Olympus Corp Ord

Hello, everyone. I'm Stefan Kaufmann, CEO of Olympus Corporation. And as you could hear at the beginning, my Japanese has not significantly improved over the last 12 months. Sorry for this. I would like to thank you all for participating in this conference despite your busy schedules. First of all, I would like to express my deepest condolences to the victims of the Noto Peninsula earthquake, their families and everyone involved, and my heartfelt sympathies to everyone affected by the disaster. No employees of the Olympus Group were seriously affected by the earthquake. Also, the Kanazawa and Niigata branch offices of Olympus Group have not sustained any particular damage, and there are no manufacturing facilities of Olympus Group in this region. You certainly have seen our two timely disclosures from last Friday and this afternoon, and I would like to give you now more background information. I'm sure that you may have more questions in the Q&A part of the earnings call, which I will then, together with my colleagues, try to answer, hopefully to your satisfaction. Olympus Group procures endoscope parts from a supplier located in Ishikawa Prefecture. The earthquake has impacted and damaged the factory of this supplier. The production of the supplier is stopped at this moment and the timing for resumption of operations has not yet been determined. We are in very close contact with the supplier and actively support him and his employees to resume production as quickly as possible. We are also working closely with the second supplier who manufactures the same component to increase production volume as quickly as possible. However, out of an abundance of caution, we decided to slow down the sales of new endoscopes in order to ensure the continuity of patient care, and safeguard healthcare supplies for service and repair, either by keeping spare parts on stock or utilizing new endoscopes to increase our loaner pool. The likely impact of the earthquake on fiscal year 2024 result is estimated to include shortfalls of revenue of approximately 24 billion yen, and the impact on our business performance for fiscal year 2025 is still being confirmed. It is very important to understand that this forecast is based on a scenario for slow recovery of production. Further, not all our scopes are affected by the supply shortage. For example, scopes within TSD like bronchoscopes and surgical scopes will be manufactured and delivered to our customers without any timely delay. Finally, based on the current information available to us, We are confident that the loss of sales occurring in this last quarter will shift to the first quarter of fiscal year 2025 and the months commencing. Next, I would like to talk about the change of executive officers from fiscal year 2025 onwards. Starting from April, we will welcome three new executive officers and Gabriela Kehner, who has been serving as TSD head to date, will assume the post of Chief Strategy Officer. Nacho Arbea, to our regret, has decided to accept an offer from a public-listed pharmaceutical company based in Barcelona and leave Olympus after 23 years of service for the company. I would like to congratulate him to his new role as CEO. Now I would like to briefly describe three new appointments. Tatsuya Isumi, Boris Solnyk and Seiji Kuramoto. First, I'm excited to introduce Izumi-san, who will be newly appointed as Chief Financial Officer. With his track record in different finance roles of Itochu Corporation and its group companies, we expect him to contribute to further strengthening governance in finance and improving efficiency and profitability of Lumpus. Jikashi Takeda decided for personal reason to resign. Boris will be newly appointed as Chief Quality Officer. We are currently executing our comprehensive quality transformation program Elevate, and he has been leading Elevate's ongoing efforts, providing strong leadership and fostering a culture of patient safety with his expertise in quality management. Meanwhile, Pierre Bossier, who currently serves as Chief Quality Officer, will continue in fiscal year 25 for a defined period of time as quality executive advisor reporting directly to me. By enhancing our quality management capabilities and strengthening our patient safety focus and product quality culture through Elevate, we will build a solid foundation for the prosperity of the quality assurance and regulatory affairs function, which are key capabilities in a global meta-company. Finally, Seiji Kuramoto, who currently serves as co-head of TSD, has extensive experience in research and development, sales, and marketing in the medical business, along with achievements in forging innovative collaborations with our business partners, including Sony. He will be appointed to executive officer while continuing to serve as co-head of TSD and will further accelerate the growth of the therapeutic solutions business. CG will be supported by the new co-head of TSD, Gabe McHugh, who is based in Boston and has reported directly to Gabriela before. I'm happy to say that we have a very robust talent pipeline in our company, and we will continue to strengthen our corporate values and focus on long-term sustainable growth under the new leadership team. As you are aware, our most important priority is patient safety. The remediation of the findings that resulted into our three warning letters and the transformation of the entire company towards a company with the highest level of patient safety focus and a quality first mindset. I'm happy to report that our remediation efforts are well underway and our relationship with our regulators are constructive and reassuring. We expect The expenses related to Elevate to be approximately 30 billion yen, SG&A expenses of approximately 7 billion yen and other expenses of approximately 23 billion yen in fiscal year 24. But these expenses are expected to decrease after this fiscal year. Culture plays a pivotal part in any transformation. And on January 31st, 2024, our new core values of patient focus, integrity, innovation, impact, and empathy were introduced to our employees. Olympus established its first set of core values in 2018, and our core values have served us well until now. However, since then, Olympus has transformed into a medtech company. Our core values were reviewed not only to address the culture of true patient safety focus and customer centricity, but also to align with the expectation of quality and innovation from all stakeholders of the evolving medtech industry landscape. Our core business remains robust and grows steadily, specifically in the area of GI diseases. But unfortunately, we continue to face some temporary headwinds which negatively impact the overall growth story. The suspension of shipments of some products in addition to the impact of purchasers' decision to delay tenders as they manage the effects of the anti-corruption campaign in China and other regionally located headwinds are a few examples of this and the Noto earthquake now comes as an additional growth obstacle to us. However, excluding China, we achieved solid 4% growth after exchange adjustment in the third quarter October to December. In North America, where our new EVX-X1 was successfully launched, sales performance has been strong from the beginning and order intake is high. Also, our GI endotherapy business grows double-digit in North America. Finally, we also continue to actively pursue M&A opportunities and partnerships with other companies to further maintain our sustainable future growth. Specific examples include the acquisition of Tevong Medical, a manufacturer of metallic stands for GI, a business alliance with Sony in the field of GI and respiratory endoscopes, and an agreement to collaborate with Canon Medical Systems on ultrasound endoscopy systems. Today, I would like to focus on the gastroenterology area in North America, our growth driver. First, let me start with GI endoscopy. In October 23, we launched X1 GI endoscopy system in the U.S. In the U.S., EVIX X1 received 510K clearance from FDA at the end of April and has been exhibited and demonstrated at several academic conferences since DDW. In our last earnings call, I outlined that X1 has been very received by endoscopists globally. And after the launch in the U.S., we see this confirmed by our sales numbers. EV61 has been performing very well in the U.S., with 9% growth in the third quarter since its launch. The latest order situation is also favorable, and we would expect growth over 30% in the fourth quarter, putting the supply chain shortage aside. As you are aware, the North American market accounts for about 35% of all total sales in the GI endoscopy segment. Next, I would like to talk briefly about our GI endotherapy devices. North America accounts for about 25% of our total sales in this segment and has been growing at a double-digit year-on-year rate for six consecutive quarters since the second quarter of the fiscal 23. And sales in the first nine months of this fiscal year also grew by 15% and continue to grow strongly. Growth is particularly strong in three core clinical areas. Colorectal cancer detection, e.g. endocuff vision, collateral cancer treatment, product lines for ESD and EMR, hepatopancreatic biliary, HPP diseases, e.g. stone retrieval baskets, stone extraction balloons, hemostasis powder. We will continue to invest in this portfolio to expand our business. We are also very pleased to highlight the recent completion of our acquisition of Taewong Medical. This acquisition opens new segments, enhances our care pathway strategy, and provides additional synergies for Olympus, which we believe will help us grow our entire GI portfolio. Let me explain. As many of you already know, the success with our GI endoscopes has created a complementary growth engine through our GI endotherapy business. One place where GI endotherapy has done very well is in the treatment of HBP. HPP diseases are a $1 billion plus opportunity for Olympus and a segment where we have a leading position. Our success in HPP resides from our broad portfolio of GI endoscopes where we have a strong market presence and from the frequent innovations that Olympus has made with access and treatment devices such as guide wires. Metal stands and radio frequency ablation solutions are a great addition to our portfolio as they are very important for HPP procedures and their use is growing rapidly beyond HPP as well. These new solutions open up new geographic areas globally, such as China and Japan, as well as additional procedures, such as endoscopic soft tissue ablation, which Olympus could not address before. Bringing metal stand technology in-house and having access to radiofrequency ablation catheters will both open up new segments for us to address and create greater product pull-through for our leading HBP portfolio. Now, I would like to pass on to CFO Chikashi Takeda.

Thank you, Stefan. So, once again, hello, everyone. I'm Chikashi Takeda, CFO. Using several slides, I'd like to go over the financial results for the third quarter as well as the four-year forecast. Slide 11. This is the overview of our consolidated financial results. Consolidated revenue amounted to $675.7 billion. The medical business reached a record high for the third quarter and for the first nine months, a 5% growth. For all areas, we saw an increase in revenue. By region, all region except for China grew on the backdrop of favorable foreign exchange by business segment, medical services, and GI endotherapy continued strength. Gross profit was $400. $51.4 billion with gross margin deteriorating 0.8 points due to a provision of approximately $5 billion associated with a voluntary recall of the small intestine endoscopy system and others in ESD. SG&A expenses were $340.9 billion with SG&A ratio deteriorating by 2.7 points. Major factors include include an increase in expenses related to remediation and quality transformation program Elevate, and expenses for improving efficiency and strengthening of operational infrastructure for innovation and sustainable growth. Adjusted operating profit declined 18 billion yen to 110.2 billion, down 14% year-on-year. The adjusted operating margin deteriorated by 3.7 points to 16.3%. Other income and expenses, a loss of $71.5 billion, a loss of about $50.8 billion due to the discontinuation of manufacturing and sales of electromagnetic navigation systems by Varon Medical, and expenses of about $17 billion related to the Remediation and Quality Transformation Program, Elevate. In the previous fiscal year, we recorded a gain of 14.9 billion, including a gain of approximately 16.4 billion on the sale of a land in Tokyo. Profit was 7.5 billion from continuing operation. In the meantime, with the completion of the transfer of evidence in April, we recorded a gain on the transfer in the first quarter of this fiscal year. Total profit including both continuing and discontinued operations amounted to 235.2 billion with EPS of 192 yen.

Next, I would like to explain a full-year forecast of fiscal 2024 utilizing page 17. So we have revised the forecast to reflect results up until the third quarter in addition to changes to Forex assumptions from the previous forecast. In addition, revisions have been made to incorporate what we believe will be the impact of the Dodo Peninsula earthquake, which amounted to approximately 24 billion yen in sales. The assumed exchange rates out of the basis for forecasts are 143 yen to the U.S. dollar and 156 yen to the euro. We project that revenue will increase 5% year-over-year to 924 billion, with adjusted operating profit declining 18% year-over-year to 145 billion yen, with adjusted operating margin of 15.7%. We project the record profit attributable to owners or parents of 252 billion yen, with EPS of 208 yen, reflecting a gain on the transfer of evidence. Also, profit from continuing operations is expected to reach 24 billion yen with EPS of 20 yen. Regarding dividends for fiscal 2024, we plan to issue a dividend of 18 yen per share unchanged from the forecast announced in May. Going to slide 18. This is the forecast by segment. In ESG, both revenue and operating profit have been raised down, mainly due to the impact of the notorious earthquake, suspension of shipments of some products in surgical endoscopy, and the impact of Patricia's decision to delay tenders as they manage the effects of the anti-corruption campaign in China. In TSD, we also have revised down both revenue and operating profit due to the impact of the market environment in China and the North Peninsula earthquake, in addition to supply delays due to the quality issues and part shortages. Expenses related to the remediation and quality transformation program elevated are estimated to be approximately 7 billion yen in SDN expenses and approximately 23 billion yen in other expenses for the full year. Yes, actually we have another slide. This is the last slide. This slide shows the factors behind the increase or decrease in adjusted operating profit compared to the previous forecast. This is a waterboard chart. As already explained, we continue to face a challenging situation this fiscal year due to various factors. In addition to a decline in sales, adjusted operating profit is expected to be 145 billion yen due to the impact of the suspension of shipments of some products, a change in sales composition by region due to sales decline in China, and a change in the product mix due to the Norto Peninsula earthquake. So in terms of the operating income workforce chart, please refer to the appendix under IFRS, page 27. So please refer to that page. Thank you very much. That is all for me.

We will now move to Q&A session. So I'd like to ask about the momentum of your operating results from this fiscal year to next fiscal year. Downward revision to your forecast is regrettable. But looking at the reasons for that downward revision, the impairment loss on the R&D assets is included, I understand. And three months ago, you posted, you recorded the impairment loss on Varon Transfer. And therefore, if you exclude those, a profit actually grows. So I think this is positive, constructive in that you are building the foundation for growth for next fiscal year. Can you explain the backdrop to these actions? And also, although this was a difficult year because fundamentals improvement and borrowing unexpected costs, are you being more positive about next fiscal year? High level response would suffice. Stefan, please.

I will take these questions and maybe, Chikashi, you want to supplement. So first of all, thanks a lot for the question and also for your perception of our performance. And actually, I do agree. This year has been, from some aspects, a little bit like bewitched. So while our core business is still having a very good momentum, We have seen a couple of headwinds that have been out of control. And obviously they have a significant impact on our performance both top line and bottom line in fiscal year 24. As I outlined in the last earnings call, we are still in the process of remediation and transformation. So I don't want to be too optimistic when it comes to sales growth in fiscal year 25. But I'm very reassured that, and that's in line with what I said in the last earnings call, that fiscal year 2025, you will see better results in terms of sales growth, and you also will see better results in terms of margin. We will most likely not yet achieve the 20% operating income margin in fiscal year 25, and we will most likely not yet achieve 6% compound average growth rate in fiscal year 25. But from my point of view, we're doing at the moment the right things. The momentum is on our side. Maybe in one of the other aspects, we have been missing a little bit of luck, although that doesn't sound very good out of the mouth of a CEO. But that's also part of the reality. And I'm very positive. Nothing has changed my perspective on this, that fiscal year 26, we can return back to growth, to profitable growth, and that we can also make all the strategic investments into the future of our company that are necessary to take.

For the Noto Peninsula earthquake, what is the impact? I would like to hear more in detail. Maybe it's a bit difficult to disclose, but if possible, what are the parts shortages that is happening? And I think it's a supplier-supplier. What is the – I think it's a supplier. How far are you aware of the situation? When is the production going to resume? If anything you can share, I'll appreciate it. Another point is that, generally speaking, the medical device components basically tend to hold a high level of inventory. If I'm So having this impact from this earthquake, maybe that was expected. In terms of the BCP-related prospect, what is your take on inventory? So in terms of the $24 billion, I think basically, is this the worst-case scenario or the – If you're able to catch up earlier than possible, maybe the impact will be less than that. Can you enlighten me about this point?

For the question, and this is indeed a very good question, and I'm just trying to answer within a limited amount of time available because, indeed, it's a little bit complex. So let me start here. with the nature of the supplier. The supplier is producing components, alloy steel, seamless pipes that we use and further process for our medical endoscopes. And this component is a key component basically in the vast majority of all our endoscopes. The complexity is that this is not only one component, but this component has 100 to 130 different varieties. And this component, after it is further processed at our site, is built into more than 100 scopes in different constellations. So it's not that one component equals one scope. Basically, when we look at the overall situation, we really have to take an perspective SKU by SKU. That made it for us a little bit difficult at the beginning also to estimate the full impact of the damage that has happened after the earthquake with our supplier. So that's the nature. Basically, the first two weeks, and I think you are even more aware than I am, the situation in Noto was really bad. The damage has been huge. Also, the mental health of the people is not great. So, we have over the last one and a half, two years professionalized our procurement department. So, we have a pretty good insight on our tier two and tier one suppliers and we also have risk mapped them. So, we knew already beginning of January in the first week. that one of our critical suppliers is located there. But it took us two weeks to reach out to him, and it took us another week to go there in person, talk with the supplier, make sure that his family is in a good mental condition and that he's willing and able to resume production. And since then, we provide him with a lot of support. So that's the overall situation. So then let me now come back to the impact. At the moment we have different scenarios and all scenarios depend when this supplier can resume production and it depends how quickly the second supplier can increase capacity. So there is a level of uncertainty. So while I'm very optimistic, and all the news we have received in the last couple of days are very positive. We don't have certainty yet when production will be resumed. So then, looking at our position in the market, we enjoy a 70% market share in endoscopy, as you well know. And alongside this market share goes a huge responsibility. So our responsibility is that we can ensure that our customers, the doctors in the hospitals, will always be able to run procedures. And in order to do so, our first priority at the moment is to secure on the one side spare parts or finished goods for repair and service. And at the same time, we continue production, but we have advised that and instructed our regions for a few days or two weeks to pause delivery to our customers until we have clarity about the situation because those scopes we can also use to increase our loaner pool in case that a scope cannot be repaired, but the hospital depends very much on this single scope to run a certain procedure. From a company perspective, there are two ways to deal with this situation. The first way is, and for me that is a little bit gambling, we could assume the best case scenario, continue to produce and sell our endoscopes. And if things go well, most likely we can all congratulate ourselves and be happy that neither there has been any impact on the top line, on the bottom line, also no impact on customer satisfaction and customer security to run procedures in the hospital. I personally believe that for a company like Olympus that holds itself in high regards for integrity, and has just also launched new core values with a strong focus on patient safety. I don't think that's the right way to deal with the situation. So our assumption at the moment is that most likely within the next two, maximum three weeks, we will have clarity about the exact timing when production can restart. Until that moment, we want to be on the safe side. We hold back with delivery of new endoscopes and we reserve our capacity for service and repair. So that's the scenario we have applied. And then obviously we have to be consistent because this is how we communicated with our customers. This is how we communicated with regulators. This is how we communicate with you. So then this scenario has to find impact into our lending forecast. So we cannot have a more positive lending forecast than our actions are in reality. And that's basically the situation you find. That's what I tried to highlight at the beginning of my presentation, the assumptions you see here. are all based on a negative scenario, which we all at the moment don't believe comes true, but we cannot completely exclude. There is opportunity to recover already some earlier, or not earlier, but at the end of this fiscal year. And as I mentioned, it's capital goods. It's not consumable goods. We also don't believe that this is lost sales, but this is basically a shift from the fourth quarter of this fiscal year into the first quarter or second quarter of the next year. So that was a little bit longer than I intended to answer your questions, but it's complex and I think it's very important that you understand our rationale and hopefully also agree that we want to apply the highest integrity standards which are, from my point of view, not only relevant, they are mandatory for market leader and endoscopy with a market share of 70%. We have to be responsible in what we do and we have to secure that patients can be treated.

Thank you very much. So I have a follow-up question. If I understand correctly, in three weeks' time, the supplier situation, if you can understand it more clearly, it means that you'll be able to understand the impact on your performance more clearly after three weeks. So in three weeks' time... Is the more accurate information is going to be communicated to the equity market? Is that the correct understanding?

Don't hold me accountable for the three weeks. Basically, on all the information available right now, we believe that in the next two to three weeks, we will have clarity on when production can be resumed. And then obviously, depending on the impact, we will communicate this. I mean, that's good news if it happens. So we will not be shy to share it with you.

Understood.

A question about our inventory and safety stock. So indeed, after the great earthquake in 2011, we have already started to build safety stock for critical components in the average two and a half months of reach. I mean, obviously now under the impression of the latest event, we will look with a refreshed lens on our risk mapping of suppliers and our safety stock metrics. And as an immediate action, there's a possibility that over the next couple of months, we will increase safety stock and inventory in order to take even more cautious and preventive measures to be outmost prepared if such an event would happen again.

So looking at Q4 forecast, revenue very strong today. and SG&A very high as well, and therefore operating profit is going to be smaller. Most likely, top line is going to be smaller, and SG&A would be smaller as well, and therefore the operating profit as a result would be the same as the subtraction from your business forecast and the actual for the first nine months. So for the January-March period, what is the most likely operating profit is my question. Okay.

This question is not so easy to answer since we have the uncertainty around the impact of the earthquake in Noto and how this will influence our possibilities to satisfy the order intake we certainly see in many areas. When you look at the lending Trikashi has presented today, Taking into consideration how I explained our stance with respect to prioritizing repair and service is not an unrealistic one. So I think there might be upside opportunities on the top line, but I would not be bold enough to make any commitment at this moment of time. When it comes to SG&A, throughout the entire year we have taken, independent from the latest events, actions and measures to reduce SG&A. When you follow our quarterly SG&A development, you see that we started with a peak in the first quarter and now quarter by quarter we were able to reduce the SG&A. And I think also in the last quarter, we will see a further reduction. And obviously, and this is not fully reflected in the lending, we will also ask our colleagues to apply cost-cautious management because while we see the impact on the top line, we also have to take preventive measures as much as we can to protect the bottom line. So I hope this answers your question. So all in all, the lending is what we regard realistic. There might be some small upside opportunities on sales growth. There might be some upside opportunities on cost management. But all in all, I would not expect that there will be a huge deviation to what we have presented today.

That would mean that not on each line item, but we should look at the operating profit forecast. That's where we should focus. Am I correct? The operating profit?

Yes.

Thank you very much.

Let me just double check because I'm not sure if this has been properly translated. Can you confirm or not confirm?

No, I don't have anything to add. I think the conversation made sense. Thank you.

So first I would like to ask about China. In the outlook of China as of November, compared to November, it has decreased. So anti-corruption campaign impact, we've talked about it. So why is this lingering so long? So I would like to ask more in detail the background of this decline in the performance of China. So besides this anti-corruption campaign, maybe there is some concern that the economic growth in China is becoming weaker. So is this economic slowdown only due to the anti-corruption campaign in China?

Let me give a very general answer to your question and then I would ask Frank and Gabriela to specifically talk about our ESD business and our TSD business because the situation is quite different depending on the therapeutic area where you look at it. So in general, and I think that's also something I said in the last earnings call, we see also this anti-corruption campaign as an opportunity for us in the future. But obviously at the moment, there's a strong restriction from purchasing departments to buy capital goods. And this does not only apply to Olympus, that also applies to other companies. According to the information we have, this will continue until June and there might be even a risk or whatever terminology you want to choose that this anti-corruption campaign might be even expanded to other fields more in the regulatory environment and not so much in the hospital environment. So this is the situation. Nevertheless, long term, we remain bullish on China. As you know, we are in the process to open a manufacturing site in order to comply with the Buy China policy. And we also are committed to make necessary investments into the markets. But the length of the negative impact of the anti-corruption campaign goes beyond what we thought at the beginning of the year. And then maybe, Frank, you want to start with ESD and then hand over to Gabriela to give a bit more insight on TSD because, as you know, the business situation is maybe a little bit ambiguous.

Yes, can you hear me? Yes. Yes. Great. Thanks for the question. And this is obviously one of our key focus areas to understand and work for towards improvements, especially for the capital goods in China. We were sharing with you last time that the X1 regulatory approval was making us optimistic together with the typical year-end rally that would happen in december um we must admit that dx1 has been received so our core processor product very positively by all users but we and many other companies have not seen the typical december peak in in orders and as stefan kaufman just explained We have been all more optimistic that the impacts of the anti-corruption campaign would slow down more quickly. That doesn't seem to be the case. And we also have in comparison to the sales one year earlier in December, we have the so-called loan stimulus program, which has been stopped by now. So we, we have at least those two impacts and obviously also the by China situation that has had more impact on our SE, so surgical business. The GI endoscopy business we feel is very solid. And we are basically debating on how and when we will recover. We don't feel like, especially with the X1 launch having been successful, that we are actually losing market share. But we are just not seeing the numbers which we were predicting together with our Chinese colleagues. and with that i would i would hand over to gabriella to talk a bit more about the not gastrointestinal and capital goods outlook and situation thank you very much frank and i think for our tsd business

About half or 50% of our business in China is also capital goods sales, so nothing else to add than what Frank has already explained. But on our consumable side of the business, we were still nevertheless impacted and impacted. From a short to midterm perspective, we've seen some continued impact from some of our supply shortages that are also affecting our portfolio there, particularly in the respiratory side. However, as Stefan mentioned, from the long-term perspective, we are still seeing a lot of opportunity as we see procedure volumes continuing to steadily increase and in particular have a very strong differentiated portfolio in our endotherapy business and respiratory business, which are a key area of focus for us. and where we will continue to hopefully in the long term see our growth come from in China. Thank you.

During the presentation, you didn't talk much about this, but looking at your materials, the Career Support Program, Career Support Program is what I'd like to... ask about. I think this is euphemism for restructuring. Am I correct in assuming that that's the case? And for the third quarter, 2 billion yen was expenses. For Q4, I think 800 million yen is projected. Would this continue into the next fiscal year, the expenses related to this career support program? Will you continue to see expenses in the next fiscal year?

Thank you so much for the question and your sharp observation. um let me see how i can answer that that question the best possible way so i think i told you that that a couple of areas for improvement in our company is the budgeting process and also taking accountability of the budget of the the functional heads and i mean global budget accountability so what we have done this year differently is that uh We did not wait until the end of the budgeting cycle in May to conclude on the targets. Basically, we have given all functions global budget targets already in the month of September in order to give them the opportunity to use the second half of this fiscal year to prepare the ground that they can achieve their budget target in fiscal year 25. This is not only related to Japan. This is a global initiative, and I think this will help us in fiscal year 25 not only to create a culture of budget accountability, but also to start to reduce SG&A and move them in the right direction. And as you know, with respect to my three strategic priorities, it's patient safety, innovation for growth, and productivity. And obviously, we need more productivity to invest into innovation for growth. And that's a matter of fact. And we are very, very committed, the whole executive officer team, to make this happen. The other, and that's part of the GTOM project initiative we will start next year, is that we really will look at the global operating model from the perspective of a pure meta company. So you know the history of Olympus. On the one side, we have been a Japanese manufacturing company with affiliates around the world with a low level of harmonization. On the other side, we have been a conglomerate of different businesses with a holding organization on top of it. And obviously, now that we have verticalized our business by moving into a pure MedTech direction, we still have not yet achieved the optimal operating model for our company, and that's on the list of projects for fiscal year 2025 to look at this. Also,

The SG&A expenses have been reduced, and you said that you are seeing the results, the effect of that. And I think you have made a downward revision to the SG&A expenses for this fiscal year. So what are the success areas in reducing the SG&A expenses? Where have you been successfully reducing the SG&A expenses?

Well, I mean, first of all, and thank you for your question, just to make sure that we do not misunderstand. So the idea was that in fiscal year 2024, by assigning early budget targets to all functions, we can use fiscal year 2024 in order to execute already the measures to achieve the budget in fiscal year 2025. So the full impact of all of this you will see in fiscal year 2025 Nevertheless, also fiscal year 24, we have not been lazy on managing our SG&As. Basically, we have a couple of initiatives in order to freeze vacancies in the company, in order either to renegotiate contracts with suppliers and outsourcing partners or consultancy firms, And that's an area where we can progress more, but we're doing already much, much better than previously. We are much more dedicated in the way we prioritize our projects and stage them over a longer period of time. I think in the past, we had quite a lot of projects going on in parallel. with all the related costs and obviously we'd rather take a long-term view, prioritize projects and sequence them over the next couple of years in order to avoid that they all peak at the same moment of time. And again, as I said at the beginning, I think in the first quarter, we did not pay enough attention, so we saw quite an increase in the SG&A. But now in quarter two, quarter three, and you will see more of that in quarter four, I think we get a much, much better grip on cost control and expense management.

So the CEO, Stefan, you talked about seamless pipes, that the supplier was making seamless pipe. So I think it's more on one of the components that is used for the body of the endoscopes. Is that correct? So if you come – I want to know how – the probability of this is going to be – come back to production for the first quarter, the second quarter, in the next fiscal year. Is this specific supplier – the first supplier is going to resume the production? Is this a different – supplier but this will be a small component um in terms of the uh in terms of the component i think um you have to do calibration and at the end i think basically you have to conduct audits but you don't have to do so and you said talk that this component will be used in 100 types of skus but you are lying to one supplier for this key component that's a kind of surprise And so I would like, maybe there's some lessons that you have learned in terms of supplier management. Well, this is a kind of vague question, but in terms of the probability of the production going back in line, the first quarter to the second quarter next fiscal year, what is the reasoning behind that?

Thanks, Kutani-san, for the question. And let me ask, let me answer first your second question about the learning. So first of all, this supplier is not a single source supplier. There's a second supplier, but this supplier is covering 80% of our demand. So it's covering the vast majority of this component we need for further processing as a mechanical component that is used in the tubes of our endoscopes. I think in Medtech, maybe different than in other industries like automotive, to have a single source supplier or supplier who's covering the majority of the demand is not so uncommon because when you look at our products, the specification of these components is very unique. And on the other side, the quantities we need is very small. So it's not so easy to transfer these kind of components to a larger corporation because usually you need a specialized manufacturing place that is really focusing on these components. And we have benchmarked our single source or majority single source components. supply with other MedTech companies. And obviously we are a little bit higher than others. So there's a learning that we have to improve our BCP, but it's not that we are in a unique position. So what are the learnings? I would categorize the learnings in short term, midterm and long term. Short term, as I said, we have to take a refresh look at our supplier risk mapping. And if we find suppliers where we do see an exposure, which is as critical as it is now for the production of our endoscopes, we have to increase our inventory and our safety stock. The second is short to mid-term. We have to improve PCP. So there are areas where we can do certainly better than we have done at this moment, not in the situation itself, but in order to be prepared for such a situation. And the last point is, but that's really mid to long term, and that's a bit more complicated. Obviously, this is root cause in the way we design our endoscopes. So I think mid and long term, we have to rethink if our endoscopes cannot be more modular than they are today and not as unique by securing still the same quality and superiority they have today. And by this being able to drive a better sourcing strategy for the company. But that's nothing we can realize overnight. That's a bit of a larger project, as you can imagine. But obviously, you heard me saying this when we were receiving the warning letters. Every crisis is an opportunity for change. And we are also very much committed to use this as an opportunity for change in our company.

I'm looking at slide 27. I have a question on slide 27, your revision to the forecast compared to the previous forecast. So dividing between Q3 and Q4, how would they break up?

When you say dividing,

Okay, in Q3, what has been realized and what's the projection for Q4? So the forecast and the actual.

Okay, then let me hand this over to Chikashi.

Okay.

Okay. It's very difficult to explain precisely. Easy ones, sales, revenue, Q4. And there are three elements for revenues, so towards the bottom of the slide, three items. We can't say one quarter is larger than the other quarter. Or I don't think it's appropriate to say which is a bigger factor. That's for the revenue. Cost. Cost of sales here. The expenses related to compensation for some products in surgical endoscopy. That's for Q4. And product mix, Q3 and Q4 both. And NOTO earthquake, of course, Q4. SG&A expenses, in Q4, the last quarter, we are going to do the optimization with further momentum. So I wouldn't say majority, but a lot is more on Q4. I hope that answers your question. In other words, Q3 actual compared to your internal projection, what was the downside, shortfall for Q3? Revenue? Revenue? Again, it's very difficult to explain this clearly because there are many factors involved here. So I can't really generalize. Progress rate is one thing I like to talk about. Approximately, at the end of Q3, over 70%. That's the average every year, whereas this year it was about 70%. Usually it's above 70%, but this year it was 70%. More ESD. Delay more prominent in ESD. And as a result, if I can generalize, what we said three months ago, year-on-year growth rate, revenue 3% was our projection. That's what we said three months ago, whereas this time around, looking at the progress as of the end of Q3 and the impact of Notto earthquake, minus 0.7%, excluding the impact of foreign exchange. So expenses related to compensation for some products in surgical endoscopy. Can you elaborate on that? UHI photo. During the surgery, the CO2 is injected to make space for surgery. And we made the release in October of last year, but we, in the U.S., this has been suspended. And... And we had to take actions for that. And that is included in the forecast for the cost of sales for Q4.

So this is one question, quick question from me. So when is China going to recover? I want to know that. When I looked at this material, so the anti-corruption campaign led to the delay in tenders. And I thought that this would recover quickly. But according to your presentation, it seems that there's some real estate issues, the wage being unpaid. and there's some bank loans situation by China policies, and I don't know whether the treatment water situation from Fukushima is going to have an impact. It will be a more lengthy recovery. It's not simply the delay in tender, more a long-standing situation for the China recovery.

Thank you for the question, and I wish I could give you the answer. The reality is that uncertainty in the Chinese market and the volatility at the moment is pretty high. First, we thought that the anti-corruption campaign would end end of March. Now it seems there will be a prolongation. Obviously, we also see that value-based purchasing is increasing plus by China. So at the moment, we are in intense discussions with our region with respect to fiscal year 25. I want to be transparent and honest with you. We are not sure yet if we can already in next year regain momentum for high single digit growth. So at the moment, we are not sure about this. Frank, anything you want to add from an ESD perspective, which is the driver of our business in China?

Only one confirmation, which was already included in the question. As this is more multifactorial than we maybe portrayed before or anticipated, As you mentioned, this is A, the anti-corruption campaign is prolonged beyond our expectation, but B, the other factors and the overall situation in China are contributing to our expectation that we will not see like a V-shaped recovery in the moment when the anti-corruption campaign stops, but more a slower and steady recovery. But we are... As Gabriela mentioned earlier, I'm absolutely convinced that the growth of the overall need for good endoscopy in China will drive us back to this level of high single-digit, and the big question will be how quickly can we achieve that again.

But on the other hand, so I think basically for the third tier, tier three hospitals is going to increase. So in terms of the, basically, this means that it's going to be taken long.

Basically, let me repeat what I said. When we talked about headwinds, so the unmet needs in China are significant. When you look at all KPIs, number of endoscopists per capita, when you look at mortality rates of colon cancer, I mean, there's a huge unmet need. And that's the reason why we remain, and maybe that's the wrong expression, but we remain bullish. So we believe in the growth potential and we believe that we have a right to place there. We have a 50, 60 year old long history basically together with Japanese HDPs. We went to China and trained doctors and nurses in endoscopy. So we have a very strong footprint there. But we also have to accept that the volatility and the unpredictability is higher than it has been the last years. And that's the reason why you see Frank and myself being a little bit careful to raise very high expectations on a V-shaped recovery in fiscal year 25, which does not mean that mid and long term we believe that high single digit growth is possible for us in China.