Olympus Corp Ord

Hello, everyone. Thank you for joining us today for our fiscal year 2026 first quarter earnings call. My name is Bob White, President and CEO of Olympus. As many of you know, I was appointed as CEO in June, and it's an honor to address you for the first time as CEO of Olympus. I would like to start by expressing my gratitude to our employees, customers, and stakeholders for their continued trust and support during this period of transition. That said, I want to share my candid views on our first quarter performance, which fell short of expectations. In the first quarter, Consolidated revenues decreased by 12% year-on-year to 206.5 billion yen. Furthermore, insufficient short-term cost control in the face of revenue declines resulted in a drop in adjusted operating profit to 13.2 billion yen. Major markets, excluding APAC, experienced challenging results. In particular, the U.S. faced challenges due to difficult comparison to prior year's strong performance, which was driven by the launch of EVUS X1 and the elimination of back orders following the Nodo earthquake. Then, in the first quarter of this year, we experienced a delay in purchases ahead of the upcoming new product launches in this fiscal year. In Japan, the challenging environment surrounding hospital management persists. And while in China, the business climate is affected by the ongoing impact of the buy China policy. Regarding the revenue forecast for the balance of this fiscal year, we do anticipate positive momentum in the US from new product launches, such as the eat off scopes. In Europe, we expect better execution in key markets like the UK and Germany. That said, considering the impact of the recent FDA import alerts, continued softness in certain markets such as China and Japan, we've adjusted our full-year revenue forecast. Operating profit has also been revised. Considering mainly the U.S. tariffs affected from August 7th and the FDA import alerts, however, moving forward, we will drive structural cost management and with the goal of ensuring better execution and, for example, that the growth rate of SG&A expenses does not exceed the growth rate of our revenue. Our quality and regulatory transformation project, Elevate, continues to progress in line with our commitments to the FDA and remains on track for completion within fiscal year 2026 as previously planned. This comprehensive effort addresses the issues outlined in both the warning letters and the related import alert, reflecting a unified approach to remediation. Despite starting the fiscal year under challenging conditions, including the U.S. tariffs and the FDA import alert, as CEO, I'm confident that we can significantly improve our disciplined execution to begin delivering healthy, sustainable growth and profitability. We are committed to accelerating critical innovation, strategically managing our portfolio, and improving cost efficiency through structural reforms while advancing the development of a new strategy. The recently announced establishment of Swann Endosurgical is a key milestone in our innovation journey. We are focusing on the development of endoluminal robotic technology, aiming to contribute to the advancement of endoscopic procedures and improve medical outcomes through new products and business expansion in the GI field. We are currently updating our new strategy, and I look forward to sharing it with you towards the end of the calendar year. I'm confident in the path we are charting. We have a clear understanding of where we have the right to win, what it will take to grow, and what must change. I have three immediate priorities for this fiscal year. First, successfully completing Project Elevate and preparing for the reinspection by the FDA. Two, protecting our bottom line through robust cost and operational measures. And three, continuing to invest in innovation to drive future growth. Speaking of our quality transformation, Olympus continues to prioritize the importance of providing safe and effective solutions for patient care and improved regulatory compliance. Since 2023, we have focused on strengthening our patient safety and quality culture, improving our quality systems, strengthening and maturing our organizational capabilities, and working diligently to achieve effective completion of the FDA commitments. Significant progress has been achieved through Project Elevate. And as a result, we believe we've completed 96% of our quality commitments to the FDA. However, the current FDA import alerts highlight the need for further improvement and execution. Our focus on executing with urgency is aligned with Project Elevate deliverables as we work to meet the FDA's expectations. For fiscal 2026, we do not expect to see changes to the expected timeline for fulfilling the commitments to the FDA and the associated costs. From fiscal year 2027 and beyond, improvement efforts for a sustainable quality management system driving patient safety and innovation will be reflected in SG&A with expenses specifically related to Project Elevate expected to decrease. We remain committed to continuous improvement to deliver world-class quality, patient safety, regulatory compliance, and innovation. Turning to innovation, while the first quarter results did not meet expectations, the upcoming launch of products in the U.S. is encouraging. We have high expectations for the impact of new products such as the Edof scopes, EUME3, Slim Ebiscope, Viscera Elite 3, and Thunderbeat 2. In particular, the Edof scope, which was launched in the U.S. in July 2025, is a highly unique product that assists endoscopists in detecting lesions by keeping the entire lesion in focus when examining the mucosa of the GI tract. This innovative product has been eagerly awaited by many doctors, particularly in the US market. It's expected to contribute to improving the quality of endoscopic care and to positively impacting our business results. As we develop our new strategy, we are very focused on innovation with a desire to enable endoscopy-based care to reach far more patients. For millions of patients, endoscopy-based care has meant precise, minimally invasive care, transforming both diagnosis and treatment. Importantly, Olympus drove the last two major innovative shifts in this field, first with fibroscopes and then with video endoscopy, which significantly expanded the procedural ecosystem through advanced visualization and therapeutic solutions. Now, a third wave is forming, powered by digital, artificial intelligence, and endoluminal robotic technologies. These technologies have the potential to reduce time, skill dependency, and physician burden, enabling higher patient volumes and significantly expanding access, and most important, with the potential for an improved patient experience and better health outcomes. To realize this vision, we're developing our intelligent endoscopy ecosystem. Our first AliSense CAD AR products will launch commercially in the middle of fiscal 2026. We've also announced a major step toward future innovation in the endoluminal robotics last month. These are important steps for our company and for the field of endoscopy. As reported, Olympus has partnered with Revival Healthcare Capital to create a new company, Swand Endosurgical. This strategic action aims to accelerate the development of endoluminal robotics and deliver innovative medical solutions with an initial focus on GI treatments. We estimate that the market size for endoluminal robotic surgery in the U.S. alone is could reach over $2 billion by 2040. This partnership is part of Olympus' strategy to strengthen our position as a global med tech company and expand our presence in important and long-term growth markets. Endoluminal Robotics has the potential to contribute to the widespread adoption of minimally invasive endoscopic surgery, improve medical outcomes, and ultimately enhance health and well-being for more patients. Olympus has been actively investing in this field through in-house research and development, as well as investments in startups, and this will continue. In summary, our vision for the future here is built on three key pillars. One, accelerating innovation and market entry, leveraging both internal and external innovation to fast track development and commercialization. Two, transforming patient outcomes by enhancing procedural safety and improving patient outcomes through superior dexterity and precise articulation and optimized operational efficiency for physicians. And three, scaling our platform for broader applications, enabling expansion across multiple disease areas and applications with modular intraluminal subsystems built on a shared platform. Through this partnership, we are committed to providing safe and effective treatments for patients and helping shape the future of healthcare. Now, before I turn it over to our CFO, Tetsuya Izumi, I want to offer you a perspective on the opportunity we have at Olympus to build new strength in how we operate our company. At Olympus, we see an opportunity to build new muscles in how we manage the business, muscles that will strengthen our foundation and accelerate our trajectory. This is not just about incremental improvement. It's about fundamentally elevating our discipline, our speed, and our impact. We are focused on bringing sharper business discipline and faster decision making into the organization, and that starts with simplifying how we operate. Moving to a divisional structure that clarifies accountability, reduces complexity, and enables more decisive execution. We are going to raise the bar on leadership accountability and ensure that decision makers are empowered and responsible for outcomes. Execution must be disciplined and data driven. We're committed to understanding where and why we are challenged in the market and then use those insights to be more agile in our actions. We also see significant opportunities in how we manage our P&L and allocate resources. We are reshaping our cost structure to be leaner and more agile, while improving margins through productivity and prioritization. Every investment we make must deliver impact, whether through innovation, market expansion, or operational efficiency. We are strengthening our ability to assess, to allocate, and track resources so that our resources fuel the highest value opportunities. This change is also about leadership. We are building a stronger enterprise mindset across divisions, supported by clear governance and aligned incentives. We are investing in talent, focusing on developing leaders who set high expectations, deliver results, and support their teams. This is the opportunity ahead of us to build a stronger, faster, and more focused Olympus, and we're all in. With that brief introduction, I'll hand it over to our CFO, Tetsuya Izumi, who will lead you through our detailed financials for the first quarter.

Hello, everyone. I'm Izumi, CFO. I would like to provide a consolidated financial result and a business review for the first quarter of fiscal year 2026. As Bob White, our CEO, explained earlier, we had a very slow start in the first quarter. Consolidated revenue decreased by 12% year-over-year to 206.5 billion yen. In major markets except APAC, revenue decreased. In particular, North America saw a slow start due to the previous fiscal year's strong performance driven by EVAS X1, the elimination of backwaters following the Noto earthquake, and delayed purchases ahead of upcoming new product launches in this fiscal year. Operating profit significantly decreased year-over-year to 16.6 billion yen. This is due to a decrease in gross profit resulting from a lower revenue and an increase in SD&A expenses such as R&D expenses. Adjusted operating profit decreased by 65% year-over-year to 13.2 billion yen, with an adjusted operating margin deteriorating 9.5 points to 6.4%. Next, let's take a look at the business situations in each segment. First is the gastrointestinal solutions division. Revenue decreased 13% year-over-year. Adjusted operating profit significantly decreased year-over-year to 20.1 billion yen, with an adjusted operating margin of 14.5%. Major reasons for this is an increase in SDNA expenses such as R&D expenses for the next-generation endoscopy system, coupled with a decrease in gross margin by revenue decrease. I will now give a review for each subsegment. In GI endoscopy, revenue increased in APAC. driven by strong performance in Australia. On the other hand, revenue decreased in North America due to a strong performance in the previous fiscal year driven by EVA's X1 GI endoscopy system, the elimination of backwards following the Nautilus earthquake, and delayed purchases ahead of upcoming new product launches in this fiscal year. Revenue also decreased in China with its intensifying competitive environment due to the Buy China policy and other factors. In GI endotherapy, revenue decreased in China due to the impact of volume-based procurement and Japan due to intensifying competitive environment. While revenue in the SPB area increased, revenue decreased in metal stent products. In medical service, in addition to a decrease in revenue in North America, yen appreciation resulted in an overall decrease in revenue. After forex adjustment, revenue increased in Europe, driven by a steady increase in service contracts and repair volume. Next, in the surgical and interventional solutions division, revenue decreased 10% year over year. Adjusted operating loss was 1.3 billion yen. Major reasons for this is an increase in SG&A expenses, such as R&D expenses, coupled with a decrease in gross margin by revenue decline. As for the performance of each subsegment, in urology, revenue decreased in North America where the elimination of backwaters had a positive impact in the prior fiscal year. While resection electrodes for benign prostate hyperplasia remained steady, revenue decreased in ureteroscopes and products related to lithotripsy for stone treatment. In respiratory, revenue decreased in Europe where the elimination of backwaters had a positive impact in the prior fiscal year. and China with its intensified competitive environment due to the buy China policy and other factors. Yen appreciation also resulted in overall decrease in revenue. After forex adjustment, revenue increased primarily in North America driven by strong performance in EBUS scopes, EBUS TBNA. In surgical endoscopy, revenue decreased in Europe where large orders had a positive impact in a prior fiscal year. While Viscera Elite 3 surgical endoscopy system performed well, revenue decreased in GI endoscopic products for operating rooms. This is a financial position as the end of June 2025 total assets increased 8.1B from the end of the previous fiscal year. So we have conducted fundraising cash and cash equivalents decreased due to the repayment of debts and the payment of corporate income tax. In the meantime, Inventories increased due to the build-up of inventory that had decreased at the end of the previous fiscal year and the impact of U.S. tariffs. Liabilities increased mainly due to fundraising through corporate bonds and debts at 100 billion yen, while debts were repaid. The equity ratio at the end of the fiscal quarter decreased to 50.8%, down 1.7 points from the end of the previous fiscal year.

Next is status cash flows. Cash flow from operating activities was negative 15.2 billion yen. It decreased YOY due mainly to a decrease in profit before tax and the payment of corporate income tax. Payment of corporate income tax increased significantly YOY including tax payment of overseas subsidiary on gains of the transfer of evident. Cash flow from investing activities was minus 17.5 billion yen mainly to expenditures associated with acquisition of tangible fixed assets. Free cash flow stood at negative 32.7 billion yen. Adjusted free cash flow was negative 17.5 billion, excluding extraordinary factors such as acquisitions, transfers and reorganization of business. However, we believe that it will return to positive with revenue recovery and expense control from second quarter onwards. Cash flow from financing activities was positive 22.5 billion yen due mainly to fundraising through corporate bonds and debts, while the repayment of debts and dividend payouts were posted as negative factors. As a result, cash and cash equivalents stood at ¥241.2 billion at the end of June 2025. Moving on to four-year forecasts for fiscal year 2026. First, I would like to explain the key points of the revisions to the forecast announced in May. The FX assumptions that are the premise for the forecast are 145 yen for the US dollar and 169 yen to the euro based on the average rates in the past one month. We have a revised four-year forecast due mainly to the impact of US tariffs and FDA import alerts. Under the strong leadership of the management team, we are committed to tightly managing SG&A expenses to be the growth remaining below their revenue growth rate and driving business operations to achieve the new guidance. and further details are provided on the next slide. This slide represents the major factors that affected the adjusted consolidated operating profit forecast compared to the one announced in May. We have newly factored in a decrease in revenue due to the impact of FDA import alerts and a deterioration of cost of sales ratio due primarily to the US tariffs, resulting in a decrease in adjusted operating profit. Please note that we currently estimate the gross impact of US tariffs to be approximately 26 billion yen on cost of sales. Considering the effects of various mitigation measures, the net impact is estimated to be approximately 16 billion yen, which is included in the forecast. We will consider additional measures to further mitigate the impact. We will deploy various initiatives across businesses and regions, and implement company-wide cost reductions to address these impacts, and we forecast adjusted operating profit to be 157 billion yen. Next, I would like to explain the revised forecast compared to the previous fiscal year. Revenue is expected to be ¥998 billion on par with the previous fiscal year, expecting steady growth over 3% after FX adjustment. In GIS, we will promote new products. If it is X1 in North America and in SIS, revenue is expected to increase centered on focus areas such as urology. Adjusted operating profit is expected to be 157 billion yen, with an adjusted operating margin of 15.7%. While we expect to see an increase in long-term strategic investments such as R&D expenses for further future growth, as well as the impact of their U.S. tariffs, we will undertake cost structure reforms. In both GIS and SIS, while revenue is expected to increase year-on-year, profit is expected to decrease after FX adjustment. Profit attributable to owners of the parent is expected to be 94 billion yen with EPS of 85 yen. Regarding shareholder returns, there is no change from the previous announcement in May. We plan to issue a year-end dividend of 30 yen per share, an increase of 10 yen per share. We are also in the process of a buyback of 50 billion yen. As explained, first courses started off very slow, but we expect to see launch of several new products that will contribute to sales growth going forward. Also, we plan on the start of operations at a factory in China for local production for GI endoscopes. We will need to manage through various challenges such as U.S. tariff policies and FDA import alerts going forward, but under the strong leadership of the management, we will continue to make efforts, and that's all from me. Thank you.