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.

I'm actually shocked by the magnitude of the decline in GIS U.S. sales. We all knew going into one quarter that one quarter last year was an absolute blowout with the launch of the EVOS X1 system, and I think there was additional uplift last year from back quarters stemming from the earthquake last year. But the magnitude of the negative 18% decline in first quarter U.S. GIS would seem to suggest something else, namely anticipation for the EDAF scope, which was approved in the U.S. in May. So we're surprised because I don't think there was pullback in the EU or Japan when the Opscope launched. And I wasn't even aware that U.S. endoscopes use, endoscopists use magnification currently during endoscopic diagnosis because it probably increases diagnosis time, if anything. So could you unpack for us what exactly is going on in the US GIS division this quarter? How much was a negative 18% decline a function of tough comps last year? And how much was it an intentional pullback? And does your current GIS forecast include significant sales and profit contribution from the Edox scope because the forecast barely really changed, at least in the top line? That's my first question.

Thank you for the question. This is Bob. I will start and then Frank, you can come in. Your diagnosis is actually correct. So we had a tough comp coming in to this quarter for the reasons that you mentioned. And then we actually did see buying patterns slow down in advance of the launch of the products. So you're correct. To the second part of your question, though, and I'll have Frank comment on this, we see a really strong sales pipeline. So I've been through in detail the the GIS and the SIS pipeline for the rest of the year. The leading indicators are there in terms of product availability, launches, and sales pipeline. But, Frank, why don't you add some color as well?

Yes, and thanks for this very good question. I think you pointed out that the utilization of EDOF in America, you were not so aware about their interest in that. What we have seen is probably also due to the staggered launch of EDOF around the world that the American endoscopists have seen the benefits of EDOF. We have obviously helped them to experience that with our demonstrations. and that led now to a higher than expected delay or postponement of actual orders and installations. As Bob just pointed out, we have analyzed very much in detail the pipeline. There is confidence that that is delayed and we will come back to our target turnover for the X1 within the remaining quarters of the year in the United States. That's our current assumption.

Oh, yeah, thank you. Bob, by the way, so one of the biggest problems with Olympus is this company has never really talked about pipeline. And I agree with you. You actually have an exciting pipeline this year, but I don't think most people know. So I think in the future, please talk about that. So a follow-up for Bob on your robot strategy. So first of all, thank you for addressing the biggest risk and also opportunity for Olympus, which is the development of endoscopic robots, because we all know that most surgery will be robotic in the future. Now, the press release for the Swan Endosurgical wasn't exactly clear on what type of endoluminal robot you were going to develop, because there's lots of different types, right? So there's robots for lung biopsy, which probably you need to develop because your competition is already there. Or there is a possibility that it's for endoscopic submucosal dissection, which I think you know is a big potential market. There is also a possibility that it could be something more ambitious, possibly for natural orifice, transluminal endoscopic surgery, otherwise known as NOOTS. So could you talk about what the objective of Swan Endosurgical Robotics is and your overall strategy in developing robotics? Was this your initiative or something that was already there before you arrived? That's my final question.

Yeah, thanks for your question. And also, thanks for leading in with the importance of our pipeline. And that is something we're going to continue to talk about each quarter. We believe strongly that innovation is the lifeblood of MedTech, and we're going to work really hard on accelerating our innovation cycle. And you're right that the specifics of the future vision we have for Swann Endosurgical, we weren't too specific for a lot of reasons. One, this is a complex robotic system. It involves a lot of parts. And we really thought about this from a platform standpoint. And as you know, robotic-assisted bronchoscopy entered the market several years ago. This market's been great. But endoluminal robotics for the GI space haven't been launched. So we're excited about this as a platform play. And I'll let Frank talk to you specific. But no, I mean, the team had been working very hard on this. Clearly, we view robotics as one of the key growth factors for Olympus. for a long time. And we think about that just because of the underlying market growth. Olympus has to be in fast-growing markets. So while we won't be too specific, Frank, I think if you want to add some context about how we see the platform capabilities of SWAN and our thoughts, that'd be great.

Sure. And to come back to your questions about what type of procedure do we want to tackle? We definitely see this as a platform that should help us in all endoluminal flexible endoscopy-related applications. We spend quite a lot of time to consider where we should go first, and we will tackle first where we have the biggest right to win, and those are our gastrointestinal applications. And as you already pointed out, while there is some bronchoscopic robotic technology out there, until now, the challenges of endoluminal flexible gastrointestinal robotic applications have not been mastered. We feel that with this setup, where we try to to utilize our deep intelligence and knowledge and technology for flexible endoscopy in the gastrointestinal tract, but combine that with the available robotic ecosystem system intelligence in America. And we put this in a context where we can harvest the speed and the agility of a startup But allow that startup to work with proper financing and technology background behind us gives us lots of confidence that we can win here. So start with GI endoscopy, gastrointestinal endoscopy. And you mentioned notes to conclude my comments. Notes is something that depends a lot on closure of the gastrointestinal wall after you either have done a very aggressive ESD or you have created an access to do notes type of procedures. So to tackle that topic 20 years after notes was big is one of the ambitions we have.

If you could just ask, was this your initiative, Bob, or is this something that existed with Mr. Kaufman before?

I can't speak that it exists with Mr. Kaufman. When I came in, and certainly you have an appreciation for my history with soft tissue robotics, we looked at what are the key growth drivers. I think Frank and the team had this on the radar screen as a key move. And for us, this is about prioritizing growth drivers in the marketplace. And that's why we moved quickly to get this in place. And I think the other thing I would mention is you see this build to buy approach. This is something that certainly we've, both in my previous companies, we've used as just a great way to think about it. I have a lot of confidence in our R&D organic engine approach. But understand, this is about speed and creating new technologies. And so doing this in this build to buy, you should expect to see more of that from us. I just think it's a great approach.

Excellent. Thank you.

So the company plan was revised. I want to know how much progress you have made against the new plan. Q1, revenue and profit. I see the progress is slow. But since you presented the initial plan, it's only been three months. So what has changed? What are the biggest factors? Q1 progress is very slow, and in terms of sales, FDA import alert impact was the only one that was mentioned. But toward the second half, isn't there going to be a huge downside risk because of this? I want to understand the situation. Thank you.

I think you all start off, and then Azumi-san, I'll ask you to contribute. You're right that it was only three or four months ago that we created our FY26 plan, and in that time, a few things, in fact, have changed. Certainly, the tariffs have come to be now at 15%. Certainly, tariffs existed before that, but when we think about the full-year plan, that's a real impact, and it's an impact – That immediately hits COGS in the U.S. And in the short term, that's difficult to offset. I think we've taken some very specific actions to mitigate that, and Azumi-san mentioned some of that. And in the midterm, we're going to continue to try to offset, you know, the tariffs. Certainly, we also had difficult comps, as you saw from prior year. That contributed to Q1's performance. And then we had product availability in both businesses that we talked about. The point of your question is do I think there's downside risk for the rest of the year? We've really looked at this forecast hard in terms of the specific leading indicators, sales pipeline, product availability, backorder levels, as well as market performance in where we think China and Japan will be. And we think we're on a forecast that we can absolutely deliver. The team is committed to delivering this. In addition to this, we're very much focused on getting much better cost management, and we alluded to that. So I think you can trust this plan. It's a plan we believe in. It's a plan that we've assigned accountability very specifically out for us to deliver. So that's how we feel about the rest of the year. Azumi-san, if you'd like to add anything specific, please do.

Well, Bob actually covered everything, mostly. Q1 US was strong last year, and we already knew that. And compared to that, in this fiscal year, Q1 would not be as strong. We did know that. But the delayed purchase was unexpected. It of scope. When we explained this, we had very good feedback. And because of that, the delay of purchase, this impact was not really accounted for, to be honest. But we now know that once we sell, we believe, we hope that it's going to grow explosively. Now China, competitive landscape, how harsh it was, was not expected. And sales team is now stronger. So we want to make a recovery there. And local manufacturing, local production, should begin before the end of the calendar year, we have visibility into that as well. So once we start the local production, we know that demand is there. So we expect recovery happening there. That's all from me. Thank you. Thank you very much. I have a follow-up question. Listening to what you say now, it seems that in the United States, in terms of pipeline and backorder, you have a good positive sense. But for China... maybe there is uncertainty whether you can grow fast in the short term. So what are the specific risks that you see, major risks? And also if you underachieve the sales objective, do you think you can control the expenses so that you can at least achieve the profit goal? So which KPIs are important to you in other words?

I'll take that first and then ask some colleagues to jump in. I want to pick up first your China question. When we look at China for the rest of the year, we believe we have it, that we understand the risks, and that's factored into our forecast already. So we've basically looked at China, but We're not quitting on China. Again, I mean, I've talked about this. In the long term, China will be a phenomenal growth market. Of the most hospitals, the most doctors, the most patients. Certainly the buy China policy has had an impact, but that's why you've seen us move to localization. As Azumi-san mentioned, the first products will be here before the end of the calendar year, which is good. But equally important to that, this is about sales execution. This is about being very focused on sales pipeline, making sure we've got the right people focused, the incentives in line in doing that. And so all of our general managers have been to China recently. I myself will be there in a couple of months. So we're very focused on that market. The second part of your question is also good, which is if risk does exist on the top line, will we be able to control the bottom line? The team is 100% focused on that. We understand that while top lines we sometimes can't control, to be clear, we know we're going to focus on the bottom line cost control. So, yes, you can rest assured that focusing on our costs is a big piece of our new disciplined execution that we're going to put in place. Frank, maybe if I could just ask you to add additional color on China. I know you spent a lot of time there, as is Seiji as well, but perhaps some additional context. Sure.

Yeah, yeah, with pleasure. I think the key points we are focusing on to recover our results in China are on the one hand, acceleration of availability of localized products, but also acceleration of registration of existing products. One of the key products we are counting our recovery on in the second half of the year is the EUME3, so our ultrasound endoscopy system, the core system. that has not only a positive impact on our EOS sales, endoscopic ultrasound sales, but also is typically part of bigger bundles for bigger hospital university clinics where a lot of pull-through business for GI endoscopes is included. On top of those two product availability points, which means registered and ideally locally manufactured products faster into China, we do what both Tatsuya and Bob already pointed out. We have, I think I mentioned that in previous calls, we have from April onwards changed our go-to-market strategy from a geography-based one to application field or business unit based structure. We've seen already now much more transparent way of managing our pipelines into sales execution. And that is going to be the basis on which we want to then bring in the products faster as I explained.

I would like to add some comments as well. As Bob said, over the mid-term, we believe that China is a growth market, but in the short term, there are different factors pushing down the sales level, as you may know. Over the mid to long term, we have three key initiatives. For SIS, we have various products that we have to really select and focus on. Respiratory. Endoscopy, we have high market share there. And as Frank said, new ultrasound processor is already in a portfolio. So based on, we also have a pipeline that covers the next several years. So we would like to focus on this, including the human resources. And secondly, collaboration and partnership with local manufacturers, especially in urology. uh with a local manufacturer well we can provide our strong solution and they can provide their strong solution and those can be combined together and as the book said before thirdly we used to split the sales structure into four in china but we have reorganized them to increase efficiency So looking at the cells in the future, we want to control SGN-A tightly as well. That's all. Thank you. Thank you very much for your very detailed answer. That's all from me.

My first question is about the FDA situation surrounding the FDA. So you talked about the import alert, and then I think you are communicating with the FDA. So where has been the challenges? What are the discussion points that you have made, and what are you trying to change? And based on this import alert, how has your discussions with FDA progressed? At the same time, the cost of Elevate, I said that this year it's not going to change, but this fiscal year it's going to go down. That's what I have said. But in terms of enhancing the quality management structure, you're going to look at that as a cost. So next fiscal year, I think basically this should have gone down, Because the cost is going to go up, the magnitude of the decline of the cost compared to what we have heard about three months ago, is this more going to be impacted for the fiscal year, including how much cost is coming from elevator? I would like to hear about that.

Okay, let me start that. There are three questions in there. First, our communication with the FDA. Second, what is it that we might have to be doing differently? And then thirdly, the cost in terms of Elevate and how that shows up, where it shows up, and what it means. So I'll have... Azumi is going to talk about the last. Boris, I'll bring you in for the middle. But let me just talk about the import alert. Certainly, it's disappointing to get an import alert, but understand the import alert is tied to the warning letters. It's not different. And so it's an opportunity to accelerate and focus our actions accordingly. We did meet with the FDA in mid-July. And, look, the FDA expects us to have successful outcomes for the upcoming FDA inspections. They, of course, have not been back to us yet. So I don't want you to think there are different actions for the import alert versus what we're doing for the warning letters. And I would tell you our conversations with the FDA are open, they're transparent and active. But Boris, perhaps you can just give a little more context of our activities to work through both the warning letter and the import alert. I think it's important to share some of our actions which have been underway. And then finally, Azumi-san, do you want to answer the third part of the question in terms of how we're thinking about cost moving forward? So, Boris?

Thank you, Bob, and thank you for your question. As Bob mentioned, the to the warning letter, and it's been over two years. We're coming up on three years since the FDA inspections. We've done a lot of work. We've consolidated our quality systems. We've implemented a complete process. We have improved our performance in how we file MDRs, and most importantly, we've done a lot of improvement internally with how we operate within the quality system. We brought a third party, which we've coordinated with the FDA as well, to audit us to verify the implementation and the effectiveness of that implementation. And we've also shared those results with the FDA. But as Bob mentioned, the FDA has not had the opportunity to come in and inspect our facilities. And ultimately, this is what they need to do to verify the effectiveness of our auctions. And we do expect that sometime in the near future they will come in. We have been preparing our facility for these inspections. We've been re-verifying all of the work that we've done to make sure that it's robust. We're raising the bar on the execution within the quality system and that work will stay with us and will be ongoing. But also what's really important is we've raised the competency, and this is where a lot of the investment went in, is raising the competency across our organization. We've brought in a lot of new talent into our quality organization. who essentially built the global quality organization. We've done the same thing with the regulatory affairs team, which helps with the communication with all of the agencies, including the FDA. And we've done the same thing in operations and R&D to improve how we do investigations, how we improve our products. And all that work will culminate in the efforts to demonstrate both to the FDA and to ourselves we have the same goals as the FDA, and it's to make sure that we're got safe and effective products in the market and they're available. So ultimately, we're expecting the FDA will come in and inspect us. And of course, those inspections will be strongly connected to the resolution of the warning letter and lifting of the import alert.

Thanks, Boris. Thank you, Boris.

In terms of the cost related to Elevate, in terms of the progress of that, for this fiscal year, S&A, $10 billion, and other costs, $10 billion is our estimation. The first quarter, we have been consuming that for about a quarter. For this fiscal year, there's no outlook that this is going to increase. As Boris has explained, basically, we... are anticipating or planning, and we're ready to receive the inspection for this fiscal year, and we've been preparing for that. So even though we have received the important alert, this will not lead to a cost increase for this fiscal year. For the next fiscal year and onwards, what's going to happen? It's very difficult to answer accurately at this point, but currently, elevate related programs, Well, planning to end it in this fiscal year for the fiscal year, we think that the cost will go down as planned. However, that said, it all depends on the results outcome of the inspection of the FDA. So there is some invisibility here. But at this point. We think the inspection will be conducted and will be verified in terms of what we have done and the warning that it will be lifted and we'll be able to go back to the LWB program to a kind of a normal mode. So that is our anticipation as of now. Understood. Thank you. So in terms of the, my second question is about, go to page 11. There are four points they have given as a management, which are the points that you want to change. I think you have four points here. So I think all the other management from the past has been focusing on these four points. So Bob. What can you do differently from your predecessors? So it's still a short time since you have taken this post. These four points, I think your predecessors have been focused on that. So what are you focusing on? So maybe you can simply talk about your thoughts about these four points. Thank you.

Yeah, thank you for your question. Of course, I can't speak to my predecessor, what they did or didn't do. I can tell you what the team and I have spent a lot of time on. is sharpening and placing a premium on execution, also placing a much sharper focus on optimizing our cost structure and resource allocation, and really focusing on our time on investing things that have an impact. So I think a lot of people could have developed these points. These are very specific and very personal for us for the leadership team. And we've committed to place a premium on execution. We do that on a weekly basis with clear accountability, and we track. And so we think a big part of moving Olympus to a high-performance team. is being much clearer on accountability and responsibility. So you should judge us in our actions, of course, not in our words, but that's what the senior team and I are very much committed on, to create the stronger, faster, more focused Olympus, and we're excited about that. So in time, you'll certainly judge us appropriately on our results, but these are not just words. These are serious, and they're commitments that the senior leadership team and I have made to each other.

I have some additional questions about FDA. I understand that you already had a meeting or meetings and the GI endoscopy may experience the same risk. Do we have to worry about that risk or not? We do understand the company's explanation. However, it seems as if there is some kind of miscommunication between the company and FDA. As a result of the meeting, did you conclude that the current response is sufficient? Because from our perspective, it looks like maybe the scope of application of this alert may expand and you may have to do additional countermeasures or spend additional costs. So can you please respond to this question? Thank you.

Yeah, thanks. I'll take that first. It's a fair question, but when we met with the FDA, as Boris explained, to review what was in the import alert, it was tied to the warning letters and our actions there specifically with completing those requirements getting to root cause, understanding and executing with urgency. So it's not a different set of actions, nor do we believe that there is significant more risk in the rest of the portfolio. The FDA wants us to deliver safe and effective products. They've not been back yet. This was a good reminder for us to execute with urgency around the work from the warning letters. So our focus is on completing that work, and that's what our discussion has been with them and what they have asked us to do. So, Boris, I'll let you comment anything additionally.

Thank you, Bob, and I think you've covered it. We had a productive meeting with the FDA. We reviewed with them the improvements that we've implemented over the last two and a half years and also showed them the remaining part of the plan. We did get a confirmation from their side that we are focused on the right things, but ultimately they do need to come in and verify that. We have of course been also in in a formal way in response to the warning letters. So they've been closely watching our progress. And the verification of that work is ultimately what they're seeking for. And they do want us to execute well within the quality system that we've established. And, again, this is where our focus has been and will continue to be to demonstrate regulatory compliance.

Thanks, Mors.

One follow-up. GI endoscopy, is there, well, do you think there's only a very small risk that that will be included in the alert, the import alert?

The FDA is obviously an independent body. As we met with them, they were very much instructing us to focus on what they told us to fix, and that's where our efforts have been. All of this points to a successful re-inspection of our facilities, and that's what we're focused on. And that's why the import alert and the warning letters are joined. So I don't want to speak for the FDA. They can choose whatever they want to do, of course. But their focus is to make sure we deliver on our commitments that they gave us in the warning letter and then reminded us of in the import alert. Boris, anything to add there?

No, no. I think you've covered this well. Of course, the FDA can make the decisions, but we're implementing all the corrective actions and we're tracking that work very closely. We're continuing to communicate with the FDA and tracking product performance. So it's hard to tell what they will do, but we believe the next step would be to demonstrate that success through inspections.

Thank you very much. I think the previous questions has covered those markets, but Japan. In the first quarter of the previous year, it wasn't that high a level, but the revenue has declined, whether it be GIS or SIS. So I would like to get more context about the Japan situation and the reason behind this.

very much for the question. Japan's an incredibly important market for us. And I'd like both Frank and Seiji to talk about Japan, where we're at, but then importantly, what we're doing, because we have optimism about Japan and we have a number of actions underway. So guys, you want to take this, please? Frank, you can go first.

Yeah, let me jump in first. I'm Our analysis of the Japanese situation is that we are operating in a market that is suffering from a limited budget. And we are seeing that our market share in the high-end hospital segment is protected and sound. But in the clinic and lower-end segments of the market, we are starting to lose market share against lower-priced competition. And we have identified counter actions that circle around the connectivity between our scope hardware and IT and AI based technology. And we are also looking at launching additional features for our core of the GI portfolio, the CV1500 in due course. And we are then also building bundles for those clinic segments allowing us to protect the installed base. So recovery is planned for the second half of the year, and at the moment we are working hard with our Japanese domestic colleagues to ensure perfect execution of those mitigation countermeasures.

Well, thank you for your question. So from the SIS perspective, for the first quarter, Japan's revenue declined. I would like to comment about that. And globally, for SIS, for the urology, There has been a backorder for the major products, and that has been impacting the Japanese market, and that is one reason why we underperformed. However, the main reason is that with surgical endoscopy, the budget execution has been delayed. That's the major reason. However, that said, the pipeline is quite abundant, so we will continue to follow up this area. So in terms of the future outlook for Japan, so if you look at the – besides the CE, we have a high market share. So we would like to improve our customer contact and offer these – then increase our presence here in urology. Saltive laser, we are going to introduce saltive laser urology in Europe and the United States. This has been well-received. and we have been able to grow strongly. In Japan, we'd like to introduce this as well. So it has the storm solution, and then it has our customer contact in this specific area. Thank you. So this is a follow-up question. I think we basically talked about the countermeasure already, so I think I'll end with a question at this point. Thank you very much for your response.

Okay, perfect. Yeah, thank you for taking my questions. So, in the interest of time, just a quick one on Swan Endosurgical. So, it looks like you guys have taken a 45% minority interest in the joint venture. Would it be consolidated into your financial statement?

The answer is no. It's only 45% and our partner has a majority, 55%. So it's a joint venture. So we will account this profit and loss in the equity method.

Okay, perfect. Yeah.

Equity method. Yeah. And also just a quick 1 on the input alerts looks like on slide 20, you guys budgeted about 15Billion Japanese for that this year. Would that be all this year, or do you expect other expenses related to this?

It's up to FDA, so we don't know when its import alert is released. So we saw for the whole year, import alert will remain. So we cannot import these goods to the U.S. for a year. That's why 15 billion yen revenue comes from that.

Okay. Yeah. So if it gets resolved this year, then we wouldn't have that impact starting next fiscal year.

Yeah. Also, yeah.

But for planning purposes, as Zumi said, we kept it in because until it gets lifted, it's here with us.

Okay. Understood.

Yeah.

Great. Okay. Thank you very much.

I appreciate taking my questions.