Olympus Corp

TSE:7733

Earnings Call Transcript 2023-Q3

[Chikashi Takeda, Chief Financial Officer]

Hello everyone. I am Chikashi Takeda, the CFO. I would like to give you the review of our consolidated financial results for the third quarter of fiscal 2023, as well as the full year forecast for fiscal 2023.

Please note that today's briefing will focus on continuing operations. Please refer to the appendix section for detailed information about the discontinued operation. Now, a review of our financial results.

Page two; highlights. These are the highlights of our financial results for the third quarter. During the third quarter, we continue to see the impact of supply, shortages of semiconductors and other components, together with rising materials cost. But the situation is gradually improving and we have taken measures to minimize risks as much as possible.

Revenue increased 17% on a consolidated basis. We achieved double-digit growth for both ESD and TSD, setting record highs for both the third quarter and the first nine months in the medical business. Operating profit and operating margin also set record highs for both the third quarter and the first nine months.

As for full year forecast, we have revised our foreign exchange assumption from the previous forecast. Based on the results up to the third quarter, we have slightly lowered revenue on constant currency, but have left adjusted operating profit unchanged.

We are still on the track to achieve adjusted operating profit margin over 20%, the target set in the corporate strategy. We expect revenue of JPY871 billion up 16% year-on-year and the operating profit to achieve record highs both in amount and ratio. Profit as the sum of continuing and discontinued operations, expect to reach a record high of JPY376 billion due to a gain on transfer of scientific solutions business evident with EPS of JPY297 up 229% year-on-year.

Let me go over the details of financial results and the business review. Page four, overview of consolidated financial results, consolidated revenue totalled JPY641.5 billion in the first nine months, up 17%. Revenue in medical represented record highs for the third quarter and the first nine months, with double digit growth for both ESD and TSD.

Gross profit was JPY433.7 billion, with gross margin improving 0.7 points. Despite the impact of rising materials costs and others, gross margin improved due may lead to a change in regional sales mix driven by increased sales in China in Q3 and Yen depreciation effects. SG&A expenses were JPY306.1 billion union with SG&A ratio deteriorating by 0.3 points.

In particular, expenses associated with face activities and strengthening of the operational infrastructure such as QARA increased. In other income and expenses, a gain of JPY14.9 billion was posted, mainly coming from a gain of JPY16.4 billion on the sale of land in Tokyo in Q1 and the record recording of JPY1.3 billion from the adjusted acquisition consideration due to a change in the fair value of conditional payment that was part of the acquisition consideration for Meditate in Q3.

Operating profit was JPY142.6 billion, up JPY40.4 billion or 39% year-on-year. Operating margin improved 3.5 points to 22.2%. Please note that adjusted operating margin, excluding other income and expenses, which is a milestone in our corporate strategy, was 20%.

Profit from continuing operations was JPY105.6 billion with EPS of JPY83 up 29% year-on-year, while total profit including both continuing and discontinued operations was JPY108.4 billion with EPS of JPY85 up 25% year-on-year.

We have been operating this fiscal year under conditions of multiple growth inhibitors and rising costs while making investments in growth areas and strengthening operational infrastructure. The environment remains uncertain, but we will continue to strive to achieve revenue and profit growth and reach the must-hit target of over 20% adjusted operating margin set three years ago.

Moving on to the full year forecast, please turn to Page six. We have revised the FX assumptions from the previous forecasts. Based on results up to the third quarter, we have a slightly lowered revenue excluding FX, but adjusted operating profit remains unchanged.

The forecast assumptions for annual average FX are JPY135 to the dollar and JPY140 to the Euro. For more details, please refer to Page 24 in appendix for FX sensitivity. Revenue is expected to achieve JPY871 billion up 16% year-on-year. Operating profit is expected to achieve JPY198 billion up 35% year-on-year with an adjusted operating margin of 21.1%, record highs for both amount and ratio.

Although multiple risk factors continue to stay in front of us and the outlook remains uncertain, we will proceed with all efforts with the goal of achieving the must-hit target of above 20% of adjusted operating margin set in the corporate strategy.

Profit is expected to reach record high of JPY376 billion, reflecting a gain on transfer of Scientific Solutions Business. EPS is expected to be JPY297, up 229% year-on-year. Profit of continuing operations expected to be JPY149 billion with EPS of JPY118 up 37% year-on-year. Regarding dividend for fiscal 2023, we plan to pay dividend of JPY16 unchanged from the announcement in May.

Next page shows forecast by segment. We expect both ESD and TSD to continue double-digit growth year-on-year. As a result, the combined revenue of the two divisions in the medical field is expected to reach record high. We previously announced that EV61 would be launched in the US within the fiscal 2023.

However, we have been revised the schedule to ensure that all regulatory requirements are completed prior to the launch of the product. We are now aiming for a launch in the middle of fiscal 2024. We do not expect this postponement to have a material impact on our business performance.

In ESD, the impact of supply constraints, including semiconductors, is improving. We expect continued sales expansion of EV61 one in Japan, Europe and APAC. In China, we expect growth supported by pent-up demand due to delays in tenders and business negotiations caused by the Shanghai lockdown in the first quarter as well as government support such as low interest loan programs for medical equipment.

In TSD, we expect continued growth centered on the three focused areas, while in Japan and China, number of procedures is declining due to rapid surge of COVID. In Europe and North America, where the number of procedures are recovering, sales of mainstay products are expected to be strong.

We will continue to work on achieving adjusted OPM above 20%, despite the unstable and uncertain environment by controlling SG&A expenses through companywide efforts such as hiring constraints, review of various projects, limited nonessential overseas trips and review of R&D priorities. Discontinued operations expected to record gain on transfer, resulting in significant increase in profit.

This is going to be my last slide. I would like to explain about the warning letters that we received from the FDA and our efforts to strengthen quality assurance and regulatory affairs. Olympus received warning letters regarding an inspection of the Aizuwakamatsu facility based in Fukushima, Japan and in July and inspection of the [indiscernible] factory based in Tokyo, Japan in September.

The content of the warning letters cites quality system issues related to process and records for design and manufacturing, as well as late submission of MDR. We are closely communicating with the FDA through both written and live interactions in order to ensure they are met in a timely manner.

We have been promoting efforts to strengthen quality assurance and regualtory affairs, including the globalization of equality and regulation. We have implemented a global Complaint Improvement Program that is a new process and technology platform to ensure compliance.

We established an independent worldwide quality and regulatory organization structure including hiring many leaders with knowledge and experience of a QARA at meditech companies under the Chief Quality Officer reporting directly to the CEO.

We have been implementing global quality system and the governance model for all Olympus sites and businesses and remediating design and manufacturing processes and records. The total amount of investment for these initiatives is currently under review. We will inform our forecast when a reasonable estimate can be made. The latest costs include JPY1.4 billion in expenses for the current fiscal year.

In order to become a leading global medic company, we will further strengthen our quality assurance and regulatory affairs and globally establish quality and compliance to ensure patient safety. Thank you very much for convention.

[Chikashi Takeda, Chief Financial Officer]

Before we move to taking your questions, we would like to focus on one question that we received in advance regarding the results up to Q3 and the projection for Q4. [indiscernible] that question.

[Unidentified Company Representative]

Yes, I think I've covered majority of that in my presentation and although I skipped the oral presentation, the longer version that is available from the company website, which includes the scripts. Do answer your question.

As for the guidance, compared to the guidance for revenue, largely in line with the guidance, but when comes to specifics TSD revenue, is a bit short. That has been the trend so far and so that is the reason why we made a very small revision to the full year forecast.

And profit is doing better than the guidance to a certain extent and regarding the SG&A expenses, compared to the projection three months ago, we are spending more. As is included in the slides, the sales activities are becoming more active is one reason and for enhancing the operational infrastructure, we are hiring people and also QARA and some other functions.

To address the specific challenges facing the company, we are making the investments and expanding, which explains an increase in SG&A over the projection. That has been the case up to the end of the nine month period.

Regarding Q4, the adjusted operating profit number hasn't been changed, meaning that during the last three months, we are to catch up, especially regarding the SG&A expenses by implementing further measures, we are to catch up and make up for the difference. That's my high level response. And Nacho is close to the field. So I think he can add some more comments.

[Nacho Abia, Chief Operating Officer]

Thank you, Takeuchi. Can you hear me well?

[Yasuo Takeuchi, President and Chief Executive Officer]

Yes, very much.

[Nacho Abia, Chief Operating Officer]

Well, I would like to add some comments on the revenue development in Q3 and along the first three quarters of the year. I think at this point of the year, we are completing a solid revenue growth year, having in mind all the different situations that we have experienced in this year, including the lockdown in China in the first quarter, the COVID surge in China and in Japan in the third quarter, and some continuous supply chain tensions that have provoked some delays.

I think, we've seen -- having all that in mind, still we have been able to solidly grow our ESD business, especially with a remarkable after-effect change impact 10% growth in our gastrointestinal business in ESD, and including as well a recovery of the business in China.

In ESD for GI that even with a very severe lockdown in the Q1, we are able -- we have been able to show growth in the year-to-date in the China region for ESD. In TSD the situation has been a little bit more complex because the tensions in the supply chain and the lockdowns has provoked a situation where well in TSD business is mostly run rate, obviously when we are not able to fulfil immediately the orders from customers, those orders are lost because the procedures cannot wait.

But even though, I think that we are at this 2% growth in the TSD business, and our analysis shows that without the situation in China and TSD and without the tensions in the supply chain, we would have been able to be on north of 4.5% growth in the TSD business, which give us a lot of confidence in terms of when the normality in terms of supply chain, which is where we are now and the China situation is normalized, we can return to the role that is expected in the TSD business.

So altogether I think is a healthy situation. EV61 is progressing very well in those regions of the world has been launched and we are expecting this to be the case in the United States as soon as it is launched. And in TSD, with the exception of the situation in China and the supply chain, we believe that both the Urology and the ET business which are the mainstays of the business are progressing very well based on the plan. So these are my comments regarding SD and TSD. Thank you very much.

[Chikashi Takeda, Chief Financial Officer]

We would like to open the floor for questions now. Since I can only ask one question, I want to ask about the warning letter from FDA. One is for [indiscernible] design validation, efficiency and also lack of response for earlier findings and design record deficiency and MDR. And the other letter is about basically URF for medical device as a whole delay in MDR.

So I would like to understand the current status of response for each because if you go back, there was an MDA delay for duodenum endoscopy, and I understand that you had to pay a penalty for that in the past. And at first glance, it looks like there has been no improvement since then.

[Nacho Abia, Chief Operating Officer]

For isolympus [ph], I understand that it's something that you could deal with documentation. But for the [indiscernible] endoscopy, this was exposed metal, which could cause penetration and despite that fact, why was MDR delayed? I think it had to be reported within 30 days. But how much was the actual delay? I would like to know and how do you intend to respond to this situation? That's my question.

[Chikashi Takeda, Chief Financial Officer]

Thank you. Mr. Cotoni [ph]. CTO, Pierre Boisier is joining us today. So he would like to take this question. Pierre, the floor is yours.

[Pierre Boisier, Chief Quality Officer]

Okay. Before I start, I would like to go through and introduce myself. So my name is Pierre Boisier. I am the Global Chief Quality Officer for Olympus. Olympus is committed to becoming a leading global medtech company. Since March of 2021, when I joined the company, we've been focused on support of a global QARA globalization effort which supports the pillars of all of our quality and compliance improvement efforts. This initiative began with my hiring as the Global Chief Quality Officer.

In addition, Olympus has hired many new senior executives to lead the quality and regulatory global organization. The new leadership possesses decades of industry experience from top tier companies, including leading companies going through change initiatives.

We are moving from a regionally based managed quality organization to an empowered, centrally managed global organization with oversight of all Olympus facilities. Improving quality culture and mindset, strengthening and consolidation of quality systems across Olympus, establishing new governance structures and standardizing practices at all Olympus operating sites, most importantly, provide assurance that the compliance issues identified by the FDA are being addressed.

Following the FDA inspection and the issuance of the US FDA warning letters, Olympus has accelerated efforts to invest in our globalization initiatives. This is an important and essential investment for Olympus to become a leading global medtech company and achieve sustainable growth.

Over the next few years, we will be making significant investments in this area to further strengthen our global assurance and regulatory affair function as well as to establish quality and compliance to ensure patient safety worldwide. Lastly, we are closely communicating with the FDA to ensure actions are timely through written and live interactions, and in order to ensure FDA expectations are met in a timely manner.

So with that said, I think there was two parts to the question. The second question was, how late were the MDR reports? The reports are due to the FDA within a 30-day working period. If I remember correctly, the complaints that were cited were between 45 days and 60 days old when they were reported.

It is also important to remember that when the FDA came in and audited our files, they were going back over a three-year time. During this time, we had gone through COVID, and for about a year we were trying to figure out the best way to work and so things were not always going as required. So that's not an excuse, it's just the reality of as we were going through the COVID lockdown, companies had to find new ways of working. Did I answer your question or was there additional?

[Chikashi Takeda, Chief Financial Officer]

So I think you were talking about at least addressing the MDR for the URF scope, I guess, whatever failures that occurred there. You said it's 45 days to 60 days. So obviously it's not that far away from 30 days and it's COVID related.

What about the ISO documentation? I think is that something that's going to be resolved really quickly and while we're on the subject of regulations, if you could comment on any impact on Olympus from the India, that is changing the medical regulation.

I think it made it very difficult to sell products, and I think a lot of companies have talked about cost increases from that and on top of that, of course, there's the Italian clawback law that was, I think, went into effect somewhere in last year. Some companies have put a lot of write downs on that based on this Italian mall. If there's any impact on it, those are my follow ups. Thank you.

[Nacho Abia, Chief Operating Officer]

Okay, go back. Just to be clear, I am not trying to say it was all COVID as far as late MDRs go, just to be transparent, part of our problems for MDRs are operational as we are working through regionally controlled quality systems, our systems don't always link up to be able to hit the 30-day window. I think that when the FDA went into our facility and found the 15 late MDRs, some of that was probably caused by COVID. But I don't want to say that everything was always caused by COVID.

I would have to say that our systems are, as we work on globalization, and we create one system, one quality system to have everything come together that will fix all the problems, but we're not going to get there until mid-next year at the earliest, through the end of next year. So, hopefully I've clarified that the MDRs.

As far as Aizu [ph] goes, the issues that were identified in Aizu were tied specifically to process validation and to design verification. There were no safety issues found. There were no product issues found. It is not, I believe, like past inspections where they actually found a product issue that had to be resolved. So far our analysis and we are still going through a lot of analysis or identifying, which processes need to be validated.

But as we look at each of the processes, we're also analyzing the product to ensure that there are no safety issues. So we've been working very closely with the FDA on that. As far as India am not aware of that. Nacho, is that something you're aware of?

[Yasuo Takeuchi, President and Chief Executive Officer]

Thank you, Pierre. I think I can take the last two questions about India and Italy. In the case of India, there is -- actually in India there are continuous changes in both the regulation, but also the reimbursement. So it's a changing environment.

Our work in India is quite stable and our market share in our main platform, GI is quite solid there. The market is still not as relevant as the population in India would say. But our market share numbers are good and the products that we have for regular register there are working very well on this plan. So there is very limited impact in our business plan on the changes for the Indian changes in the regulation.

As per Italy, yes, I can confirm that we have all the reserves in our books related to the global clause that was imposed. So I think in both cases, the situation is in good shape. I hope I answered your question.

[Chikashi Takeda, Chief Financial Officer]

Could you quantify those reserves? Is it in the couple JPY100 million range or is it a JPY100 billion?

[Yasuo Takeuchi, President and Chief Executive Officer]

The reserve, I don't want to speak by the finance department, but on the few millions of euro.

[Chikashi Takeda, Chief Financial Officer]

This is Takeda speaking. So as Nacho mentioned, the amount is not that material to our company. And also I would like from finance perspective that new regulation in EU and in India activities are already taking place and finance does understand that in other words, we are making investment from our side as well. I hope that answers your question.

[Unidentified Analyst]

One question. So as I explained EVIS X1 launch in US is going to be pushed back further. You said to meet all the regulatory requirements, what do you mean by that? And this was sort of a last minute decision to postpone. What is the backdrop of that?

[Yasuo Takeuchi, President and Chief Executive Officer]

Thank you for your question.

[Unidentified Analyst]

No, first question is about what the old requirement means to make US launch in the United States exponents. I just was asking if either of you can answer to the questions.

[Nacho Abia, Chief Operating Officer]

I can take a first shot and Pierre wants to come and additionally, he can do it. The current situation and the current thought on the approval in the X1 is that we are working with the FDA to submit all the necessary documentation and we expect that the approval, the FDA regulatory approval, the 510-k approval for the platform, we are expected, and obviously this never can be confirmed 100%, but we are expected to have it around DDW. This is our current thought.

After that, we will be able to initiate the promotion, the promotional activity in the United States, but we still would require a few months in order to prepare all design validation and product validation which is required in ISO.

So with all together we believe that around the middle of fiscal year '24 we will be able to make a complete launch of the product in the market but the promotion activity, the time we kind of speak with customers about EVIS X1 we are hoping and expecting that we'll be right after we did that. I don't know if Pierre, you want to add something or I hope I did an accurate representation.

[Pierre Boisier, Chief Quality Officer]

I think you did really good Nacho. When we go through and get a 510-K, lot of times we have to work with the regulatory agencies, in this case, the FDA and understand what they're approving. So if there's a change in labeling or there's change in anything on the product to make sure that we have the processes validated and gone through all the factories, make sure everything is ready for mass production. So it will take a little bit after the approval of the 510-K.

[Unidentified Analyst]

Thank you. I am aware of the screening process by FDA, but so what specifically were the issues that prohibited the launch as originally scheduled, and why is it that you are finding that out right now?

And a follow up question, if this is going to be in the middle of FY '24, I understand that in the US, many of the business is on the lease basis. So I'm afraid the EVIS X1 profit contribution for FY '24 is going to be limited that is as far as the US is concerned. So can you talk about that?

[Yasuo Takeuchi, President and Chief Executive Officer]

Thank you. Regarding your first points, I think Nacho partly referred to that, but let me repeat. The follow up question, okay. I think you have answered some of the questions already, but…

[Nacho Abia, Chief Operating Officer]

Yeah, I think I can comment on the business in both of the EVIS X1 as you and the he question you referred very well. The nature of the US business is mostly related to leasing, which means that essentially every time we launch a new platform is a smooth transition because those lease contracts are still in place until they have to be renewed and this is what we normally do, the technology update.

Meaning that in any given year, when we launch a new platform, it has a smooth ramp-up of the penetration of the EVIS X1 platform. So I think that the current situation in the launching of the product of the platform, it's not going to impact our business results or our business expectations for fiscal year '24, and in any case, we were expecting a smooth move between the core and the existing platform.

We know it's going to take always few years to penetrate the existing 190 platform that there is a market and so it's not like a spike in the first month as of the launch, it never happened because precisely of the lease characteristic of the business.

So I think the current situation is not going to impact our business plan for fiscal year '24. I think that's the most important message. As to why it's further delayed, I think probably Pierre is better to comment than me.

I think that from one side, obviously we need to fulfil the application of 10-K. From the other side, we need to make sure that the proper validation and design validations that happen in the factories are accordingly with what the FDA is expecting as well from us and this is what would take a little bit more of time even after the effect in 10-K approval will be awarded. That's a quarter situation.

[Yasuo Takeuchi, President and Chief Executive Officer]

Pierre, do you want to add something.

[Pierre Boisier, Chief Quality Officer]

So as we were going through putting the product on the market, trying to get approval, there was negotiations with the FDA on how certain things should be tested. And if I remember correctly, with the FDA on the EVIS X1, we came through and we debated on how to test certain modules. We finally came to an agreement and we're working full force now on our agreements that what we've had.

But we've gone back and forth with negotiating the best way to prove the devices and so, we finally gotten to that point with the FDA where we have full understanding of what they're looking for and we're going to be able to meet it.

But my belief is that the slowdown in between was us trying to figure out exactly how do we best provide this and the FDA has been working very closely with us on this.

[Chikashi Takeda, Chief Financial Officer]

So that would be a response to your follow up question. Was that helpful? Yes. Thank you. Thank you very much.

[Unidentified Analyst]

I have a question about China. In the beginning of this fiscal year, China EST sales plan, you present a certain number and in the first half, you basically maintain the full year guidance and lockdown impact was present in the first half.

But still you expected that there would be large enough pent-up demand and that is why you maintained the full year forecast for China and in the third quarter, I think you actually see pent-up demand translating into strong sales.

But there was something unexpected as well. Low interest loan program by Chinese government, this wasn’t expected in the first half. This is a new factor. So for the full year sales revenue in China, do you think there's going to be a big enough impact from this loan program that would affect and change the focus that you gave us in May?

[Yasuo Takeuchi, President and Chief Executive Officer]

I will try to answer first and then Nacho, you can give us some additional comments later. About three months ago, this new policy was introduced, and it would have a positive impact on our business. That's what we said three months ago. And, in fact, in the third quarter, we haven’t received a big number reported. But taking the low interest program actually generated some benefit up until December and also in the fourth quarter.

Well, the application is closing end of December, and the actual usage will continue until March. So the fund that is obtained through this loan program will be used. So that is a potential positive factor that we're looking at. However, when it comes to the Q4 outlook or the full year forecast, we do not believe that it would have a material impact. That is our view.

For EST, anyway, the initial forecast is still maintained, and demand is expected to increase during the second half and that is what is happening, in fact and we believe that momentum will continue into the fourth quarter. That is our story, Nacho?

[Nacho Abia, Chief Operating Officer]

Something more than just to compliment. The situation in China during this year has been a little bit complex from the very beginning. So the first two months of the year were completely lost due to the COVID, the COVID lockdown. Then the business recovered. Then the government announced these low interest loans and that this was a boost for the orders.

But then at the same time in Q3, we have again COVID spikes in China that provoked again some complicated situation from the supply chain in China. So I think it has been a complicated year with minuses and pluses, and I think all together, we have been managing the situation pretty well.

And despite almost two months of north sales in China, we're going to end the year with a growth and about 4% or 5% growth in our ESD business based on the solidness of our GI business, which I think given the circumstances and given all the situations, it's actually a pretty good result. And this has been impacted by the loans, of course, the low interest loans as well, but again, this is the tailwind. There has been some headwinds in other areas.

TSD situation is a little bit more complicated because again, its procedure based business and many, many procedures were canceled in China that has not been able to recover at the end. I think that as -- I think the situation in China is always fluid and flexible and I think that we're expecting to continue our plans in Q4 and even officially the low interest program has been canceled at the end of the year.

But I know that many of the orders that were placing the system before still will be delivering Q4. So we still expect to have a good Q4. In China in the absence of any other external factor like COVID or any other thing that can impact and get in the supply chain. Thank you very much.

[Unidentified Analyst]

Thank you. Follow up question. Now question about TSD. So endoscopy procedure count, surgery count, I understand the volume went down in the third quarter and what about January and February? Do you have the latest information?

[Yasuo Takeuchi, President and Chief Executive Officer]

Well, your question is about China.

[Unidentified Analyst]

Yes, that's correct.

[Yasuo Takeuchi, President and Chief Executive Officer]

Up until December, as I have explained and as was explained, number of procedures had been struggling. It was not recovering very fast up until December and since January, the number of procedures is expected to increase. Well, that was our expectation, but I think I have to ask Nacho to respond to your question because he was talking about the actual numbers on the ground. Nacho?

[Nacho Abia, Chief Operating Officer]

Yeah, I don't have the specific numbers of the proceeded recovery in the Q4 versus the Q3. What I can say is that January is always -- February is always the month where we have the New Year in China happen. So there is traditional a significant slowdown of the operation in that time.

So when from one side, we think that there is no reason that procedures will not resume as normal in this quarter. It's also impacted by the New Year celebration in China, which has slowed down the activity of the hospitals as well.

So I would say we expect a normal Q4, including the New Year and that means that on the TSD side, we should expect a normal year in terms of procedure development and so on.

[Unidentified Analyst]

Thank you. That's all for me.

[Nacho Abia, Chief Operating Officer]

Another question on China. By China policy, has there been any change to buy China policy? I know that those Chinese manufacturers are not a competitor for Olympus, but going forward, I think the Chinese government is going to be very flexible in its policies. So in terms of your production capacity and global supply chain, are you planning to start the local production in China?

[Yasuo Takeuchi, President and Chief Executive Officer]

Thank you for that question. I would like to comment on the measures that we can take. Of course, China is an important market for us today, and it will continue to be important for us going forward. We like to contribute to the health of the Chinese people through our products and services, and there are many opportunities as well.

That view remains unchanged, of course. By China policy, how are we to address that? There are many possibilities. Right now, all I can say now is that we are considering various possible measures that we can take. So that will be my response to your second question. Your first question again, I would like to refer that to Nacho again. Please.

[Pierre Boisier, Chief Quality Officer]

Yes. Thank you again. And as usual, I see a strong interest in China and luckily our present continue being solid there. I would echo Takeuchi comments that we are exploring any necessary activity that will allow us to keep our Korean level of competitiveness in China. But having said that, is also true that our technology differentiation mostly on the GA platform is still very significant.

And there is no specifically on the on the ESD side on GI, there is no local competitor that in China that we see that despite any buy China policy is actually getting our market share. So I think that we are maintaining our market share despite any policy from the government and our orientation in China and honestly speaking, I think that with buy China policy or without buy China policy, our strategy is always the same, right? So we have to provide the best possible product, with the best possible service, with the best possible education, with the best possible servicing in the market.

And this is what has been our growth engine in China in many years. And we plan to continue that. We are considering all options. And if at some point we would feel that China manufacturing would be necessary to be added to the strategy, it would be clearly considered.

But I think at this point, we are in a good competitive situation in China and Takeda mentioned, we will continue doing all the scenarios and all the considerations to keep that competitive position there. Thank you.

[Unidentified Analyst]

I'm looking at page five of the earnings material about ESD, China. Third quarter grew 57%, excluding FX, it still grew by 38%. I understand that there were inventory issues and COVID issues as well, but what was the actual growth, apple-to-apple growth? In other words, this looks really dramatic growth. Is this due to one-off factors and if although one-off factors were excluded, what would be the actual growth?

[Yasuo Takeuchi, President and Chief Executive Officer]

Thank you for your question. It is well, I don't have any specific numbers on hand about the baseline, but last year, in the third quarter, this is year-over-year, so I'm comparing it against the previous third quarter. Second quarter of the previous year, actually, there was a bit of a shift from third quarter to second quarter. So the second quarter number was higher and the third quarter number was lower than expected.

And we are basically comparing it against that baseline and that's where the 38% came from. So how much do we add back to the last year to create the appropriate baseline? I'm sorry, I don't have the specific numbers in front of me, but that is what happened and if I was to add something, the question is about Q4. We do not expect 38% growth, for example.

[Unidentified Analyst]

Oh, that's very clear. Thank you. A follow-up question. I don't know if I should ask this to you, but whether it's ESD I know that you're seeing a lot of recovery because of many different factors. But if you look at other medical device companies, their performance is suffering due to COVID-19 by China and Tender [ph]. But you are making recoveries. Is this specific to your products? Is it the product specificity or is it related to inventory? Maybe the inventory dropped too much last year and this is a rebound. How do you assess the situation?

[Yasuo Takeuchi, President and Chief Executive Officer]

Yes, I will try to answer your question. I am not really in a position to be able to say anything about other companies. We don't have sufficient information to do so. But as far as Olympus is concerned, there is a clear trend that ESD is strong and TSD is not recovering as much as ESD. So that is the situation; ESD product power, strength.

And not only the strength of products, but also strength of services and training. The whole platform through long history has been established in China. And I would say that that may be the difference between us and the other companies that you have been hearing the stories from. Nacho, add something to this question.

[Nacho Abia, Chief Operating Officer]

Yeah, I think that in China, but in general right. So the reality of the TSD business, as has been explained many times, is procedure based and so we are more exposed. So as many of our competitors in the same space, we're very exposed about changes in the procedure set right and this year, we had a lot of disruptions in China. China? But also disruptions in Japan and in other places that impact the number of procedures.

That are being performed and that obviously impacts our revenue until those procedures have recovered, plus, on top of that, we had some delays in the supply chain that provoked that. We couldn't fulfil that demand.

In any case, I think that what we have to understand as well is that where is our competitive situation in TSD. And I think we are making advances that will return in positive growth later. For example, in our stone management business, we have been placing tons of instruments and selling tons of capital instruments, gaining market share in the space that obviously, once those procedures are fully recovered are going to bring a lot of devices business for those business.

So I think that when we look at our TSD business in this year, we know what has been the headwinds factors that has impacted the limited growth, but we know as well that in several areas we are gaining market share. Our position is very solid and we are gaining market share in. We are making good strides and increasing our footprint geographically and even in the United States, growing or above what the market is.

So I think that there is a lot of indications that tell us and give us confidence that the TSD business is going to continue growing at a higher pace in the future, despite that, maybe this year again, for the headwinds that has been explained, we couldn't grow at that level. But our expectations continue being very strong for the TSD business and we believe that those products categories will do very well. So I know it's a broad answer, but just try to characterize a little bit what TSD business about.

[Yasuo Takeuchi, President and Chief Executive Officer]

Thank you, Nichol. That's it for answers, that's very clear. Thank you very much.

[Unidentified Analyst]

One question related to economic situation after COVID, especially in the US for the last two years, I think we have seen rather good recovery, but going forward the question is what's going to happen? The recovery that we have seen may be followed by a decline. Well, in your case, you have new product launches, so it might be different. But overall, looking at calendar year '23 or your fiscal '24, what is your projection in terms of the economic situation? Thank you.

[Yasuo Takeuchi, President and Chief Executive Officer]

I'm wondering from what perspective I should answer your question. The economic situation, health care overall is less affected by the economic situation. I think that is a common understanding. Having said that, we do live in the economic world, so in many aspects we have to pay attention and be careful, of course budgets at hospitals and of course related to the interest rate.

EVIS X1 discussion, we talked about the lease arrangements and lease would be affected by the interest rate. So that's one thing that we have to pay attention to and also the cost aspect.

In the inflationary trend should it continue, cost will go up. So how do you address that, is big question. So looking at the macroscopic economic situation, as I stated earlier, healthcare tended to be less affected.

So maybe our sensitivity has been less compared to other industries, but when we look at the recent trends and when we project into the future, I think we have to take into consideration the factors, which we have not taken into consideration in the past.

[Yasuo Takeuchi, President and Chief Executive Officer]

I will be more cautious in that respect if that answers your question. Yes, thank you.