Olympus Corp Ord

Now we would like to start the Q&A session. I have a question about the question-related issues. I want to understand the current status. Last year in June, some of the products received an import alert. And last year, in the third quarter, ship hold was announced based on the inspections. And the ship hold was going to be largely completed within the fourth quarter. That was an explanation last time, but it's still part of this fiscal year's plan. So, I want to understand the current status of ship hold and schedule of the inspections. How is it progressing? Please share the current status.

Yeah, thank you for the question. Let me address both parts of that. You mentioned the import alert first. The import alert, again, is largely tied to our ISOO facility. And so until that ISOO facility is reinspected, that import alert may not be lifted. And to put the import alert in context, that was roughly 1% of sales. So that's the import alert. The inspections that took place in the fall, as I mentioned on our Q3 call, in an abundance of caution, we put a number of products on SHPHOLD. And as I mentioned, I think it was 20 or so, the majority of those began to be released from SHPHOLD during Q3 and Q4. The reason that some of this remains in FY27, as I mentioned and Michael mentioned, largely in the first half, is we do have a few products that remain on ship hold that we would expect that would be off of ship hold by the second half of FY27. So that's the That's an answer to your question in terms of what's the current state as it relates to import alert as well as products on SHPHOLD.

Thank you very much.

I have one follow-up question. From this fiscal year and beyond, what happens to elevate cost? What is the outlook for elevate and quality-related expenses? In this fiscal year's plan, 24 billion negative in the other expenses. So, is it going to be completed before the end of this fiscal year, or does it depend on future inspections? Is there a risk that this expense will grow bigger than this?

Thank you for your second question, and you are correct. In FY26, elevate cost was approximately 200 oku yen, as we shared, and 50% of that was in SG&A and 50% of that was in other expenses. Elevate cost as a program was ending and is ending in FY26 as we announced. And importantly, the spend that we will continue to do in the quality area will be treated within SG&A and not below as a one-off cost as had previously happened in Elevate. This is important, and the reason we're able to do that moving forward is a lot of the good work that Elevate done in terms of core quality processes we're now able to leverage in our ongoing quality program. So you should expect to see a dramatic reduction in below-the-line quality one-off costs as it relates to this specifically. So thank you for the question.

That's all from me. Thank you. Right now, about quality control issue, the Fukushima plant itself, as of February, has not received the inspection yet. But what is the timeline at the moment? In the first half or second half? And if possible, what is the preparedness towards the inspection? That's my first question.

As backdrop, we are in close, ongoing communication with the FDA in a very constructive manner. They have not notified us of any more upcoming inspections, so I don't know the answer to your question, the first part of your question. But the second part of your question is important, and that is we've been preparing all of our plants including ISOO for inspections and maintaining all of our facilities in the state of inspection readiness because this is where we expect our plants to operate on always. So don't know when they would be back, but our preparation for ISOO and other plants is ongoing and we feel good about the quality work that is underway across our operations footprint. Thank you for the question.

Thank you very much. My second question. This year's guidance is my second question. In terms of the GIS, the range for the profit is larger than the range for the sales. So, what is the impact of China in GIS? And also in Q4, it seems that there is a tremendous deterioration in China. Could you also talk about the Q4 results in China?

Thank you for the question. Let me talk about China overall. As I mentioned on our Q3 earnings call, I expected that our progress in China would be nonlinear or meaning a bumpy as we got back to reasonable growth in China. And in fact, what you saw in Q4 is that China remains a challenging market for sure. Q4 reflected greater caution in hospital procurement than we saw earlier in the year. But importantly, over the medium to long term, our plan is to return China to sustainable growth. And what we've done, I think, is really important in China. As I've mentioned on previous calls, we've replaced the leadership team, improved our commercial discipline, expanding our locally manufactured portfolio to improve competitiveness. And so what I believe you'll see is this ramp as we move throughout FY27. In some, I believe we're taking the right actions. It will be choppy as we get China back to a, you know, a mid single digit grower. And importantly, that's when I talk about the three, four or five plan. from 27 through 29, I simply need China to be a low to mid-single-digit grower as opposed to a decliner, and I'm confident that we have that opportunity in China with the actions we have underway. Thank you for the question.

Understood. Thank you. I would like to ask my question in English.

Thank you very much for taking my question. Congrats on a very strong result on March 26th. I've got a question about the competitive landscape for the GI endoscope globally. We understand that the competitor is now growing very quickly, not only in Japan, Europe, where the hospital budget is restricted, but also in the US. It seems like they are commenting that they're gaining the market share. So I just wonder, We are really worried about your competitiveness. Even in the US, it might be disrupted. How do you evaluate the current situation as of now? Also, I understand that you are going to launch a new scope for the EV6 fund globally in the second half of March 27, but do you see any risks that the product launch will be delayed? Maybe if the issue might be, you know, if it's become complicated, I'm just worried about the risk to be delayed. Could you clarify, you know, or could you briefly comment on this, you know, my concern? Thank you very much.

Yes, thank you for the question. And I'll have Keith talk specifically about his view of the market within GIS and our competitive position. But before I do that, let me offer that our market share position is strong across all regions, including North America. And you saw in Q4, when we have new products in the hands of our sellers, you see tremendous results. And so you saw that in just Q4. Before I turn it over to Keith, the one other point I wanted to make, which is to the second part of your question, which is our new product pipeline is very robust. And we continue to get new products approved by the FDA on a very good cadence. So while we work through quality remediation, that has not impacted our ability to get new products approved. But Keith, why don't you add your thoughts on the competitive nature and how we're positioned?

Look, we have confidence in our competitive position in the markets. I mean, if you look at how we performed in Q4, I mean, double-digit growth in the United States, really strong growth in EMEA, strong growth in Asia-Pac. I mean, Japan today, we're working on a new commercial model to drive the higher competitiveness, right, a more focused sales organization. And in China, Bob covered China before, but when we think about how we compete in this market, we've got confidence that we can compete at a high level. And from an execution standpoint, we continue to increase our ability to execute both in our commercial organizations, but also in R&D as we look to bring new competitive products to the market.

Thank you very much. One additional question is that I'd be surprised to see that, especially Bob, you decide to consider the option for the surgical endoscope. What makes you that decision? I know that you came from Medtronic. Medtronic also has a similar product. So maybe if you could share the view on your decision. Thank you very much.

Yeah, thank you for the important question. The reason I'm announcing a strategic review of surgical is when we look at surgical, and again, for everybody on the phone, surgical as we defined it is comprised of surgical devices, surgical endoscopy, ENT, and OR integration. And when we look at these businesses as a group, compared to the growth profile and the weighted average market growth of Olympus, as well as the margin profile that we aspire to. We made the decision that these businesses should be put under strategic review. Nothing's off the table as we explore a range of options to unlock value. Not going to be specific on timeframe, but I am going to be specific that we will update you as we go through this process. Because I think it's really important for our investors and our shareholders to know that this is a management team that is going to take courageous, decisive action on its portfolio and ensure that we're in a position to win and grow and produce profitable growth as well. So we'll keep you posted on that. But fundamentally, our decision came back to the criteria, which was strategic fit, a creative growth, and return on invested capital.

Okay, thank you very much.

Thank you for taking my question. So two questions. One, just the question concerning the believability or confidence in your forecast. So when we go back, if you recall, in Q2, Olympus basically said that they were very confident about the remediation, the progress. But in third quarter, of course, we were surprised with ship holds and, well, aid inspections, which I think is quite unprecedented. So how confident are you that when the time comes for the Aizu plant re-inspection, you won't have any additional ship holds and additional cost for remediations? How confident are you that some of the Form 483s you received will not turn into a warning letter? That's my first question.

Thank you for the question. And let me unpack that for you. First off, I'm very confident in our forecast. I believe our state of readiness at our manufacturing facilities continues to improve. You were right that it was a bit unprecedented, the eight inspections that took place at the end of last year. But the observations that resulted from those inspections helped us further accelerate and strengthen our existing initiatives, which is why, to an earlier question, I don't anticipate a bolus of costs in the ongoing remediation because, as you know, or you may know, is Following those inspections in December, we turned in a comprehensive response to all those observations. And in that response, we make a number of commitments, and we're executing on all of those commitments. And let me just say, there is absolutely no difference in what the FDA wants and what Olympus wants. in terms of patient safety and quality so i'm confident we're doing the right work and i believe we're in a good state of of readiness as we continue to progress okay thank you is any um are you sure so the form 483s will not turn into a warning letter is there any sort of communication with the fda or any assurance that that's not going to take place Thank you for that question, too. Of course, the inspections remain an open matter for the FDA. While we meet with them regularly in an open, constructive dialogue, they have not signaled any action yet as resulting from those inspections. One could anticipate that in general, although this also isn't necessarily a rule, that somewhere between four to six months after inspections take place, the FDA lets you know what they thought. But we've not heard anything yet. We continue to do our work, right? And that's the focus. We're doing our work and meeting our commitments. So it's difficult for me to say, but there's no indication yet from the FDA.

Would it be accurate to sort of describe what happened in the third quarter as in, like, you guys weren't expecting eight inspections all at once, and that's why you had to resort to ship holds? And so, you know, if it's just Aizu, then you're kind of more prepared. Is that how we should think about it? Yeah.

Well, certainly I did not expect eight in Q3. No one does.

You could go for the Guinness record.

Maybe a Guinness record. That was a bit unprecedented. But, again, I mean, that taught us we still had some things to work on. It pointed that we had to accelerate the globalization of some of our quality systems. We had some things to work on. So, again, that was, in my mind, that was a signal, keep doing what we're doing, do it faster. And to your point, certainly we'd expect, you know, a single site to be a lot less complicated then. eight simultaneously. But look, we're responsible for all of that. So it's not just ISU that's being prepared. It's all of our facilities that are on a state of preparedness for an upcoming inspection.

Thank you. Just lastly, on the surgical endoscope, obviously, we're a little surprised because, you know, we were expecting things like Thunderbeat and things like that to be put on the sort of, you know, put on the review. Now, it is true that I don't think Olympus has ever really demonstrated much competitiveness against Stryker. But isn't there any thought of trying to accelerate sort of development of being able to compete with Stryker? And obviously, this surgical endoscope probably has some sort of synergy with your ongoing work at Swan Endosurgical, right? So isn't there a thought of trying to strengthen this through an alliance or something?

Well, so to be clear, which is why I wasn't announcing a very specific set of actions, but saying as we take this surgical business under a strategic review, there very well may be elements, there may be underlying platform technologies that are enablers that continue to enable our progress in other areas as well. So When I say specifically nothing's off the table, that also means that we'll see how this develops. But I think it's important that I signal that what our expectations are relative to growth and margin and return for each of our businesses.

No, we appreciate that. Thank you.

FY27 Guidance. adjusted operating profit and operating profit. The gap between the two is 24 billion. Now, what kind of expenses are included in the adjustment?

Let me, our guidance, do you mean adjustments below the line when you're talking about adjustments to it, right? So, Michael, I'll have you take this. The point I was making to the previous person who asked the question was, Last year in 26, we saw a significant below-the-line cost for our quality remediation for Project Elevate that roughly 200 OCU, half of which was in SG&A and half of which was below the line. The point I was making to that previous question was we expect that below-the-line quality costs to, in fact, be reduced significantly. The other measures below the line, whether it's workforce optimization, GTOM, et cetera, but, Michael, perhaps you want to...

provide further sure below the line yeah so the the the adjustments that we put below the line for in your I think the question was focused more on the future guidance for 27 not on on 26 but there will still be some expenses related to G Tom in 27, although they'll be drastically different in scale, as well as some tail end quality costs that will be below the line. But again, a very different scale than what we saw in 26. Typically, the adjustments below the line are going to be targeted towards one-time items like R&D impairments and things of that nature where you have one-time items or you have large-scale programs that you're putting below the line. So what I would tell you is the difference between the full year 26 numbers and the 27 figures that we have are driven from the fact that these large-scale programs are being minimized in 27 from a perspective of the amount that we're going to be spending on them. So in the guidance, you're going to see that difference, and that's what's driving the profitability higher below the line in that respect. So hopefully that helps give you some clarity as to what's the drivers.

Thank you very much for your explanation. I have a follow-up question. Middle East related expenses. What kind of expense items are you accounting for? That's my follow-up question.

Yeah, thank you. Regarding the Middle East, it's a good question. We're monitoring that situation very closely. To date, the direct impact has been limited, but the way we're thinking about this is first from a cost and logistics perspective. We're actively managing our logistics providers and have identified Contingency routes to mitigate both space constraints and rate volatility. Starting to see some cost pressures in transportation in freight surcharges, primarily driven by higher crude oil. But we've not yet faced material restrictions on that. Regarding energy and material costs, of course, rising crude oil prices create upward pressure on energy-related expenses, but we're closely monitoring that as well. And when you think about our supply chain, we're working very closely with key suppliers, governments, by the way, logistics partners, to systematically reduce our supply risk. We also have inventory coverage currently for critical components. in line with our global standard levels. And importantly, there's no impact today on our customers or our patients. This is a situation that we monitor closely when we look at the cost. As we know it today, it's manageable for us within the guidance that we gave you.

Understand. That's all from me.

Thank you. I have a question about Q4 financial results. In your press release, there was a mentioning about North America, which was much better than the expectation in sales. Compared with your internal expectation, what were different? What were the upside that you had for the fourth quarter compared with your expectation for North America?

Yeah, so thank you for the question. You know, as we mentioned on the Q3 call, we had good expectations for North America in Q4, but particularly around Edof Scopes, our new product, we wanted to see, you know, demonstrations turn into sales. But I would also offer you that Q4 North American performance and performance in EMEA and APEC and elsewhere around the world really showed the strength of the entire Olympus operating team coming together from the commercial organization to the operating organization, global operations, supply chain, to ensure that we were able to produce, ship, install products. And so it was great to see that – us execute and awesome to see our customer demand for this product. So it was just, it was us fulfilling demand and that's what we believe it was a good tailwind as we go into FY27.

Thank you very much. You said that demonstration EDOF scope equipment, there was a shortage for those EDOF. That's why there was a concern you expressed in Q3 call that there may not be enough deliveries. But what was different from your expectation? Regarding the equipment available for demonstration, did you have enough number of equipment? Or for the SIS business, was there anything that was different from your original expectation for SIS?

Yeah, so again, I think one, we saw great demand for eat-off scopes in the U.S., and importantly, our factories produced more. So that was great we were able to meet that. We also saw tremendous uptake in our Gore Viabil stents following our January launch. So this was a healthy pipeline that then converged in conversion rates. So that was particularly strong. And on the SIS side, when we put products, pulled them off of SHPHOLD, they also delivered meaningful contributions. So it was a team effort across the organization that allowed us to really have a very strong Q4.

Understood. Thank you very much. That's all the questions I have.

Two questions about the United States. In Q4, the sales were strong, but do you feel the absence of that in the first quarter of the following fiscal year, or do you think the strong momentum will continue into the first quarter of the following fiscal year and beyond?

Yeah, so thank you for the question. The strength we saw in Q4 was particularly strong. I mean, we saw tremendous growth. But importantly, we see strength continuing in the U.S., and we look at that based on our leading indicators of order activity, pipeline visibility, so we believe that sets us up for a very productive FY27 in the very important market of North America.

If that is the case, We don't have to worry about the absence of the strength of the fourth quarter. So the strong momentum will continue each quarter in the new fiscal year. Is that the correct interpretation?

Again, let me be clear on our guidance, which if you look at Olympus overall, and I talked about China being a little choppy in the first half. We still have in SIS some products on ship hold. I was answering the question particularly about GIS in North America. We like the strength that we saw in Q4, how we exited, and we expect solid strength here as we move throughout the year. We're going to leverage that to offset some of the other pressures that we saw across the business that I talked about. which is why I wanted to be transparent and talk about the phasing as I see throughout the year, which I would view it as, you know, a slower start to a stronger finish, which is exactly what Michael mentioned as we talked about, you know, consumables versus capital sales. So that's why I feel confident in our guide we gave you, which we're targeting 3% growth, 100-plus basis points of operating margin improvement in FY27.

Thank you. One more thing. Impact of tariffs in the United States. For the FY26, 25 billion yen, a negative impact on profit. But for the new fiscal year, how did you include the tariff impact in your guidance?

Right. Michael, have you picked this up? But we basically assumed that the 15% tariff was going to continue in FY27, and we know that's a dynamic situation, but that's the way we thought about it. Michael, you want to pick up any more detail on the tariff scenario?

Sure. Yeah, I mean, obviously, the dynamic with tariffs is pretty much unchanged year over year, despite the Supreme Court's ruling, as we assumed 15% for our full year 2027 numbers as well. So, despite, you know, some good news from a cash flow perspective, when we can get our refund, we've baked in the expense into our expectations. in 2027 is similar to what we saw in 2026.

Thank you very much.