Olympus Corp

TSE:7733

Earnings Call Transcript 2023-Q1

[Chikashi Takeda, executive]

Hello, everyone. I'm Chikashi Takeda, CFO of Olympus Corporation. Thank you very much for taking time out of your tight schedule to participate in this conference. I'd like to provide a review of our consolidated financial results for the first quarter of fiscal 2023, as well as full year forecast for fiscal 2023.

Slide 3. Here, you can see the highlights. Revenue increased by 12% on a consolidated basis. We achieved double-digit growth for both ESD and TSD, and the Medical business has set a record high in the first quarter. Operating profit hit record highs in terms of both amount and rate for our first quarter. EPS was JPY 20, up 34% year-on-year. We took measures to minimize some risks that had been identified at the start of the fiscal year. I managed to keep them within expectations while capturing growth.

Moving on to our full year forecast. Having revised our foreign exchange assumptions, we have revised revenue and all profit levels upward from the May forecast. We expect revenue to achieve JPY 1,019 billion, up 5% from the previous forecast, with Medical reaching a record high. We expect to achieve the target adjusted operating margin of over 20% set out in our corporate strategy. Profit is also expected to reach a record high at JPY 172 billion with EPS of JPY 135, up 50% year-on-year. These factors assume business operations while controlling various risks associated with changes to the business environment.

Now consolidated financial results and business review for the first quarter. Slide 5, please. So this is an overview of our consolidated financial results. Consolidated revenue amounted to JPY 214.1 billion, up 12% year-over-year, with very good revenue for Medical in the first quarter. We achieved double-digit growth for both ESD and TSD. Despite a significant drop in sales in China due to the Shanghai lockdown and delays in shipments due to shortages of parts such as semiconductors, revenue increased significantly against the backdrop of sales growth in regions other than China and contributions from new products. Gross profit was JPY 137.2 billion. The gross profit margin was slightly below the previous year. The cost of sales ratio increased due to the change in regional sales mix caused by a significant drop in sales in China due to the Shanghai lockdown as well as rising material cost, et cetera.

SG&A expenses were JPY 108.9 billion, with SG&A ratio deteriorating 0.9 points. Expenses increased in both amount and ratio due in part to an increase in expenses associated with sales growth in Medical and strengthening of our operating infrastructure, such as the QARA function, coupled with increasing personnel costs for strengthening our operational infrastructure associated with the reorganization of SSD. In other income and expenses, a gain of JPY 12.5 billion was posted. Other expenses included approximately JPY 2.4 billion as expenses for the reorganization of SSD. Other income included approximately JPY 16.4 billion as a gain on the sales of land in Tokyo.

Operating profit amounted to JPY 40.8 billion, an increase of JPY 13.2 billion or 48% increase year-over-year, with operating margin improving 4.7 points to 19.1%. Please note that the adjusted operating margin, excluding other income expenses, which is a milestone in our corporate strategy, was 13.2%. Under the severe business environment, given the COVID-related lockdown is Shanghai, operating profit was JPY 24.9 billion, an increase of JPY 6.2 billion year-over-year. EPS stood at JPY 20, up 34%. Under the severe business environment, given the COVID-related lockdown in Shanghai, global supply shortages of semiconductors and other components as war in Ukraine, we work to minimize these impacts by having each employee fulfill their roles on a global scale in order to meet the expectations of all the stakeholders, especially patients and medical professionals. Despite the tough market environment, this was factored in at the start of the fiscal year, and the first quarter progress was largely in line with expectations.

Next, I would like to explain the full year forecast for fiscal 2023. This will be Slide 12. I explained in May that some negative factors due to the changes in the external environment has been factored into the full year forecast. Having taken these factors into account, our financial results in the first quarter proceeded in line with the plan. We think we don't need to change the outlook for the remaining 3 quarters. However, having rise our ForEx assumptions, we have revised the full year forecast upward for fiscal 2023. Forecast assumptions for the forecast are JPY 134 to the dollar and JPY 140 to the euro. For more details in ForEx sensitivity, please refer to Page 27 in appendix. We expect revenue to achieve JPY 1,019 billion, up JPY 51 billion from the previous forecast. We also revised operating profit upward by JPY 25 billion. We expect adjusted operating margin to reach approximately 22% by continuously promoting cost optimization, while at the same time, implementing strategic investments for the future.

Operating profit is expected to achieve record highs for both amount and ratio. Profit is also expected to reach a record high of JPY 172 billion with EPS of JPY 135, up 50% year-over-year. Regarding dividends for fiscal 2023, we plan to pay a dividend of JPY 16 per share, unchanged from the announcement in May. We will continue to manage business operations while keeping a close eye on some risks anticipated in May, including supply shortages of semiconductors and the components, the aftermath with the Shanghai lockdown and the war in Ukraine.

So that's all from me. Next, COO, Nacho Abia, will continue his presentation.

[Nacho Abia, executive]

Thank you, Takashi. This is Nacho Abia, Chief Operating Officer of Olympus Corporation. And today, I would like to provide you some information about our Therapeutic Solutions division business, current and future growth drivers.

Can you move to the next slide, please? Following our established strategy, Therapeutic Solutions business, or TSD, aims to grow by focusing on targeted diseases in targeted clinical areas where Olympus can help elevate the standard of care. The most relevant targeted businesses we are focused on are in the area of GI-endotherapy, namely colorectal cancer, pancreaticobiliary diseases and gastric cancer. In urology, benign prostatic hyperplasia, stone management of bladder cancer and in lung cancer in the respiratory area.

Next slide, please. GI-endotherapy business competes in a total addressable market of JPY 300 billion to JPY 350 billion, growing at a 5% to 7% CAGR. This is a market where Olympus continues to leverage a strong position, market position across the gastroenterology suite and looks to introduce new offerings that improve the standard of care and drive future growth. We are in a very strong position as the #2 in the Endotherapy market, and we will continue building on our #1 position in the GI-endoscopy market.

Today, I'd like to highlight 2 examples of business success. The first establishes a strong foundation for current predictable growth, while the second highlights a very high growth rate development. First one, in the ERCP market, which has a single-digit growth rate. Olympus is highly differentiated with 2 products in this space, guidewires and sphincterotomes. These products provide significant revenue for Olympus and are both growing faster than the market with high single-digit growth rates. Second, Endoscopic Submucosal Dissection, ESD procedure is another exciting opportunity growing at double-digit rate. Olympus is #1 in this segment, highlighted by Dual Knife J, where we have been growing at double-digit rate. Finally, Olympus is also preparing to drive significant additional future growth in future with, for example, its recently introduced EndoCuff, which is off to a great start and a single-use cholangioscope, which is under development. In summary, in GI-endotherapy, we are well positioned for growth due to its market-leading product across the various GI clinical procedures.

Next slide, please. In Urology business, Olympus competes in a market of approximately [indiscernible], which is growing at 5% [indiscernible]. For discussion purposes, we can think of urology in 2 ideas [indiscernible]. Okay. Sorry, it was -- translation is listened in the English channel. So for discussion purposes, we can think of Urology having 2 areas of anatomical focus, upper tract and lower tract. Stone management is a condition of the upper tract and represents a market opportunity of JPY 180 billion, growing at about 4% annually. Olympus has a broad portfolio of ureteroscopes and lithotripsy generators for stone management. These products together provide a solid revenue foundation with steady single-digit growth. Additionally, in the last years, we've been enjoying high growth in stone management with our new Soltive laser lithotrispy system and lithotrispy consumables, which are growing at double-digit rates. And we are also preparing the market for its future single-use ureteroscope, which will drive additional future growth.

Moving to the lower urology tract. There are 2 clinical conditions, BPH and bladder cancer, which together comprise JPY 125 billion market, which is growing at a 10% annual rate. Here again, Olympus has been present for many years and generates a strong revenue stream from cystoscopy and resection consumables. High growth in this area comes from Olympus latest PLASMA+ resection system, and they are accompanied bipolar electrodes. And for future growth, Olympus has developed in the market for its iTind minimally invasive BPH treatment, which is showing very encouraging clinical fit.

Next slide, please. Finally, our respiratory business is also well positioned to deliver strong growth due to the value it brings to the Pulmonary Lab and the high-growth area of lung cancer diagnosis and stage. Olympus is the global leader in the reusable bronchoscopy market, with a market-leading portfolio of broncoscope and devices to diagnose and treat pulmonary diseases. This portfolio, along with the new EVIS X1 bronchoscopy platform continues to drive sales growth. Our products also hold a premium positioning in the growing field of lung cancer staging and diagnosis. Lung cancer is a leading cause of cancer deaths in the world today, and Olympus has been a pioneer and leader in staging and diagnosis since 2004. We need to introduce the world's first endobronchial ultrasound bronchoscope and associated transbronchial needle aspiration needles for later example of suspending cancerous tissue.

It was bronchoscopes and EBUS-TBNA together are growing at double-digit rates. Looking forward, future growth, Olympus continues developing the market with the thoracic electromagnetic navigation platform from our Veran Medical Technologies acquisition as well as its broad portfolio of single-use bronchoscopes. We feel confident that our leadership in the Pulmonary Lab and the growing field of lung cancer diagnosis and staging provides a significant market opportunity that underpins current and future growth.

I hope this information has been helpful to clarify a bit better of our potential in the Therapeutic Solutions division area. Thank you, and this concludes my presentation.

[Takaaki Sakurai, executive]

We'll now move to the Q&A session. But before that, I would like to go over the questions that we received in advance, especially the frequently asked questions.

The full year forecast has been unchanged, but what was the impact or has been revised upward only based on the foreign exchange assumption change, but what was the result for 1Q? And there were many risk factors, I believe, in Q1. So can you comment on that is the question.

Thank you. Can you hear me? Takeda would like to respond.

[Chikashi Takeda, executive]

I think 70% to 80% of the answer was contained in my presentation, but let me repeat. First, against our internal budget, basically in line with our budget, that was the result for Q1. Shanghai lockdown and semiconductor and other materials supply shortage and the situation in Ukraine and Russia. These risks had been assumed from the very beginning of the fiscal year, and this had impact on revenue. 1% or 2% impact on revenue growth was what we assumed from the very beginning, and with that assumption, the results were in line with our expectation for Q1.

Now going forward, we don't want to write it down. And so that's why we wanted to wait until this QA session. So what are the lost opportunities, I think, is another area that you might be interested in. Our internal analysis indicate following at the high level. In terms of revenue, over JPY 10 billion plus maybe 15 -- as much as JPY 15 billion at least over JPY 10 billion additional gross profit impact. That's what the calculation shows. Now it doesn't mean that the result of this analysis would be the additional revenue that we could have achieved. No, that's not what we mean, but that is the size of the impact that we had in mind more or less. That's all.

[Takaaki Sakurai, executive]

Next, let's go into the Q&A session, taking questions from the participants. The first quarter results, and you have revised your full year outlook. In terms of the margins, in terms of the trend of the margins, the reason I ask is that the first quarter, the ESD margin was 21% and the post-COVID from the second quarter to the second quarter, 3 quarter, cumulatively is up 36% margin. I think, basically we have to reach 36% margin to reach the level. So in TSD, I think, this quarter was 18%, again, to be able to achieve the revised outcome. So the second quarter, third quarter, fourth quarter, in average, 24% of margin would be necessary to be achieved.

So in terms of the margin improvement, specifically, I think basically, you're seeking that in the ESD business. So it means that the reason why you are anticipating a more higher margin from the second quarter onwards, whether it's the product mix? Or do you transform Olympus initiatives? What are the things they can do to improve the margin?

[Chikashi Takeda, executive]

So I would like to respond. First of all, largely speaking, in all of the businesses, the China business specifically, you had the Shanghai lockdown in the first quarter, there was a substantial decline in our revenue. On top of that, in China, I think specifically for the ESD business, within the region, the profit contribution was high coming from China. So first of all, well, if you look at the overall situation for the second quarter onwards, will Shanghai lockdown impact?

Basically, we'll have -- we're going to catch up from that lockdown and basically, the China contribution to the profit is going to improve. So that would be the 1 major assumption that we are factoring into our outlook. And looking in more detail, so excluding the ForEx impact, that is or BSD, the next 9 months, year-over-year, basically, the growth rate will be the same at the first quarter, at least -- that is the minimum level of the growth that we are anticipating.

In terms of cost, it will be the same level as last year. I think that we'll be able to reach that SG&A for the ESD business. The spending of our expenses for the first quarter was at a high level. So we want to control that for the following 9 months. That will be our assumptions.

The TSD business, the first quarter sales growth year-over-year was 2.3%, close to 2.3%, or maybe close to 3%. I think in the following 9 months, we can double the growth. That is due to the recovery of China. On top of that, the growth driver for the Urology area will be accelerated. So in terms of the region, it will be Europe, the U.S. and Japan. But for the non-China businesses, our market is going to grow. So that is the big picture that we have.

So in terms of COGS, Again, this will be the same level against the previous year. And for the China contribution is going to rise, and I think that will drive the profitability. So SG&A in terms of consumption or the progress compared to normal year, first quarter was basically about the same level. So I think as long as we use SG&A, like previous years, I think that will be okay.

Going to SSD. It's a bit behind, but we're just focusing on -- I think we still focus on the revenue. We have the Shanghai lockdown. And in terms of -- there has been a challenge in terms of the procurement of the parts and material. We have been able to ship the products. On the other hand, in terms of the backlog of orders compared to last year's level is double -- the order backlog is double compared to the previous year. So we'll be able to get our hands on the materials and components. Now on -- so based on the improvement of the environment, the backlog will turn into sales and then basically, we'll see orders and then ship our products as normal, meaning that with the remaining 9 months, we'll be able to catch up for the SSD business.

[Takashi Akahane, analyst]

So one follow-up. This -- I want to hear more detail about China. So China for April, May, June, what type of momentum was there? Specifically, may be April to May was stagnant, but in June, how much catch-up were you able to achieve in June? So the recovery in June was stronger than expected. Can you explain? And if you look at the full year forecast, so your 2022 China capital spending in terms of the hospital spending, I think basically, you're seeing that it's going to be positive, meaning that your customers will have the budget to spend. Does that -- is that assumption unchanged? So if you have any updated insight about this, I would like to ask about that. Thank you.

[Chikashi Takeda, executive]

So some I will answer, and after that, Nacho, I would like to turn to Nacho to follow up, or maybe correct me. First of all, for the -- in terms of the numbers, I would like to respond to that. First of all, April, basically, in terms of the shipment, it was 0. That is the situation. And going to May, about 50% to 60% utilization has recovered going to June. So maybe year-over-year, double digit growth is being seen.

So after the lockdown has been lifted, in line with that, the revenue has been trending in line with the lifting of the lockdown. So that's all for me, and then I would like to turn to second question from Takashi on the expectation of the spend of the hospitals in China, how we saw and how we are now seeing the situation there.

[Nacho Abia, executive]

Yes. Thank you, Takashi. Just to complement a bit your explanation, which I think is accurate, what happened in April and May in Shanghai and the lockdown in Shanghai, not only impacted obviously the business in the Shanghai provinces, I mean, the income in orders, but also impacted the rest of the country because for these 2 months, product demonstration was literally almost impossible to do because of the nonpossibility to ship products from Shanghai warehouses to the customers, which delayed in all over the country, the tender processing.

So we are going to need a little bit of inertia in order to recover all those tenders. But what I can say is that after April and May almost having no sales due to the external factors that we could not control, in June, we have a very strong recovery month already. So we show it significant additional sales over our original plan. And the expectation is that over the coming months, those tenders will reactivate. And we are seeing a strong GI endoscopy activity in China. And although it's not easy to predict exactly what is the number that we can achieve there, definitely, we see some significant growth in China in the months to come. That probably will begin materializing in big numbers starting from September this month, where the tenders will reactivate.

So we are positive about the situation in China. We are contacting customers there and they expect as well their business to [indiscernible]. So that's what I can add to Chikashi's explanation.

[Takashi Akahane, analyst]

Can I just double check that you are not really seeing any signs of budget cut by Chinese hospitals at this moment?

[Nacho Abia, executive]

The situation in Chinese hospitals in the last 2 years or 3 years with the COVID situation has been a little bit strange with its ups and downs. I think that we were expecting some recovery on the budget these months. And the direct impact of -- on hospital budgets of the lockdowns in April and May is still difficult to predict. What we see is some reactivations of tenders, and at least for the GI business, we see that there is a lot of activity to the market. So we are confident that this area will recover strongly.

[Unknown Analyst]

The first quarter, China is a concern, but I would defer that to other questioners about China that is ESD segment, Japan, Europe, usually, excluding the foreign exchange impact presented big growth in revenue. And I think that's where the focus is usually. I think EVIS X1 was an impact, but can you explain what the reason was for this big growth in revenue other than EVIS X1? What was the beneficial factors that contributed to growth in revenue?

[Chikashi Takeda, executive]

Okay. Let me first answer that. And Nacho, if you have anything to add, please do so. First, Europe and Japan, EVIS X1, yes, it was felt. And in Japan, at the end of last fiscal year, the semiconductor shortage issue affected the business, and so order backlog was increasing. And since April, they resulted in shipments. That was another factor that contributed to the growth in revenue. And in Europe, in addition to EVIS X1, it's part of the picture, but in U.K., NHS, the budget that was executed that benefited us especially for GI, ESD. So segment benefited from this as an additional revenue source to increase the revenue results in Europe overall. And also, in Russia, at the end of last fiscal year, shipments were held. For those orders, we were able to ship during this first quarter, which was another contributing factor. Nacho, anything you want to add?

[Nacho Abia, executive]

Not much to add. I think that we are seeing very solid business in Japan, in the U.S. and in Europe. In Europe and U.S., there is regional factor. One is the NHS in the U.K. continue with strong purchases plan. As you say, the other is that overall in Europe, EVIS X1 is really driving the growth. The same one in Japan. So we are seeing very strong businesses there. In the United States, even if still we have not launched the new EVIS X1, the loyalty of our customers to our products and the appreciation to our products is still very visible. So we are having a very strong Q1 market -- also provoked by the last, again, 2 years, COVID situation that provoked the strange purchase behaviors. But I think altogether, the GI business continue to be very strong in all geographies with obviously the exception of China because of the lockdown situation. And TSD, specifically urology and respiratory and endotherapy are showing very nice growth in all geographies -- across all geographies in general. So I think that this is the situation we are seeing in Q1 and what we expect to continue in Q2. Thank you.

[Unknown Analyst]

I have a follow-up question. Looking at the current situation in Japan, semiconductor has been secured already, and therefore, the shipments would return to normal level. Is that a correct understanding as far as Olympus is concerned? And also, when you secure a semiconductor, did you have to pay a premium for that, which might result in increased COGS going forward? Should we not be concerned about that?

[Chikashi Takeda, executive]

Thank you. I would like to answer that. First, did we secure all the semiconductors necessary? Well, compared to what we were anticipating initially -- how should I put it, the risk had been lessened. To a large extent, we have been able to secure the necessary supply. That was for Q1. Having said that -- how should I put it, the long lead time for orders are not being allowed now. So up to this point in time, we made lots of efforts to secure the semiconductor supply up to this point that is, and we are expecting this to continue that supply will be secured. But for the long lead time orders, we have not been receiving the commitment from the suppliers. And in that sense, it's uncertain. But compared to our original anticipation, we did better in Q1. And based on that experience in Q1, although there are uncertainties at least compared to 3 months ago, things are looking better is the way I see it.

And price. For the last 3 months from the so-called spot market, if we are to purchase from the spot market, we knew that the price is going to be exorbitant. That's what the media has been reporting. And to secure the amount, we started to source from the spot market, and in Q1, maybe JPY 1 billion to JPY 1.5 billion COGS deterioration resulted from that. Now going forward, basically, on your question of whether you should be concerned or not, we did factor that in the full year guidance. And so in that sense, you don't have to be additionally concerned. That will be my answer. Having said that, markets change always.

So internally, fixing the budget and say that you can operate based on that is what we're doing, but at the same time and actually spending -- expanding these -- consider all possibilities. And on certain items, you are going to need the approval from the executive officer. So cost containment measures programs have been implemented. So if the prices go beyond the assumption, to prepare for that, we already have those cost containment programs running. And of course, there's no telling how the markets would turn out. So we cannot be 100% certain, but at this current point in time, we are factoring in some increase in the semiconductor prices and that's already incorporated in our guidance, and we do have the backup plan as well.

[Unknown Analyst]

So the Europe is [ ESD ] strength, I can understand that. But what I was concerned is the U.S. TSD is not as good as expected. I think for the full year, I think basically it's double digit, but it's about 1% in the first quarter. So is -- I think you have sold it in PLASMA. You had the growth, but why is it in the first -- 1% growth in the first quarter? I would like to know the background. And Takeda-san talked about ESD in terms of the margin is lower, but maybe the SG&A spending is higher. Why? I would like to know about that. So can you contain that in the second half? That's my question.

[Nacho Abia, executive]

I think, overall, TSD have been, obviously -- in the global has been impacted by general, mostly the impact in China, and this has impacted the overall business. The situation in the U.S. has been mostly driven by some situation regarding supply chain, not semiconductor linked, but linked to other parts or linked to other packaging issues that we have been experiencing that we have [ promoted ] some delays. We have been dealing with those situations diligently, and step-by-step, we are recovering those business. But I think this has had some sort of impact in Q1, and we will continue working on that in order to recover from Q2. So from a procedure point of view, we are seeing good activity, and there is nothing to worry on that sense. So I think when the supply chain will stabilize, I think we will see normal rates of growth in TSD.

[Chikashi Takeda, executive]

So going to your second part of the question of SG&A. I think this is a kind of -- I mean some of the multiple items like outsourcing, it's increasing, let's say, QARA response or expenses, personnel cost has increased somewhat, that is the sales commission and Japan. Well, the previous year, so there has been some reserves that we have given for the previous year. So I think it is sure that SG&A is higher, a bit higher in the first quarter. So in the following 9 months, rather than specifically doing something in some areas, I think it's a kind of in totality, we want to optimize our SG&A in the following 9 months.

[Unknown Analyst]

Can I just ask a question about the TSD business? I think -- well, thank you, first of all, for talking about the TSD business in general, because once EVIS X1 launches in the U.S. this year, I think there is probably not going to be much to talk about on the ESD side for a while. So it really helps to talk about this. So thank you.

But my question about the ERCP. So you're saying ERCP market growth only in about low single digits, Olympus is growing high single digits. I believe the size of this business in your portfolio is probably around JPY 20 billion, if you can correct that. You pointed out guidewires, sphincterotomes as areas of strength. I believe the Visiglide made by [indiscernible] the Guidewire has been a differentiation factor versus the competitor's offering. So I don't have -- there's nothing to argue about there. But what is different about your sphincterotomes? And why is this portfolio growing faster than peers? Can you replicate the success with other ERCP devices such as baskets, and most important, biliary stents? Because my understanding is that ERCP is an area with a lot of entrenched competition. So it's somewhat slower growing than I had thought. So if you could provide some insight into this.

[Nacho Abia, executive]

Yes. Thank you for your question, which was very detailed. I'm not sure if I would be able to answer to the level of the detail you are expecting. But what I could say is that our -- in our position in the therapy in general is much stronger in the more complicated the procedure is the better products perform and the better our market share is. And that's why in ERCP and ESD, we are doing better than the market and we are -- we have indications that we are gaining market share, even obviously, this is not accurately easy to measure, right?

I think, the -- I mean, it's really difficult to assess about the technical -- why the technology -- why some products are better than others in a market, which is that tight, in many cases, it depends as well on the taste of our customers. And this is when we have indicated that in our guidewires and sphincterotomes are very well accepted, and they are considered by our customers that they are doing a good job there.

Visiglide is one of our most successful products as well and is doing well. But I think overall, the portfolio is growing. There is 2 reasons for that. One is which, obviously, we believe that our products are at the very least at the same level of our competitors and not superiors, but also, I think that over the last year, not only recently, we've been very active in the market from a commercial standpoint, I mean, growing the number of interactions with customers that we can show our products to them and make sure that they understand the benefits.

And also, we've been growing our portfolio and making sure that we're having complete or having a more complete portfolio for ERCP. So I think these are all together the factors that are making us to believe that the situation in ERCP is positive for us and will continue being positive for us. I hope that this answer somehow your question.

[Unknown Analyst]

My first question, well, I think you did respond partially. You said that you were able to minimize various risks. I think that was one of the major messages. But when I look at Page 21, the variance analysis, the cost increase. The material cost, how was it? You said JPY 1.5 billion. I think that's just for semiconductors. So can you explain what other materials were? And to minimize the risk, what measures proved to be effective? You did mention some, but could you elaborate, please?

[Chikashi Takeda, executive]

JPY 1 billion to JPY 1.5 billion semiconductor and other materials included. Maybe I was not clear on that, but other materials are included as well. That would be my first answer to your first question.

Regarding the mitigation plans, for example, regarding the cost increase, sales price increase is what we do -- is part of what we do. And regarding the securing of the materials, we just made very steady efforts, which proved to be effective. One is that conventionally -- well, this is something that we really need to reinforce within Olympus.

Previously, we were not approaching vendors and suppliers as a single global entity. We did not do that much, but we reinforce that approach, and we also conducted the top management negotiations contact and allocation of what we do with what we have secured. We have refined that consideration as well. So those are some of the specific measures that we took. Regarding Russia, the customers, patients and health care providers, the question is, how can we deliver our products to them? To access the Russian market, our European team looked at several options and identified the route -- transportation route that will get our products to our customers. That's just 1 example, but 1 specific example of the mitigation. So that's random examples of what we did.

[Unknown Analyst]

A follow-up question, different subject. Looking at China, Q2 onwards, what is your view? Demand, you said, is recovering compared to Q1, but if we are to look at ESD and TSD separately, what is the demand for the capital product purchase and orders in China? In TSD, maybe it's declining. ESD, some of the products are seeing declines. What about the situation right now, June, July, the orders in China?

[Nacho Abia, executive]

So the situation in China, as I mentioned in previous question, is that for April and May, I mean situation has slowed down in terms of demonstrations and the tendering process has been delayed. So when needs about orders not related to tenders, we see that there is a strong recovery on procedure, which is driving already incoming orders. And at the same time, we see that there is more activity in tenders that will have not yet materialize, but we hope will materialize starting from September, October this month. So we are forecasting a good Q2, but most importantly, we are forecasting a strong Q3. That's the current situation at this point with the information we have.

[Unknown Analyst]

[Foreign Language]

[Nacho Abia, executive]

Mostly because of the tenders that, today, we are being discussed with our customers. As I say, I think the tendering process was delayed because of the lockdown, and we expect some of the tenders to materialize in Q3 this year. Has been certain delay in all the tendering processes in China due to the lockdown.

[Unknown Analyst]

So this is about the SSD business. For the first quarter, performance was bad. So this bad performance, will they have an impact in the plan to sell this business? Or does this impact the business plan of this business?

[Chikashi Takeda, executive]

So in terms of the outlook, the SSD business, the first quarter, because of the information that we have shared was quite weak. But in terms of the order backlog, it has been going up. So we will turn that into sales step by step, and then we want to reach the full year outlook. So that is a plan for SSD. And in terms of the future after the spin-off and in terms of the sales of this business, is there -- this is no impact? So you will be able to achieve the full year plan, and then basically, the buyer will be okay with that. So in terms of the sales process, there is no information that I can communicate with you in a timely manner. I would like to communicate the information when necessary.

[Unknown Analyst]

Just one question. I understand about the upward revision. Upward revision at this point in time is really good news, but the fact you implemented that, especially JPY 51.5 billion revenue, and revenue to profit, JPY 2.5 billion. Semiconductor, okay. Ukraine, not as serious as anticipated, and China is recovering. Are those the reasons why you are revising upward at this point in time? And I don't understand correctly that foreign exchange assumptions would account for this amount of upward revision.

[Chikashi Takeda, executive]

Let me take that question. Basically, the May announcement, the guidance, the underlying plan at that time remains unchanged. So this upward revision is almost entirely in relation to the foreign exchange rate assumptions. I hope that answers your question.

[Unknown Analyst]

Yes, clear. So China, renminbi, JPY 20, it's not just foreign exchange, but the volume as well. June, July, Q3, are you assuming the volume would be on par with your plan?

[Chikashi Takeda, executive]

Well, we can't really discuss on a monthly basis, but on a full year basis, on an overall basis, we do have such for China on a local currency basis, and we're translating that to the functional currency of the yen using the latest foreign exchange rate.

[Unknown Analyst]

So this is about the China ESD, TSD business. So this is a confirmation of what you said. For the third quarter, it's going to become strong. So meaning that the second quarter -- because due to the impact of the lockdown, the delay of the tenders, there will be some impact remaining in the second quarter. Is that the right way to look at this China business?

[Nacho Abia, executive]

Yes, this is -- I think what I -- just to clarify that point, I think that we are seeing a recovery versus -- obviously, versus Q1 in Q2. I mean it was some pent-up demand in April and May that is catching up in June, July. So I think we are seeing recovery, and we are doing better than our anticipated business plan in this month. The point of Q3 is that we expect short-term tenders. I mean the tender business is the one that we expect to recover in Q3, and we are working hard in order to gain those standards that we believe will boost our results in Q3. So that's the situation. So we are already seeing some recovery in Q2. We expect the recovery to continue very strong in Q3. That's the point.

[Unknown Analyst]

So 1 quick follow-up. So last year, I think, basically, in May, there was this policy that China said that [indiscernible] should be done for national manufacturers. So for the -- Buy China policy. So June Y-o-Y has covered, you said that, but maybe June was lower. It was a little hurdle to clear, considering what happened in June last year for the Buy China campaign?

[Nacho Abia, executive]

We've been commenting on this China policy in the past. I think that the -- our policy in China is to continue working with our customers and making sure that they appreciate the products and the technology that the products deliver. And this is what we've been trying to do, and we will continue working with our customers in that regard. The implementation of so-called Buy China policy or others, I think it's something that is an external factor that we have to include in our discussion with our customers. But we believe that, most importantly, as long as they appreciate the technology differentiation of our products, I think our business will continue growing nicely in China. And of course, we will continue working with not only with customers, but with the Chinese government in order to make sure that Olympus has an appropriate contribution to the well-being of the Chinese patients through our products, through education, through the different programs we have. So this is our -- the way we face the situation in China overall.

[Unknown Analyst]

The first quarter of last year, whether June, was it weaker compared to this year? Is that a question that you will not be able to answer?

[Chikashi Takeda, executive]

The IR division will respond afterwards.