Olympus Corp

TSE:7733

Earnings Call Analysis

Revenue Growth Amid Profit Decline and Share Buyback Plan

The company experienced a consolidated revenue increase of 5% spurred by record highs in its Medical business, yet profits declined due to missed gains from land sales in the previous year and discontinued operations losses totaling approximately JPY 49.6 billion. The adjusted operating profit fell by 16%, with a margin of 15.2%. However, the total profit, including discontinued operations, hit a record high of JPY 216.7 billion, boasting an EPS of JPY 174. Looking ahead, revenue is expected to grow 9% to JPY 958 billion, while adjusted operating profit is projected to decrease by 1% to JPY 174.5 billion with an operating margin of 18.2%. The anticipated profit for the owner's parent is a record JPY 289 billion with an EPS of JPY 238. In alignment with their capital allocation policy, the company announced an additional share buyback of JPY 80 billion, totaling JPY 180 billion for fiscal 2024.

Steady Revenue Growth Amid Profit Decline Due to Non-Recurring Losses

In the throes of the financial period, the company saw a commendable 5% uptick in revenue, particularly bolstered by record performance in the Medical business for both the quarter and the first half of the fiscal year. However, an ephemeral blemish tainted the otherwise stellar record, with profits declining precipitously owing to the absence of a prior year gain from land sales in Tokyo and compounded by a substantial loss from the discontinuation of Veran Medical Technologies' product accompanied by a consequential recall expense. Efficiency improvements and investments in future growth cushioned this downturn, while the adjusted operating profit dipped by 16%, and the adjusted operating margin came in at 15.2%. Yet, the company looks ahead with optimism, projecting a revenue leap by 9% to JPY 958 billion for the full fiscal year, albeit with a slight 1% diminution in adjusted operating profit and an 18.2% adjusted operating margin forecast.

Strategic Roadmap Emphasizing Quality and Innovation

Charting the course for future prosperity, the company unveils a strategic triad of priorities focused on patient safety, innovation, and productivity. In the quest for excellence, a JPY 60 billion investment over three years fortifies the Quality Assurance and Regulatory Affairs (QARA) sector through the ELEVATE program. This initiative is a testament to the company's commitment to holistic improvement, promises to catalyze innovation and enhance profitability. Among breakthroughs is the introduction of the EVIS X1 endoscopy system, an avant-garde offering affirming the company's market leadership. This and other initiatives like the PLASMA+ technology system and iTind device for BPH treatment epitomize the drive towards growth in the strategic focus areas of Gastrointestinal (GI), Urology, and Respiratory care.

Investor Value Provisions with an Aggressive Share Buyback Plan

In a robust affirmation of its commitment to shareholder returns, the company has not only maintained a stable dividend policy but also announced a vigorous share buyback program to the tune of JPY 80 billion additional to the initial commitment, aggregating to a total of JPY 180 billion for the fiscal year. This action aligns with its capital allocation strategy and underscores the company's dedication to enhancing capital efficiency and shareholder value. The total shareholder return ratio, inclusive of a forecast annual dividend of JPY 18 per share, is earmarked to be an impressive 69.5% for the fiscal year.

Earnings Call Transcript 2024-Q2

[Chikashi Takeda, executive]

[Interpreted] Hello, everyone. I am Takeda. So first of all, I would like to provide a review of our numbers. And then in the second half of the presentation, Stefan Kaufmann to talk about growth and value creation.

So thank you very much for participating in this conference for the consolidated financial results for the second quarter of fiscal 2024 despite your busy schedule. First, I would like to provide a review of the second quarter results and then talk about our full year forecast for fiscal 2024.

And please go to Slide 3. This would be the highlights. Revenue increased 5% on a consolidated basis. The Medical business reached a record high for the second quarter and for the first 6 months of the fiscal year.

However, profit declined due to the absence of the JPY 16.4 billion gain on the sales of land in Tokyo recorded in the previous fiscal year, and due to the discontinuation of the manufacturing sales of electronic magnetic navigation system by Veran Medical Technologies. This is a loss of around JPY 49.6 billion and a provision of approximately JPY 5 billion associated with the voluntary recall of small intestine endoscopies system. Other factors, including expenses, have various projects to improve efficiency as well as personnel expenses for future growth and strengthening the operational infrastructure, such as QARA.

Expenses related to the U.S. FDA were approximately JPY 1 billion under SG&A expenses and approximately JPY 11.9 billion incurred under other expenses. These expenses were mainly comprised of complaint handling, medical device reports, MTRs and the validation processes and designs and designed to strengthen the quality assurance function for medical devices as required by the FDA and authorities in various countries. We have been engaged in constructed dialogue with the FDA to date and have made steady progress in dealing with the issues indicated in the warning letters.

So adjusted operating profit, which exclude other income expenses, declined 16% with an adjusted operating margin of 15.2%. Regarding total profit, including both continuing and discontinued operations, we posted a record high of JPY 216.7 billion, with EPS of JPY 174 due to a gain on the transfer of Scientific Solutions divisions.

Regarding the first quarter to the full year forecast, we have revised the forecast to reflect results up in the second quarter in addition to changes to ForEx assumptions from the previous forecast. Revenue will increase 9% year-over-year to JPY 958 billion, with adjusted operating profit declining 1% to JPY 174.5 billion.

We forecast an adjusted operating margin of 18.2%. We project combined profit for continuing operations and discontinued operation to reach a record high of JPY 289 billion, with EPS of JPY 238. Additionally, I just announced in the time of this quarter, today, we have decided on additional share buyback of JPY 80 billion in accordance with the capital allocation policy. In fiscal 2024, we planned a share buyback of JPY 180 billion in total.

In fiscal 2024, while we expect profit to decline due to various internal and external factors, we will steadily implement measures to address the specific factors that inhibit growth, while continuing to implement upfront investments for sustainable growth. Our CEO, Stefan, will talk more about these points later.

Going to Slide 4. I will now explain the consolidated financial results and provide a business review for the second quarter of fiscal 2024.

Please go to Slide 5. This is an overview of our consolidated financial results. Consolidated revenue amounted to JPY 436.6 billion. The Medical business, which was a good high for the same quarter, and it was up 5% year-over-year. All business segments for the SDTS and others all grew.

By region, Asia and Oceania, APAC, which grew in all areas performed well by business segment. Medical Service and GI endotherapy continued strong strength. Gross profit was JPY 288.4 billion, with the gross margin deteriorating by 0.4 points.

Despite a decrease in procurement and semiconductor spot market, the ratio worsened due to a provision of approximately JPY 5 billion, associated with the voluntary recall of small intestine endoscopy systems in ESD.

SG&A expenses were JPY 221.6 billion with SG&A ratio deteriorating by 3.2 points. Major factors behind this include increase in expenses related to various projects to improve efficiency, as well as rising personnel expenses and future growth and strengthening operational infrastructure, such as in QARA.

Adjusted operating profit declined JPY 12.8 billion to JPY 66.6 billion, down 16% year-over-year. The adjusted operating margin deteriorated 3.8% to 15.2%.

Regarding other income and expenses, a loss of JPY 62 billion was posted, a loss of about JPY 49.6 billion due to discontinuation of manufacturing and sales of electromagnetic navigation systems by Veran Medical Technologies, and FDA-related expenses of about JPY 11.9 billion were recorded.

In the previous fiscal year, we recorded a gain of JPY 14.6 billion, including a gain of approximately JPY 16.4 billion on the sale of the land in Tokyo. A loss of JPY 11.5 billion from continuing operations was posted in the meantime.

With the completion of the transfer discontinued operation evident in April 2023, recorded a gain on the transfer in the first quarter of this fiscal year. Total profit included in continuing discounted operations amounted to JPY 216.7 billion with EPS of JPY 174.

Next, I would like to explain our full year forecast for fiscal 2024 on Page 10. Sorry, could you go to Page 11. Our full year forecast for FY '24, we have revised our forecast to reflect the results up to Q2 in additional changes to FX assumption the previous forecast.

The assumed rate now is on the basis forecast are JPY 145 to the dollar and JPY 155 to the euro. We project that the revenue will increase 9% year-on-year to JPY 958 billion, with adjusted OP declining 1% to JPY 174.5 billion with adjusted operating of 18.2%.

Despite the weekend as a tailwind, we expect challenging results due to various internal and external factors. We project a record profit attributable to owners of parent of JPY 289 billion with EPS of JPY 238, reflecting gain on the transfer of evident.

Profit from continued operations is expected to reach JPY 61 billion with EPS of JPY 50. Capital expenditure forecast have been revised to JPY 78 billion due to a JPY 78 billion due to a review of investment items based on the results until Q2 and impact of weaker yen. Dividends for fiscal '24 is planned at JPY 18 per share, unchanged from the forecast.

In addition, today, we announced additional share buyback of up to JPY 80 billion. The EPS figures discussed today will reflect this. So we plan a share buyback of JPY 180 billion for the full year.

Slide 12, moving to forecast by segment. We have revised on the ESD OP forecast from the August announcement considering the delayed 10 hours due to the anticorruption campaign in China, and the provision for voluntary recall of small intestine endoscope system. EVIS X1 was launched in North America, our largest market, and China from October 2023, which is expected to drive our future business expansion.

We also have also revised down the TSD OP forecast, considering supply delays caused by quality responses and the part shortages as well as loss of approximately JPY 49.6 billion related to Veran Medical Technologies posted in Q2.

FDA-related expenses include around JPY 9 billion in SG&A and JPY 20 billion in other expenses for the full year.

For elimination in corporate, despite the absence of gain on sale of land in Tokyo of approximately JPY 16.4 billion recorded last year, the expected increase in corporate infrastructure reinforcement expenses, such as IT-related expenses, operating result is expected to improve revised classification for each project this year. Lastly, discontinued operation will generate a gain on transfer of evidence, resulting in a significant increase in profit year-on-year.

Slide 13, please. This slide waterfall chart shows the factors behind the change in adjusted operating profit from the previous announcement.

As was explained earlier, we have a difficult situation this year due to various factors, such as the lower sales provision associated with the voluntary recall of some products, expenses related to FDA bonds and other factors. Because of this, adjusted operating profit is projected at JPY 174.5 billion.

Please refer to the appendix for the factors behind the change in operating profit on the IFR space. Now this is all for my part. So I would like to hand over to CEO, Stefan Kaufmann.

[Stefan Kaufmann, executive]

Thank you very much for your explanation, Chikashi. So hello, everyone. I'm Stefan Kaufmann. Thank you for joining this earnings call. Today, as the President and CEO of Olympus, I would like to share with you my view on our current situation and give you some insight on our actions to sustain growth and value creation for all our stakeholders, mid- and long term.

Our clear priority is the remediation of all issues outlined in the 3 warning letters and transforming Olympus into a best-in-class MedTech company, with highest focus on patient safety and quality. We are making significant progress in meeting our FDA commitments and transforming our operational approach to deliver innovative, high-quality products and solutions to the market with enhanced efficiency paving the way for the future.

As already indicated in May when we shared our 3-year strategy with you, some of our remediation activities have a short-term impact on growth and profitability. Foreign exchange is helping us this fiscal year, but our midterm ambition level with respect to growth and margin expansion is obviously higher than what we will be able to deliver in this year.

Our shareholders' trust is important for us. Our capital allocation policy remains valid, and we will this fiscal year, and in the future, increase value for our shareholders and improve our capital efficiency. Now I would like to provide you with some more details to the respective points mentioned so that you hopefully gain a good understanding of my leadership and direction for Olympus.

Our company strategy is easy to summarize and comprehend. We have defined 3 strategic priorities: patient safety and sustainability, innovation for growth and productivity. We invest and will harvest from 4 strategic value pools: business and global expansion, strategic M&A, care pathway enhancement and intelligent endoscopy ecosystem. And all of this, we do in 3 prioritized investment areas and focus areas: GI, urology and respiratory.

As announced in the company's strategy, we will invest approximately JPY 60 billion over the next 3 years in strengthening QARA. These will be invested in both remediation and transformational activities, which cannot be clearly segregated due to the complexity and dependency of the different projects.

And we have, therefore, consolidated remediation and transformation under one holistic program management, which we named ELEVATE. We believe that ELEVATE will be one important enabler for innovation, growth and improve profitability through sustainable benefits such as improved life cycle management, and digitally enable processes to reduce cost, improve effectiveness and shorten time to develop clear and launch new products.

Once more, the remediation of the findings that led to our 3 warning letters as committed to FDA is the undebatable top priority. But we will, at the same time, unleash Olympus' full potential. We do not want to miss out on this opportunity for fundamental change.

In addition to the QARA efforts I've just described. We are also making investments in implementing initiatives in the 3 strategic priorities to achieve sustainable growth and value creation over the midterm. And I would like to introduce some of those examples today.

As one of our remediation and transformation projects, we have strengthened our capabilities and completely revisited our structure and processes for regulatory approvals. I'm proud that we launched EVIS X1 endoscopy system as promised in the U.S., and even earlier than planned in China.

EVIS X1 is now available in all relevant markets worldwide. It will provide the company with stable growth and cash flow. In markets that we launched already a few years ago, and from now on also in the U.S. and in China. In China, the effect may delay due to the local anticorruption efforts.

So all in all, we are incredibly excited about this progress as we will be now able to cover the remaining 50% of our sales for further growth potential.

In the last month, I had numerous opportunities to talk with health care professionals at congresses in Europe and Japan and other occasions. Their feedback is unanimously reassuring that everyone is specifically praising that we have reached the next dimension of visualization. Therefore, let me highlight some of the specifications that give us, again, a unique position in the market ahead of competition.

The EVIS X1 endoscopy system is our most advanced endoscopy system, and introduces several easy-to-use technologies that aim to revolutionize the way gastrointestine neuro disorders can be detected, characterized and treated. The imaging advancements include TXI, RDI, NBI, EDOF, ENDO-AID CAD.

EVIS X1 system first launched in Europe has seen immense success and adoption. A recent customer testimonial claimed that the imaging capabilities delivered by the EVIS X1 platform, really improve our capabilities to diagnose lesions and GI cancer at an earlier stage than was ever possible before.

The EVIS X1 provides a combination of diagnostic and therapeutic innovations to streamline and improve endoscopic procedures and scope handling. We are excited to continue to elevate the standard of care with EVIS X1.

Sales growth in TSD is more impacted by remediation activities. And unfortunately, we have not yet solved all our supply chain challenges. Nevertheless, the basics are still in place.

NGI endotherapy, complementary to our core GI portfolio, we have built a broad and differentiated GI endotherapy portfolio of ESCP, ESD, sampling and hosthesia solutions. Sales in U.S. grew in the first half double digit, which demonstrates our strong competitiveness in these therapeutic areas.

As you are aware, we are in closing discussions with Taewoong Medical. Their product portfolio is largely complementary to ours, and we regard the metallic stent portfolio as a significant future growth driver.

In respiratory, we lead market position in pulmonary and Evo branchoscopes, and our investments in single-use airway management scopes in the Slim-EBUS scope, which are under development, are expected to reinvigorate the growth in this segment.

Neurology for the upper urological tract, Olympus was the first company to launch the newest volume fiber lasers for lithotripsy. We combined the top market share in this category for both the laser systems as well as the consumable fibers. Competition has increased in this segment, and we are currently revisiting our go-to-market strategy for the U.S.

In the lower urological track, we have a similarly compelling and market-leading portfolio of solutions for the treatment of bladder cancer and BPH. We expect to see significant growth from the PLASMA+ technology system and more good news to come on the following page.

Today, I'm delighted to introduce iTind, which we expect to be a mid- to long-term growth driver for biology. iTind is a minimally invasive treatment device that contributes to early improvement of symptoms of BPH. It does not require cutting or reading of prostate tissue, does not require permanent device implementation and contributes to avoiding complications associated with other treatments.

For patients, it is also a great way to maintain sexual and urinary function and recuperate at home, as it does not require an uncomfortable catheter and can be inserted with a simple procedure without hospitalization.

For iTind, on October 20, 2023, the American Medical Association CPT committee published its decision to establish 2 category 1 CPT codes, a reimbursement code for clinics, which is expected to go into effect in January '25.

Although we have already obtained reimbursement in hospital outpatient and ambulatory surgical center, iTind is a high demand in the clinical office setting due to its minimally invasive device and data treatment capability. And more patients and physicians will have access to the novel iTind procedure. The U.S., where the CPD code applies, accounts for approximately 40% of BPH patients worldwide, and iTind is expected to drive future growth in the urology field.

Next, we will discuss our efforts to improve productivity. Since this fiscal year, we are not a conglomerate of different businesses anymore, but a pure MedTech player. Now we have the opportunity to create an operating model that puts the divisions on top of the organization with the full accountability for the global P&L, and verticalize all supporting functions with an aligned set of targets and KPIs and clarity about accountability.

We have already allocated targets for productivity improvements in fiscal year '25 and will, in addition, take a more structured approach next year to baseline the global organization, clarify value contribution and benchmark with industry peers to seek for further simplification and higher efficiency of our organization.

Regarding capital allocation, the policy of investing into innovation into business and M&A remains unchanged, with business investments as the top priority. In terms of M&A, we will continue to strengthen product portfolio through tuck-in M&A opportunities that complement and enhance our existing business and fit our portfolio in focused disease areas in GI, urology and respiratory.

As in the past, we aim to increase dividends to shareholders in a stable and gradual manner, and will consider share buyback when there are surplus funds available, after securing sufficient liquidity on hand for working capital and investments.

We announced today that we decided on an additional share buyback of JPY 80 billion. The total share buyback for fiscal year '24 is expected to be JPY 180 billion. The total shareholder return ratio for fiscal year '24, including an annual dividend forecast of JPY 18 per share is expected to be 69.5%. We will proactively continue to consider share buyback in accordance with our capital allocation policy for fiscal year '25 and '26. We are committed to allocating our capital with a view to improve the capital efficiency of Olympus and optimize returns to our shareholders.

This is the last slide of my presentation. As we are holding the Q2 earnings call today, it is not the right time to update our midterm target until fiscal year '26. Nevertheless, I would like to give you today at least an indication of how I expect our financial KPIs will develop in the next 3 years and beyond.

We are facing temporary headwinds on our top line caused by our quality recognition efforts, macro political and macro economical factors and some supply chain shortages. But we take actions to mitigate those headwinds and defend shareholder value, because we believe we have a great business and the right strategy in place.

In fiscal year '25, our remediation will not be finalized. I also don't expect that the macro political and macro economical headwinds we experienced this fiscal year will go away quickly. It's too early to say. But while I believe sales growth will be higher than this year, I don't expect a V-shaped recovery.

Our EPS target is including the JPY 100 billion share buyback, but not the one announced today. Also, foreign exchange effects are not included. So we aim to achieve an EPS growth well above the target of 8% as we will proactively continue to consider share buyback in fiscal year '25 and fiscal year '26, in addition to the share buyback of JPY 180 billion in total in fiscal year '24.

Part of being a leading global MedTech company is having industry-leading capital efficiency. So we have room to improve our capital efficiency. We have started already our productivity measures, but some of them will take time to fully positively impact SG&A and bottom line in fiscal year '26.

With all this said, in fiscal year '26, I expect us to achieve our mid-single sales growth target and adjusted operating margin and finally meet our target of 20%. After fiscal year '26, I expect Olympus to be set up for steady margin expansion above 20% by higher sales growth on a more efficient global operating model.

The 3 takeaways of my presentation are as follows: number one, remediation and transformation is progressing successfully, but it's not a walk in the park. It hampers growth and profitability this year. And also, it will hamper growth and profitability in fiscal year '25.

Second, our business, our strategy, our business model, our technology, our customer relationship are robust, and they secure sustainable growth and value creation for all stakeholders in the future, also in challenging times.

And last but not least, fiscal year '26, we will be back on track, for higher sales growth and margin expansion above 20%.

Thank you for your trust and your support. And this finalizes my presentation, and now we are looking forward to receiving your questions.

[Unknown Executive]

[Interpreted] We'd like to go to the Q&A session.

[Unknown Analyst]

[Interpreted] So what I want to ask most is that your performance has deteriorated the -- putting aside Veran situation. So this fiscal year, I think the situation is tough, I understand that. But whether you're going to recover in next fiscal year, I would like to make a discussion about that point.

Well, in summary, the anticorruption in China is going to put [ strain ] in your sales. And the -- I don't remember whether it be TSD OSC, there has been a decline in investment in Europe. And then I think for the urology, I think basically there has been some short supply in terms of components.

I think this has been the 3 major impacts on the actual demand. So going forward, I mean, next year, is it actually going to recover? I would like to hear your thoughts upon that. specifically. In terms of the decrease in investment in Europe, the U.S. companies have not mentioned about this much. I specifically want to take a deep dive about the situation in Europe.

[Stefan Kaufmann, executive]

Thanks a lot for your question. And then I would give you an answer from my perspective and then hand over to Nacho to supplement.

So actually, what we see from our perspective is that the situation fiscal year '24 compared to what we expect in fiscal year '25 from a macro political and macroeconomic environment will not change significantly.

So when you look at the situation in Europe, we are affected, obviously, by the sanctions against Russia, which has an impact on our top line significantly. When you look at Germany, there's, at the moment, reform of the hospital system -- of the health care system that prevents hospitals to purchase capital goods, and also the positive effect we had from the investments of NHS basically will not positively anymore impact our sales growth in U.K.

Then when you look at China, we believe that the anticorruption campaign in China has not shown so much impact year-to-date on our results, but we do expect that this will have an impact on the second half of fiscal year '24 and some of the impacts might also carry forward into the first quarter of the next year. So this is the macroeconomic environment.

And then on an internal perspective, Basically, as you have seen in fiscal year '24, we have seen a couple reports and a couple of recalls in relation to our remediation and transformation activities in QARA. And as I said in my closing remarks, we still need 1 more year to finalize our remediation and transformation activities to be back to very normal operations.

And I think this is the reason why I'm for fiscal year '24 without already committing final numbers, why I'm careful to create too much optimism that we have a V-shaped recovery. I'm sure we will do better than this year, but to catch up with the 5% CAGR, I don't think this will be realistic and feasible in the next year.

Nacho, over to you to supplement and comment.

[Nacho Abia, executive]

Thank you, Stefan, and thank you [indiscernible]. Just to complement what the and that you mentioned that might [indiscernible] much more diversified company in terms of geographic state and most of our American [indiscernible] that provides, obviously, a larger opportunity in many occasions, but also provides higher exposure in markets like Europe or China, where our penetration has been significant over years and the way that we -- of the business that we do there is very relevant in our total sales.

So I think that from an external point of view, we see definitely a situation in Europe that in Europe or in China, that it's early to say if it's going to improve. I personally believe that the European environment, it's going to continue being tough in terms of investments. I think the pressure -- the inflationary pressures is putting out of pressure in hospital systems. And we were enjoying over the last years, the massive investment on NHS in the U.K. specifically in -- and specifically in endoscopy, where they clearly overhaul the entire -- almost entire country in terms of endoscopy rooms and that forever. And obviously, the German health care reform will have an impact as well. So I think from that point of view, it's -- the situation will continue to recommend caution on our expectation there.

From an internal point of view, as Stefan just mentioned, I mean, we are just in the process of elevating through the Elevate process of quality situation. And that means much more scrutiny in every single signal that we have from the market that of any product can be potentially creating an issue with patients. And this is provoking a number of logistical situations. In the moment, we detect any signal of any kind. I mean, we really -- really look at the situation and figure out what is the best course of action. But that sometimes means that we have to stop the supply of products for a while and that's provoking some logistical challenges.

Obviously, this is in the process to be improved. But as Stefan just say, I mean, we still believe that some of it is going to continue in fiscal year '25. So definitely, I totally agree with Stefan, the fiscal year '25 will be better, but not yet at the level that we would like to recover from fiscal year '26 and beyond.

[Unknown Analyst]

Yes. So yes, we understand that finally. So for -- I guess, it looks like '25 is still going to be challenging, I think the challenges will remain. Just my follow-up question, I guess I'm trying to understand why you're up here, because it doesn't really sound like all the other companies have talked about Europe. Is there something specific to endoscopy or is it just -- this is just weakness in general from the hospital environment? This is my final question.

[Nacho Abia, executive]

The 2 single impacts that are specifically to [ endoscope ] specifically, I would say, more specifically to Olympus are the largest investment that the NH was doing over the last 3 years. And in literally reform, I mean, a lot of investment in general but specific investment in endoscopy in the country, and our exposure in Russia. I mean our programs in Russia was very relevant before the war, and in the middle of this has been deteriorated. This would be the unique situation for Olympus.

Generally speaking, they have performed in Germany. I mean, I think it's going to have an impact in the entire industry, slowing down investments as we have seen, and we are seeing this not only for import. What is the impact in other companies? I cannot say, but definitely, it's not only for Olympus Russia and the U.K., part of the single part that they believe are impacting more us than others.

[Unknown Analyst]

[Interpreted] I have a question for TSD. Maybe you may have touched upon this, but on Slide 36, supply chain, QA and supply shortage 90 billion or 9 billion to 10 billion is recognized. Do you have any numbers specifically for the first half?

What is the current situation for this problem, especially for new urology in Q2, the numbers were very weak, as I understand. So is this problem still going on?

I thought that the numbers are very weak compared with Boston, your competitor, your number was so weak. So that makes me worry. It's not maybe because of supply chain, but because of the competitive dynamics, you are getting weaker. That's my concern. But could you deny that? If that's not the case, if there is a continuous problem still, do you have any sign of improvement or do you have any idea for the end of the problem?

[Stefan Kaufmann, executive]

Like with the first question, I would start and then ask Nacho to supplement and to complement.

So the back order situation in TSD has 2 factors. One factor is related to supply shortages. The other factor is related to ship holds. And there were a couple of ship holds we had to introduce in the first 6 months of fiscal year '24.

In total, the back order situation in TSD is stable. So we are on a back order level of around JPU 4 billion, which is high, too high. So we take further efforts to reduce.

And the sales development in TSD indeed differentiate category to category, as I mentioned, in GIET, we see remarkable growth. As I mentioned, in the U.S., we grew double digit in the first half of the year. Specifically, the area of urology was touched by some of the ships, the plasma and also SOLTIVE. And as I mentioned in my presentation, for SOLTIVE, the competitive environment has increased, and we are revisiting at the moment our go-to-market strategy.

But all in all, the outlook for GIET, for urology and respiratory is that we are on a very stable foundation with a strong market position, and we believe that our products are competitive.

Nacho, over to you.

[Nacho Abia, executive]

Yes. Thank you, Stefan. And just to complement this. I think that there is a different aspect that has impacting our TSD business. But as Stefan would say, I think that we have, out of the 3 focus areas in TSD and clearly, we have quite a stable situation, growing market share, specifically in the U.S. in our endotherapy business, which is the business which is growing this year. But we've been suffering specifically in neurology and for 2 very, very clear reasons, right?

So we were the first one that we launched the thulium technology, the thulium laser technology into the market and we enjoyed for a while, of a unique position that we were the only one. But we knew, and it was very clear that our competitors will come with that technology. And because of that, we have been investing into improvements of the products.

This is the year where most of the competition is coming. And obviously, you see that. And on top, we have had some supply issues, where we have to post for some time to boost the supply chain. And obviously, this is a run rate business, right? So I think when you have supply, the customers cannot wait, and they need to go somewhere else and find those products because the procedures cannot stop.

So I think this is having an impact, but it's a temporary impact that will be recovered in both branch. One, we are working on new products and new solutions that will be added to the core and thulium laser platform that will make again ahead of the competition. And with supply chain topics, we expect them to be improved over time and to recover the stable supply.

So again, I think that the results this year on TSD, they are definitely not the ones we like to see. But I think we understand the reasons that we are confident that this will be recovered as soon as we can recover a stable supply chain. And we -- I mean, competition is always going to be there, but we will continue bringing solutions to the market that will keep us ahead of competition. Thank you for your question.

[Unknown Analyst]

[Interpreted] Sorry, I have an additional question regarding your plan for therapeutic equipment. This year's sales projection is flat. So for this fiscal year, the supply chain issue is not likely to be solved for this year, especially for QA. In the first half, do you have a number in terms of the impact from the supply chain for the first half for this year?

[Nacho Abia, executive]

I think as Stefan already mentioned that our level of order is about -- is significantly high. It's 4x higher than it should be at this point. And this is pretty much about what we feel that we are missing at this point. It is JPY 400 million, around JPY 400 million. It's very difficult to predict at this point what has happened with the supply chain for the reasons that I mentioned before, right? So we are acting very diligently, following our new quality direction and being scrutinizing any single signal that we identified from our products in the market.

And this is a process that will be improved over time, and we will be able to accelerate that process and not generating logistical delays because of that. But this exploring is still is happening, and I think that it's very difficult to predict what is going to happen in the next months. But I think to expect a sharp recovery, it's not realistic, I think that it is going to be a smooth recovery over the next months and hopefully during fiscal year '25, we can get to a stable situation during the year. And then from there, we can go with the supply limitations. Thank you for your question.

[Unknown Analyst]

[Interpreted] So I have one question. If possible, please answer. So the -- in terms of the reauditing of inspections of the FDA to release you from these warning bettors, the timing of the investigations of the FDA. So maybe 1 year, it will be difficult. It will be not in the calendar FY -- calendar year '24. We should we assume that it's going to happen in the calendar year '25?

[Stefan Kaufmann, executive]

Sure. If I understood your question correctly, is your question when we have finalized our remediation and the warning letters will be lifted? Or what is the direction of your question?

[Unknown Analyst]

[Interpreted] Yes, that was the meaning of my question.

[Stefan Kaufmann, executive]

So obviously, we cannot make any statement about when warning letters will be lifted or not. This is completely up to the discretion of FDA. The only thing I can tell you is that we are making good progress towards the commitments we have made, and we are in steady and constructive communication of different levels with our partners in Washington.

So from my point of view, we are making good progress, but to make an estimate when a warning letter will be lifted, that -- that's merely impossible to do. And again, this is also not within our influence and discretion.

[Unknown Analyst]

[Interpreted] On Page 15 of the material, once again, for the industry, you are trying to reform yourself into the best MedTech company in the industry. So after the new President came in 18 months business environment, changing from where you are, so MedTech company with the highest standard in the industry. In order to become a company like this, what is missing still?

QARA is a necessary condition, it's not a sufficient condition. In your material, stock buyback is going to be considered for next year and a year after that. So in that sense, maybe M&A? So maybe no M&A because of this timing. But for you to become the best level global MedTech company, what is still missing? You have these initiatives listed. But these are the initiatives that you have been always talking about. But what is the really fundamental issues that you still have to tackle in order to become one?

[Stefan Kaufmann, executive]

So also from my point of view, obviously, there is no universal definition what the best-in-class MedTech company is. I think there are a couple of boxes we still have to tick in order to call ourselves best-in-class. And obviously, to be a company that in all aspects puts patient safety and quality first is certainly one of the boxes where we have still room.

The other part, I believe, is related to the financial performance with respect to growth, but also with respect to margin expansion and capital efficiency. Also there, I believe our company in the next 2 or 3 years has room to improve.

And last but not least, what is a very important criteria for me is innovation, both organic innovation and inorganic innovation. And I think in that area, both in M&A but also bringing new products to the market, I think still has room to become faster to bring more new products into the hands of our customers.

So this would be the criteria I would take to call ourselves a best-in-class MedTech company.

[Unknown Analyst]

[Interpreted] I have one related question. So to raise our bar for the global MedTech, maybe there are things that you didn't look at, including surgical endoscope in the last several years. Probably you will review the portfolio going forward?

And also for M&A, like Veran's case, relatively you bought these companies with high expectations. But actually, other than Arc Medical, other companies were small in size, and the sales contributions were small. So M&A efforts in terms of pricing the company put and the efforts post the merger. I hope that the company will have more active discussions.

So I have a question about the portfolio review and the M&A strategy review. Are there any discussions going on in terms of changing the course of M&A strategy and the portfolio review?

[Stefan Kaufmann, executive]

So thank you for the question. So first, in relation to portfolio. Obviously, we are reviewing our portfolio on a constant base. You know that we have defined GI, urology and respiratory as our focus areas where we do resource allocation and investments with a higher priority.

Currently, we do not foresee portfolio changes. But as I said before, we are reviewing our portfolio on a regular basis and see if we can create more value by shifting our portfolio in a different direction.

With respect to M&A, also there, our strategy has not changed. So basically, we are not seeking for large M&A targets. We are seeking for tuck-in deals that complement our portfolio, specifically in the area of GI, respiratory and urology.

And to also reflect on your comment about Veran. Obviously, our business development function is a new function. Olympus has not done M&A for a very long period of time. We started to build up the function 3, 4 years ago. And referring also to best-in-class, we are going through a learning curve, and I believe that our capability in M&A has significantly improved over the last couple of years.

[Unknown Analyst]

[Interpreted] So my question is the -- about the QARA cost outlook, including the initiate towards the FDA. When we look back, including this year with 2 years, you're talking about spending JPY 60 billion for this limitation and JPY 22 billion for this fiscal year is going to be spent for the QARA related costs. In terms of SG&A, this will be about JPY 7 billion to JPY 8 billion, that remaining will be under other expenses, that will be about JPY 15 billion. That is my image that I have in terms of the spending.

In the first half, in the other expenses, JPY 11.9 billion is already incurred. Is it in line with expectations? Or is that -- are you spending more than you have expected in your cost? This is my question.

So I would like to ask Takeda-san, CFO, to respond to this.

[Stefan Kaufmann, executive]

I would take again the first part of your question and then hand over to Takeda-san.

So first of all, obviously, when we did the multiyear plan for fiscal year '24 to '26, we were at a very early stage with respect to planning our remediation and our transformation activities. So the JPY 60 billion at that time has been a qualified guess. Now we are much more advanced. So we have a very concrete plan what we want to do over the next 3 years. And I can confirm the number to you, we are still in the area of JPY 60 billion, so not much has changed.

When you look at the cost, what I find difficult is the differentiation between what is remediation and what is transformation, because as I tried to outline in my presentation, we want to use this as an opportunity for us to excel our capabilities.

So in many areas where we remediated at the same time, we also transformed to a higher standard. And just one example I also used in the presentation is that some of the findings in the warning letters are related to our capability and process validation and maintaining our device history records. So what we do as a company is now that we invest, and that's part of the JPY 60 billion into digitalizing our device history records, and we are striving also for a higher level of automation in our processes in manufacturing.

So to differentiate what is remediation, what is transformation, it's not so easy, and that's the reason why we brought both programs together.

And then my last point, and then I hand over to Takashi. The rule of thumb still is that 2/3 of the costs are related to [ SG&A 4 ] while 1/3 of the costs are related to [ SG&A 3 ] or COGS.

Chikashi, please?

[Chikashi Takeda, executive]

[Interpreted] So then let me answer more specifically to your question. First of all, in the previous meeting, we talked about JPY 22 billion in total that we're going to spend for this program. So this time around, including what we have already conducted, we are going to change our outlook. It will be between JPY 22 billion to JPY 29 billion, and there was about JPY 1.5 billion impact of ForEx, that will be in the most latest outlook.

If you go on the breakdown. So in terms of the increment, is both will be equally with the SG&A and other expense, both will increase in an equal manner. So it's got JPY 15 billion is going to be JPY 20 billion, that's what the other expense. So the SG&A is about JPY 7 billion, it's going to be JPY 9 billion. It's going to increase at this manner.

So Stefan has talked about -- it's difficult. You talked about remediation and transformation. But with the other expenses of remediation and in terms of SG&A, specifically for FDA initiatives is more on the transformation. So that's for the SG&A.

In terms of the increment, specifically in the first half, before framework of remediation, there are 4 work streams that is -- so on the I'm going to MDR, the cost has gone up, the complaint handling and MDR that has increased. But basically, this is because you may good progress. It has increased. So that's the reason that we're giving.

Have I answered your question?

[Unknown Analyst]

[Interpreted] So if that is the case, in the 3 years, JPY 60 billion target? Is it going to be reviewed upwards? I think I feel that way. So what is your response to my feeling?

[Chikashi Takeda, executive]

[Interpreted] Well, first of all, the JPY 60 billion, the definition of the JPY 60 billion, the same ForEx level. If the ForEx assumption changes or go up, and maybe some in detail but it is -- have you seen that over, a little over JPY 60 billion. So I think there is a certain range that we are talking about. I hope that you understand that.

But anyway, basically, what we have announced in May, what we have said in May, we are thinking that we want to go forward within this range. So JPY 15 billion other expenses is going to -- has been revised to JPY 20 billion.

[Unknown Analyst]

[Interpreted] This increment cannot be explained only by the weaker yen. So can you explain why this has increased?

[Chikashi Takeda, executive]

[Interpreted] Yes, there's some factors go up and go down. But in the first step, the complaint handling and there is a process that connects the complaint handling to MDR. The contractor cost or the professional expenses or the system integration costs. That will be the major element of this difference.

[Unknown Analyst]

[Interpreted] Understood. That's all from me.

[Unknown Analyst]

[Interpreted] Sorry for exceeding the scheduled time. Regarding the eliminations, your plan was to reduce JPY 5.5 billion. So the total JPY 46.5 billion. Normally, is this going to be the normalized base going forward or for corporate eliminations after FDA for 3 years, this is going to be less after 3 years? Or is it going to be more after the FDA response in the next 3 years?

[Chikashi Takeda, executive]

[Interpreted] Well, internally, 55 is the allocation -- internal allocation. In that sense, we have set the normal base. Basically, the corporate elimination standard will be around this. So this will be a normal level. Just for your information, FDA response is not included at all in this amount.

[Unknown Analyst]

[Interpreted] Understood. That's all my questions.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]