology. And because of that, we have been investing into improvements of the products. This is the year where most of the competition is coming. And obviously you see that. And on top, we have had some supply issues where we have to pause for some time to push the supply chain. And obviously this is a run rate business, right? So I think when you don't have supply, the customers cannot wait. And they need to go somewhere else and find those products because the procedures cannot stop. So I think this is having an impact, but it's a temporary impact that will be recovered in both runs. One, we are working on new products and new solutions that will be added to the current Julian Lesser platform that we'll make again ahead of the competition. And with supply chain topics, we expect them to improve. to be improved over time and to recover the stable supply. So, again, I think that the results this year on TSD, they are definitely not the ones we like to see, but I think we understand the reasons and we are confident that this will be recovered as soon as we can recover a stable supply chain. And competition is always going to be there, but we will continue bringing solutions to the market that will keep us ahead of competition. Thank you for your question.

Thank you. Sorry, I have an additional question regarding your plan for therapeutic equipment. this year's sales projection is flat. So for this fiscal year, the supply chain issue is not likely to be solved for this year, especially for QA. In the first half, do you have a number in terms of the impact from the supply chain for the first half for this year?

I think Stefan already mentioned that our level of backorder is significantly high. It's four times high than it should be at this point. And this is pretty much about what we feel that we are missing at this point. This is around 40 oq yen. It is very difficult to predict at this point what is happening with the supply chain for the reasons that I mentioned before, right? So we are... acting very diligently following our new quality direction and being scrutinized in any single signal that we identify from our products in the market. And this is a process that will be improved over time, and we will be able to accelerate that process and not and not generating logistical delays because of that. But at this point, it still is happening. And I think that it's very difficult to predict what is going to happen in the next month. I think to expect a sharp recovery, it's not realistic. I think that this is going to be a smooth recovery over the next months, and hopefully during fiscal year 25, we can get to a stable situation during the year, and then from there, we can go with the supply limitations. Thank you for your question.

Thank you very much. So I have one question. If possible, please answer. So in terms of the re-auditing, re-inspections of the FDA to release you from these warning letters, the timing of the investigations of the FDA, so maybe one year it will be difficult. It will be not in the calendar year 24. We should assume that it's going to happen in the calendar year 25.

I'm not sure if I understood your question correctly. Is your question when we have finalized our remediation and the warning letters will be lifted or what is the direction of your question?

Yes, that was the meaning of my question.

So obviously we cannot make any statement about when warning letters will be lifted or not. This is completely up to the discretion of FDA. The only thing I can tell you is that we are making good progress towards the commitments we have made, and we are in steady and constructive communication of different levels with our partners in Washington. So from my point of view, we are making good progress. But to make an estimate when a warning letter will be lifted, that's merely impossible to do. Again, this is also not within our influence and discretion.

On page 15 of the material, once again for the industry, you are trying to reform yourself into the best medtech company in the industry. So after the new president came in, 18 months, business environment changing from where you are. So make the company with the highest standard in the industry in order to become a company like this. What is missing still? QARA is a necessary condition. It's not a sufficient condition. In your material, stock buyback is going to be considered for next year and the year after that. So in that sense, maybe M&A? So maybe not M&A because of this timing, but for you to become the best level global metric company, what is still missing? You have these initiatives listed, but these are the initiatives that you have been always talking about. But what is the really fundamental issues that you still have to tackle in order to become one?

So from my point of view, obviously, there is no universal definition of what a best-in-class meta company is. I think there are a couple of boxes we still have to tick in order to call ourselves best-in-class. And obviously, to be a company that in all aspects, aspects puts patient safety and quality first is certainly one of the boxes where we have still room. The other part I believe is related to the financial performance with respect to growth, but also with respect to margin expansion and capital efficiency. Also there, I believe our company in the next two or three years has room to improve. And last but not least, what is a very important criteria for me is innovation, both organic innovation and inorganic innovation. And I think in that area, both in M&A but also bringing new products to the markets, I think Olympus still has room to become faster to bring more new products into the hands of our customers. So this would be the criteria I would take to call ourselves a best-in-class meta company.

Thank you very much. I have one related question. So to raise your bar for the global Meditech, maybe there are things that you didn't look at, including surgical endoscope in the last several years. Probably you will review the portfolio going forward. And also for M&A, like Varon's case, relatively you bought these companies with high expectations but actually other than ARC Medical other companies were small in size and the sales contributions were small so the M&A efforts in terms of pricing the company put and the efforts post-marger. I hope that the company will have more active discussions. So I have a question about the portfolio review and the M&A strategy review. Are there any discussions going on in terms of changing the course of M&A strategy and the portfolio review?

So, thank you for the question. So, first, in relation to portfolio, obviously, we are reviewing our portfolio on a constant base. You know that we have defined GI, urology, and respiratory as our focus areas where we do resource allocation and investments with a higher priority. Currently, we do not foresee portfolio changes, but as I said before, we are reviewing our portfolio on a regular basis and see if we can create more value by shifting our portfolio in a different direction. With respect to M&A, also there, our strategy has not changed. So basically, we are not seeking for large M&A targets. We are seeking for tuck-in deals that complement our portfolio, specifically in the area of GI, respiratory, and urology. And to also reflect on your comment about Varon, Obviously, our business development function is a new function. Olympus has not done M&A for a very long period of time. We started to build up the function three, four years ago. And referring also to best in class, we are going through a learning curve. And I believe that our capability in M&A has significantly improved over the last couple of years.

So my question is about the QARA cost outlook, including the initiative towards FDA. When we look back, including this year, let's say three years, so you're talking about spending 60 billion yen for this remediation, and 22 billion for this fiscal year is going to be spent for these QARA-related costs. In terms of SDNA, This will be about the 78 billion. The remaining will be under other expenses. That will be about 15 billion. That is my image that I have in terms of the spending. In the first half, in the other expenses, 11.9 billion is already incurred. Is it in line with expectations or is that are you spending more than you have expected in your cost? This is my question. Okay. So I would like to ask Takeda-san, CFO, to respond to this.

I would take again the first part of your question and then hand over to Takeda-san. So first of all, obviously when we did the multi-year plan for fiscal year 24 to 26, We were at a very early stage with respect to planning our remediation and our transformation activities. So the 600 OCU at that time has been a qualified guess. Now we are much more advanced. So we have a very concrete plan what we want to do over the next three years. And I can confirm the number to you. We are still in the area of 600 OCU. So not much has changed. When you look at the cost, what I find difficult is the differentiation between what is remediation and what is transformation. Because as I try to outline in my presentation, we want to use this as an opportunity for us to excel our capabilities. So in many areas where we remediate at the same time, we also transform to a higher standard. And just one example I also use in the presentation is that some of the findings in the warning letters are related to our capability in process validation and maintaining our device history records so what we do as a company is now that we invest and that's part of the 600 orku into digitalizing our devices review records and we are striving also for a higher level of optimization in our processes and manufacturing So to differentiate what is remediation, what is transformation, it's not so easy, and that's the reason why we brought both programs together. And then my last point, and then I hand over to Trikashi, is the rule of thumb still is that two-thirds of the costs are related to SG&A 4, while one-third of the costs are related to SG&A 3 or COGS. Trikashi, please.

So then let me answer more specifically to your question First of all In the previous meeting, we talked about 22 billion in total that we're going to spend for this program. So this time around, including what we have already conducted, we are going to change our outlook. It will be between 22 to 29 billion, and there is about a 1.5 billion impact of Forex. Well, that will be in the most latest outlook. If you go in the breakdown, So in terms of the increment, it's both will be equally for the SEA and other expense. Both will increase in the equal manner. So it's going to be 150 oku, it's going to be 200 oku, that's for the other expense. So the SEA is about, you said 70 oku, it's going to be 90 oku. It's going to increase in this manner. So Stefan has talked about it's difficult, talked about remediation and transformation, but with the other expenses of remediation and in terms of FDA, it's not specifically for FDA initiatives. It's more for the transformation. That's for his DNA. In terms of the increment, Specifically, in the first half, the four framework for the mediation, the four work streams, that is, So from the complaint handling to MDR, the cost has gone up. The complaint handling and MDR, that has increased. But basically, because we made good progress, it has increased. That's the reason that we're giving. Have I answered your question? So if that is the case, in the three years, 600-oku target, Is it going to be reviewed upwards? I think I feel that way. So what is your response to my feeling? Well, first of all, the 600 oku, the definition of the 600 oku, this is the same forex level. If the forex assumption changes, it will go up. And maybe it's in detail, but it says, We have it saying that a little over 600 oku. So I think there is a certain range that we're talking about. I hope that you understand that. But anyway, basically what we have announced in May, what we have said in May, we are thinking that we want to go forward within this range. So 150 oku, other expenses, it's going to, has been revised to 200 oku. This increment cannot be explained only by the weaker yen. So can you explain why this has increased? Yes, there's some factors that go up and go down, but in the first step, the complaint handling, and there is a process that connects the complaint handling to MDR. the contractor costs or the professional expenses or the system integration costs. That will be the major element of this difference. Understood. Thank you very much. That's all from me.

Sorry for exceeding the scheduled time. Regarding the eliminations, your plan was to reduce 5.5 billion. So the total is 46.5 billion. Normally, is this going to be the normalized base going forward or for corporate eliminations? after FDA for three years, this is going to be less after three years, or is it going to be more after the FDA response in the next three years? Well, internally, 55 is the allocation internal allocation. In that sense, we have set the normal base. Basically, the corporate elimination standard would be around this, so this would be a normal level. Just for information, FDA response is not included at all in this amount. Understood. Thank you very much. That's all my questions.