Olympus Corp Ord

Now we would like to move on to Q&A. My first question is about GI endoscopy doing very well in the United States. Eat off scope penetration for high-end customers. So what is the penetration rate, adoption rate? In other words, It's pretty strong in the first half, but do you think the trend will continue in the second half of the year? That's my first question.

Thank you for the question, and I'll have Keith jump in here in a minute. But you're right to point out that our EDOF scope and our EVUS X1 adoption has been strong. We believe there's upside, continued upside to that penetration, not just in North America, but Keith, as the question was about North America, you want to talk about North America specifically?

Yeah, look, EVAS X1 represents the leading edge of our innovation strategy. I would say in the US, we're still kind of early to mid innings in terms of our penetration rates. You know, EMEA and Japan are a little bit further along, but there's still multiple years of runway ahead in the United States, particularly as we extend the Edovscope family. Thank you. Okay, my second question.

R&D expenditure and also contributing to the profitability. Well, R&D expense is actually down by 2.5 billion in the first quarter. What are the factors behind this? And also from second quarter and beyond, should we expect the R&D expense to go up once again because it was lower in the first quarter? So what is your outlook on R&D expenditure?

Thank you for the question. You're right, we did have a little timing on R&D in Q1. Some of that was as a result of workforce reduction. We transitioned some of our products to capitalization. But importantly, we really looked at The projects that are contributing to the growth in both divisions and that's where we're focused our R&D dollars. So I wouldn't expect a material change other than what we've guided already for the balance of the year. Thank you very much.

Okay, perfect. Yeah, thank you. So yeah, I have a question on the China business. In yen terms, it appears to decline about 3%. How much will be the decline in constant currency? So that's my first question. And then just want to confirm the FDA ship hold. I think you are saying that basically it will be lifted starting September 2027, right? The quarter starting September 2027. Just wanted to confirm my understanding is correct. Yeah, thank you.

Thank you. Let me take, because I did not say when the ship hold would be lifted. I'll come to that second. I want to talk about China first. And it's important to put China in context for Olympus because I talked about it being a nonlinear path back from decline. And I think it's important to remember that China remains a strategically important market for us. China records 4.8 million new cancer cases annually. That's the highest in the world. It's more than the US and Japan combined. These cancers are actually weighted towards GI cancers that we serve with colorectum, stomach, esophageal, all in the top 10. And if you think about the density of the endoscopist, it's like one-tenth of Japan. So I share that with you because procedural access has structural room to expand. And remember, the Chinese government is spending 9.2% of GDP on healthcare. So our strategy in China, which I've talked about on previous calls, is really clear and it's built on four pillars. First, accelerate localization. and begin to upgrade our local identity to transform our commercial model and redesign the service model to drive efficiency and better coverage. And revamp clinical engagements as well and then get much closer at the policy level. So those four pillars are how we're driving it. With respect to the decline, Michael, what was the actual percentage?

In constant currency, the decline for the China market was 17.3% for the quarter. So thank you.

Thank you for that. And I do want to talk about the FDA broadly to ensure we're clear here. and let me go back we have submitted a comprehensive response to the FDA with our action plan and we're diligently executing against that now completion timing varies by action item but we work transparently with the FDA and we up we update them on a completion of our actions and importantly we have really open lines of communication with the agency so if an issue comes up we get it resolved Now, specifically to the warning letters, right? As I mentioned, transparent, open communication with the FDA to have them lifted as soon as possible. At the time of the last fall inspections, we had completed all the actions resulting from the warning letters, and in fact, an independent third-party assessment that was performed prior to the inspection concluded that our actions had, in fact, materially improved quality operations. But you'll remember that the warning letter and the import alert are tied also to the Aizu plant. And at the end of 2025, the FDA conducted eight inspections, but has not yet reinspected the Aizu plant. And we don't know when the FDA will inspect Aizu, but now... We've been preparing all of our plants, including ISOO, for the inspections and maintaining a state of inspection readiness. But the import alert is strongly linked to the ISOO warning letter. And so we would anticipate the resolution of the warning letter will be required to release the products on the import alert. And again, this represents, in terms of our total book of business, less than 1% of Olympus' products that are on import alert. Even 1% is important. So hopefully that clarifies where we are with the FDA as well as your first question on China.

Yeah, sure. So on slide number 10, right, you mentioned that the majority of the shithole affected product is expected to return to market in the second half of fiscal year.

Yes, yes, yes. Okay, I thought you were referring to the import alert. The shithole products, yes. That's exactly what we expect in the second half of the year. Sorry, I thought you were referring to the import alert. The shithole, yes.

Okay, so second half of fiscal year 2027.

That's right.

Okay. Yeah, this fiscal year. Okay. Understood.

Yeah. Yeah. Thank you.

Great. Okay. Thank you.

So, first quarter US sales. That's what my question is about. From fourth quarter to first quarter, for two consecutive quarters, you have been quite strong, performing pretty well. So, first quarter US performance was stronger than expected or is it in line with your plan? That's the first part of the question. And also, Despite the fact that sales were so strong, why did the company issue a weak indication?

We actually exited Q4, as I mentioned, with a very strong order book, which is a leading indicator of our performance both in North America and in Europe. So we anticipated strength We had a very solid quarter. We have high expectations, but this was a very good quarter. It's broadly in line with our expectations. And what we see is good products and good execution, but it's a long year. And the reason we're holding guidance is it's too early to adjust. And as Michael said, as we get later in the year and get more visibility, we'll rethink about it. But we feel good about the strength of North America.

Thank you very much. My second question is about expenses, costs. Elevate associated costs and also 2,000 positions reduction cost. We had a lot of one-time cost in the last fiscal year. And for FY27, we believe that some of that expenses were still being incurred. I think that was initial guidance. But in the first quarter, position reduction and elevate related expenses, they were not incurred at all. or it's very small so elevate and also position reduction these one of costs are they going to be incurred um above what's included in the guidance or has it have they already completely disappeared not disappeared but what our commitment to you was is that in prior years we took

Thank you very much. Of course, we continue to incur quality-related expenses. We've become very focused on the management of our costs and trying to ensure that these don't become one-off costs below the line, but in fact, they become part of the operation of the business within SG&A. So, Michael, if you want to add anything to that.

Yeah, no, Bob, I think you hit the big points just to maybe put a few numbers around it. I mean, last year when we were finishing up Elevate, we finished the expenses associated with that in fiscal year 26. So you're not going to see those in this year's plan in this quarter or any future quarter. As Bob said, those are now being the remediation efforts are being absorbed within our existing plan. P&L. So that's as it relates to the remediation efforts. The operating model expenses also for the large part took place last year. So in fiscal year 26. So as we think about this year, as we spoke about when we opened this year a quarter ago, we talked about The sizable decline in expenses that were going to be taken below the line. And so you should expect quarter over quarter this year to have a lot less expenses sitting in our margin for P&L. So I guess the quick version of this is that you should start to see the benefit from the operating model changes that we have. That we paid for last year and the good news is I think you're starting to see that in our P&L in quarter one as you saw SG&A go backwards by 5.5 percent on a constant currency basis but you will not see those expenses to a large part go below the line in fiscal year 27.

And just to complete that story, we've been pretty clear that our focus is on delivering 100 plus basis points of out margin expansion. And one of the reasons we're going to be able to do this is every single cost pool with inside of Olympus is measured against the MedTech Thank you for your question. Thank you very much. That's all for me. Yeah, so congratulations on a very strong start to the year. I must admit I'm a bit sort of stupefied at the delta between my forecast and your actual number.

So I'm sure you want to hear that. So the question is the sustainability, the performance of the U.S. endoscope division, because I seem to recall last year, first quarter was a pretty bad quarter because people are waiting for the EDAF scope to launch. And I think endoscopes are down quite a bit. I think something like 30% or so. So I also recall those endoscopes came back to growth in second quarter. So my question is this, will we see strong growth in the U.S. in the second quarter when the hurdle is much higher?

Yeah, so thanks for the question, and I'll have Keith kind of talk about the underlying dynamics. And so, as you know, we don't give quarterly guidance, but I will tell you that what we look at is the order book along our key technologies to look at the health of that pipeline. And And the other thing that's coming along nicely as well is our operations team is ramping nicely with production and customers are really valuing the technology. It's just it's differentiated and it's important. But Keith, why don't you add a little color around the US dynamics and what you're seeing there?

Yeah, thanks, Bob. I think Bob had a lot of the main points, but look, commercial execution in the United States ultimately keeps getting stronger. We've got better pipeline discipline. We've been winning some IDN and ASC accounts. Bob mentioned this, but we've got improved supply and availability, which is incredibly helpful for our commercial teams. I think what you really see here is the continuation of a strengthening kind of execution engine from our commercial team. Like we said, Q1 tracked in line with our internal plan and we expect the commercial team and the commercial execution to keep getting better as we go. But the growth was really driven by EVIS X1, EATOFF, our EUS demand, so EUME3, Aplio, we have a new ultrasound radial scope, and then our ET business with Avival and Retentia. So it was a pretty broad-based growth for the corridor in North America, but we still see the demand for EVIS X1 and EATOFF, and as Bob said, our order pipeline looks really good.

Thank you.

Let me just confirm, so the big growth in the OP is really coming out of the EDOV scopes because I think those are priced double on normal scopes and also the ultrasound scopes are also quite expensive. Would that explain this?

Well, we think they're priced for value in the marketplace. So, yes, we are able to get good value and good pricing on those scopes.

Okay, so the second last question just on, I think this is for Michael. Could you walk us through the cadence of cost in first half and the second half? I think you said something about second half cost increase, something about R&D costs, efficiency costs in second half. And I think there was a 10 billion yen positive impact from the headcount reduction last year, or at least that's what's coming for this year. And I don't know whether this is weighted toward the first half of the year. So if you could walk us through like a, What kind of costs we should expect in first half and second half, positives and negatives? That'd be great. Thank you.

Sure. Thanks for the question. And look, I mean, I think when we laid out the year, we kind of framed out how we were driving efficiency across the business through our enablement of the GTOM, which we called our new operating model. And that went in effect April 1st. And so we were able to see... Thank you for joining us. Thank you for joining us. To see a sizable impact this year from that savings as well to the tune of around 200 oku as well. So this year as the impact of those changes take shape into the P&L. but hopefully that gives you you know some flavors to what we can expect there look the comment I made on R&D or Bob kind of highlighted in the opening around R&D is this just natural timing right there's there's nothing I would say too much behind the numbers other than some of the Timing as it relates to project spend that gets capitalized versus what's incurred on the P&L because of IFRS accounting. So I wouldn't read too much into that other than you'll see spending probably ramp up a bit in the second half of the year, which is what we typically see with program spend. But hopefully that helps give some clarity there.

Yeah, no, I think the other thing Katani said I would say is it's early, it's early, but you're starting to see the structural changes set the foundation for the productivity journey. We've got business process optimization, better flexibility in our supply chain, and again, just this relentless drive to get to MedTech cost benchmark. So multiple things, but it's early. We know we earn credibility a quarter at a time, so, but... It's a solid start. Got it. Thanks so much.

Thank you for taking my question. So, let me ask about the outlook for the adjusted operating margin for GIS. So, the first quarter number was 23.3%, I think, which is almost near level of the four-year guidance. So, I think usually the margin improved from the second quarter onward as a seasonality of this segment. So, Is this high margin due to strong performance in the US market or should we expect different seasonal trends for this fiscal year? Thank you.

You want to take that, Michael?

I think we were very pleased with the way the business started. As you look at our mix of sales regionally, certainly that has an impact on the mix impact from a P&L perspective. As we talk about the remainder of the year and how we see revenue playing through by region, we would expect to have similar results. I would say similar results by region throughout this year, which again is a positive when we think about how the margin will play through at the gross margin. Again, I think the other part that I just talked about in my last comment was around the timing of expenses. So I don't think it's fair to say you're going to take a run rate, you know, a quarter and then multiply by four. That's probably not how the year is going to play out from a spending perspective as we have structured programs that will ramp up throughout the year. But I think as far as, you know, the impact from a gross margin perspective that you're seeing across that business, that's something that I think we'll continue to see positivity as we move forward.

Thank you so much. Let me ask one follow-up questions regarding the progress toward the four-year guidance. So for the impact from the shipment holds, the first quarter number of 13 billion yen in revenue impact from the ship holds. Could you confirm if this figure align with your initial plan and it was in a primary concern that traded within the SIS segment? And additionally, Dibini Significantly starting from the third quarter.

Yeah, so thank you for the question. I won't give specific kind of quarter-to-quarter guidance on the ship holds, but broadly that's correct. So what we saw in the first quarter was what we expected, and you're right that those ship holds, which by the way were proactive management-led decisions, were largely concentrated in SIS. and we expect those to be alleviated in the second half of the year so what should expect is what you stated is broadly correct which is it started we we did what we said we were going to do in the first quarter we think the planning and the ship holds we're making good progress on those and it will be as we suggested in our full year guide thank you so much

Can I ask about the progress of the surgical business review, which was published by you guys back in May? I know it might be a little bit too early to tell, but if it's possible, would you please provide some sort of update regarding the timeline and the scope that might be coming up going forward?

Thank you for the question. As it relates to the surgical strategic review, as I mentioned in my commentary, the review is progressing well. No conclusions. Thank you very much. Profitability, capital efficiency, and long-term value creation. And so when we think about capital deployment, since I've joined, we've talked about making sure the portfolio is in the right shape. So no new news on the surgical review, no specific timing yet, but we're approaching it with rigor, objectivity, and speed. So we'll make a prompt announcement if anything material comes up that requires a disclosure.

Thank you. The next question should go to Michael. You joined OpenPurse back in probably April. So you spent like three, four months since then. And based on your reservation since you're joining the firm, have you found any kind of some room for you to streamline your businesses in order for you guys to be more efficient and profitable?

Thank you. Thank you for the question and yeah it's been a few months for sure and it's been an exciting start to the position here at Olympus and look it's super exciting and everything I thought it was going to be from a perspective of foundational business and excellence and from a product perspective and just from a sales execution perspective. Thank you for joining us. Takaaki Sakurai Thank you for joining us. Over the coming quarters on the P&L and look on the balance sheet, there is also opportunities for us to continue to release cash to our shareholders. If you think about cash conversion cycle, certainly opportunities there and we'll be working towards improvement there. So look, I'm excited to be here. I think the excited to be here. Speaking to the results that we have this quarter as well and certainly look forward to the opportunities to continue to bring value to our shareholders with the improvements that we have planned in the future here.

Fair to say, it was a solid start and we deliver every quarter, right? So it's early in the year. We think there's opportunities. We certainly haven't run out of good ideas or opportunities to pursue, but we've got to work and we've got to deliver every quarter. So that's our focus. Thank you.

Thank you very much for taking my question. I got one question on SIA segment. I know that this segment is mostly disrupted by the ship and hold and export ban, but I can see that the US business is pretty strong. you know how you manage to come up with this strong result uh is any one of impact or you kind of doing some measures to overcome the negative impact from the ship and hold and export bond and then also sustainability of this mainly like us business uh into the after the second quarter thank you very much

Yeah, thanks. I'm going to have Seiji add some detail here, but you're right to point out that when you think about SIS, we have a number of franchises, and two of which, Uterology and Respiratory, are very good businesses and very good markets. And you saw that from the growth that they occurred in Q1. So, Seiji, I think you offering some comments on what you're seeing in the U.S. would be great. Yeah.

Yeah, thank you very much for your questions, you know. Yeah, besides with Csepel, you know, in SIS, in urology, in respiratory, in keeping a strong demand, and we could deliver, you know, a strong performance in the first quarter. Especially urology, you know, the resection is keep in a good sales, and also the, you know, especially respiratory area. Our E-Bus system keeps strong growth as well as the consumer business which we can sell combined with E-Bus, which means needle, has strong sales. So those strong segments we have, that overcome to the impact of the shipboard. And again, as Bob mentioned, in the second quarter, some of our key products will return to the market. So we expect to be back on track for years. Thank you.

Thanks, Seiji.

Can I ask you a follow-up question on urology? What's particularly strong in the U.S. market for urology? BPH or like a stone?

Yeah, thank you. Actually, both, you know, the stone resection and then also the stone for the laser. Those two is the key level of growth in the U.S. market.

Okay, thank you very much.

Thank you.

So what I want to ask is that about the GIS quarterly change for this year. So it used to be the case in the second quarter and the fourth quarter, specifically the fourth quarter, it tends to record higher sales. From this fiscal year, it seems to be the case that in terms of the volatility by quarter has smoothed out. Is that the correct way to understand that? The first quarter, last fiscal year, On the constant currency basis, the U.S. was minus 18%. So from this fiscal year, the first quarter, you said that it was in line with your plan. On the other hand, the fourth quarter, last fiscal year, North America was strong. So this fiscal year, does it mean that the fourth quarter won't generate a high level of sales compared to previous years?

So thank you for the question. When you think about, you know, last year, we had a lot going on in the business. We had a lot going on in North America relative to eat off scope availability. We had operational challenges. And so what you what you started to see us in Q4 was. Deliver nice double digit growth in the core business. We continue that in Q1. But of course, as the quarter goes on, the comps get a little different. But I would say, you know, we anticipate GIS being our key growth engine for us throughout the year. And there's nothing that tells us that we won't go. Now, of course, quarter on quarter is a little bit different, but I would draw you back to the reason you know we didn't change our full year guidance is you know we have some other headwinds that I've talked about you know China and some other things still moving back but we'd like to start so we have confidence in our full year plan.

Thank you. My second question is about the impact on the U.S. tariff. And for the first quarter one-offs, I would like to ask, if you look at page 22 of the presentation, there is a slide that talks about this. This is a waterfall chart. So in terms of this one-off, that was different from your internal plan, specifically about tariffs. Can you talk about those numbers?

I'll start, then Michael jump in here. But when you think about the way we planned the year for tariffs, we assumed a 15% tariff, you know, largely U.S. tariff. There's obviously other tariffs involved. And, you know, this is a dynamic situation. Now, you know, you've seen the news. It could be 10%, could be 12.5%. So potentially, you know, there's some upside there. But look, our job is to manage this through, Michael, if you want any specifics there, but largely the way we planned the year was at a 15% and it's getting a little bit better than what we thought.

Yeah. I think that's fair. I mean, just the comment that we have in the slide here references the fact that we built our tariff plan a bit conservative at a 15% rate. And obviously, what we saw in Q1 was a little bit better than that, which is good. I mean, obviously, that's a good thing. And we just saw the results of Section 301 come out, which for our business means that the tariffs will be somewhere between 10% and 12.5% going forward, depending on the country. But that's a good thing, considering our plan was based at 15%. So certainly some upside there from a GP perspective, which you can see, I don't know if you can see that in the slide or not, but essentially it's helping offset some of the other inflationary pressures that we're seeing, given the macroeconomic implications Thank you very much. You don't disclose the actual number, the actual amount, do you? Well, I mean, what I can tell, but for quarterly, no. I mean, what we've done conservatively to plan for the year is we put roughly 23 billion yen in our plan for tariffs for the year. So that kind of represents that 15% number we talked about, but we don't talk quarter over quarter what's happening with tariff impacts.

Thank you very much. So, I would like to confirm, the first quarter, SGA plus 7.3 billion yen, how much was better than your expectations? Maybe there are some, you talked about some timing differences, but you don't disclose that number. I want to confirm about that.

Yeah, we're not going to disclose how much is timing versus benefit that we've generated through operating model efficiencies, but I think it's fair to say that we had a good start to the year. We are more or less aligned with the plan that we had put in place and feel good that the remainder of the year will be in order of magnitude similar as we think about productivity from our op margin.

Understood. Thank you very much. That's all from me.